Hyundai Rotem urged to undergo drastic restructuring

By Lee Hyo-sik

Kim Seung-tack Hyundai Rotem CEO

Hyundai Rotem, the rolling stock manufacturing arm of Hyundai Motor Group, is facing growing criticism for not doing enough to revive its faltering business at home and abroad, according to industry analysts, Thursday.

Instead of subjecting itself to drastic restructuring in order to enhance its competitiveness and improve its bottom line, the company has been asking the government for finance and other forms of support, analysts say.

They are urging Rotem, headed by CEO Kim Seung-tack, to downsize its workforce and slash employee salaries and other benefits, as well as increase spending on research and development to strengthen its core competence.

Over the past two years, the railway car manufacturer has seen its sales plunge in key overseas markets, such as the United States, Brazil and India.

They used to win many orders to produce subway carriages and other types of rolling stock abroad. However, it has begun losing its global market share to rapidly growing Chinese competitors, including the CRRC, which have posted explosive growth on the back of the Chinese government’s extensive support.

In 2015, Rotem has secured only 80 billion won in new orders from Turkey to maintain a tram route there.

In the first half of this year, the company posted a 13 billion won operating loss. In 2014, it lost 12 billion won.

Its revenue also fell to 2.9 trillion won in 2014 from 3.1 trillion won a year earlier. This year, the figure is widely projected to drop further.

“Hyundai Rotem has been struggling with falling sales as it fails to win new orders overseas due to intensifying competition,” said an analyst at one of the Seoul-based securities firms, who declined to be named. “Falling demand for new railway cars in Korea has further hit the firm’s bottom line.”

The analyst said that Rotem has to make greater efforts to secure new contracts in foreign markets, adding that company employees have largely remained complacent about the status quo. “I don’t think Rotem employees have done their best to win new orders overseas. They really have to work harder.”

He then urged the railway car maker to downsize its workforce of 8,000 by dismissing underperforming older workers.

“Over the past 15 years, the company has raised employee wages, regardless of its corporate performance. The average age of Rotem workers is 53, the highest among Hyundai Motor Group affiliates,” the analyst said. “Many of the underperforming aged employees have to go and instead, young workers need to come in and inject vigor into the organization. This will significantly reduce labor costs. It should first take painful restructuring steps before calling on the government for help.”

The company also should spend more on R&D, he said, adding that it has to develop state-of-the-art products to compete with more price-competitive Chinese rivals.

Rotem spent only 15.6 billion won on R&D in the first 9 months of the year, equivalent to 0.7 percent of its revenue. In 2014, it spent 52.8 billion won, or 1.8 percent of its revenue.

A Hyundai Rotem official admitted that the company has been saddled with a high-cost, low-efficiency structure, adding that employee salaries have gone up regardless of the firm’s performance.

“We have increased wages and other employee benefits in line with those of other group affiliates,” the official said. “We also know that we desperately need to inject fresh blood into our aging workforce. But it is not easy because the labor union will fiercely protest any attempt to downsize the workforce.”

Rotem’s average employee salary stood at 90 million won in 2014, up from 86 million won in 2013 and 82 million won in 2012.

The official then said the company cannot overcome its current difficulties on its own, calling on the government to provide greater support.

“The government can help us do more business in foreign markets. We also want policymakers to make domestic market conditions more favorable four us,” he said. “We would like policymakers to revive the ban on the use of subway cars older than 25 years, which will increase demand for new rail vehicles.”