In the third quarter of 2024, the global automotive industry is undergoing a tumultuous transformation, with Chinese automotive companies leading the charge towards electrification and a successful shift towards renewable energy vehiclesThe domestic market in China is seeing a dramatic rise in homegrown brands, bringing significant impacts on the performance of all international automotive companiesDespite efforts by these giants to rely on political might and erect protective barriers in various continents, their overall profitability has taken a substantial hit.

The decline in earnings is stark, yet a few companies have managed to outperform the industry average; they are either electric vehicle manufacturers or companies that have minimal presence in the Chinese market.

Toyota’s profits appear to plummet significantly, largely due to exchange rate fluctuations

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Nevertheless, Toyota's profit remains around 4 to 5 billion dollars, illustrating that even a minor loss for an established player can be a strategic winWhen compared to older rivals like Volkswagen or the German luxury automakers, Toyota still maintains a competitive edge over car manufacturers like Honda and Nissan.

Interestingly, amid the turmoil experienced by Japan and Germany, Hyundai’s profit has remained relatively stable, allowing it to secure a spot among the top three automotive manufacturers globallyThe Hyundai-Kia Automotive Group has not fully merged; however, Kia, which is 34% owned by Hyundai, recorded a profit of $1.56 billion in the third quarter of 2024.

If we were to consider their profits together, the combined earnings of Hyundai and Kia would exceed $3.1 billion, positioning them above General Motors and just behind Toyota.

Historically, Korean cars have been perceived as less significant in the global market and likened to Japanese vehicles in terms of affordability

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However, the reality is that while Japanese manufacturers have richer technological heritage, South Korea stands as the second-largest battery producer in the world, demonstrating ample capability for electrification.

Although their competitive stance cannot match that of China, the existence of only Hyundai and Kia in the Korean market means they are not preoccupied with fierce domestic competition, instead focusing their efforts on global outreach—a significant advantage that is often overlooked.

In the context of the shift towards electrification, coupled with the lucrative nature of the U.Sautomotive market adopting exclusionary policies, Korean companies appear to be strategically positioned to benefit from this scenario.

1. The Displacement of Korean Cars

Hyundai and Kia trace their origins back to the post-World War II era—both have had a longer period of development compared to the Chinese automotive sector

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Yet, Korea has never been regarded as a leading automotive nationIn comparison to Europe and Japan, it has historically lagged in technology, often resorting to imitative practices without achieving success in the high-end segment or performance.

During the 1998 Asian financial crisis, decades of effort led Korean car manufacturers to still lag behind their German, American, and Japanese counterpartsFacing insolvency, Kia was directed by the Korean government to merge with Hyundai, which owns a 50% stake in Kia, but both brands have operated independently up to this day, with Hyundai still retaining 34% ownership of KiaThis left Korea with a single major automotive group and resulted in a monopolistic domestic market that primarily conducts business on a global scale.

For a long time, Korean cars have been branded with an unfavorable reputation, often viewed merely as affordable alternatives to Japanese vehicles, falling short on durability and economy

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This has ultimately led to an early retreat in the Chinese market where high-end brands are highly sought after, causing Korean manufacturers to lose out against local competitors.

Thus, in an industry-wide profit downturn, Hyundai and Kia managed to avoid disaster in a manner similar to General Motors since they have long been phased out of the Chinese marketplace.

Beginning in 2019, the market share of Korean cars in China began to plummet, and this year it has dipped below 1%. Cumulatively, they sold around 182,000 vehicles in the first three quarters, with an average sales price indicating projected revenue around $20 billion—paltry compared to Hyundai-Kia's nearly $140 billion overall revenue, meaning losses in the Chinese market would have minimal impact on the businesses.

Conversely, Japanese and German manufacturers are suffering significantly, as their substantial revenue from the Chinese market has declined dramatically

This decline could result in a revenue drop of over 10% for conglomerates, which is devastating in a low-margin industry such as automotive.

Analogous to Samsung, although Korean automotive companies were early to exit the Chinese market, their globalization efforts have mitigated major financial impactsNotably, Hyundai and Kia have witnessed year-on-year growth in their non-China sales data, positioning them favorably in the global arena.

Significantly contributing to this success has been their performance in developed markets such as North AmericaThe 2008 financial crisis prompted a shift in American preferences towards smaller vehicles, favoring the Korean and Japanese automakers and contributing to the decline of U.S

automotive strength.

As the economic landscape in America transitioned away from manufacturing, repair costs soared, leading to a preference for durable vehiclesThe Japanese and Korean vehicles grew to become the predominant category in that market.

Currently, Hyundai and Kia rank among the world's top three automotive manufacturers, while except for Stellantis, all other major competitors still maintain a significant share in the Chinese market, suggesting that Hyundai and Kia's global sales may shrink further relative to their rivals.

In fact, having divested from China early on has morphed into a strategic advantage, with North American and European markets comprising 49% of their sales, effectively positioning them as a leading automotive manufacturer primarily serving Western markets.

This year, Hyundai and Kia are still experiencing substantial growth in North America, exceeding 10%, despite a 9.5% drop in Europe, where other regions are also facing economic downturn, further impacting overall sales.

There is also the noteworthy observation that the Korean automotive market is nearly monopolized, with Hyundai and Kia holding a staggering 90% of the domestic market—equaling the entire annual sales of Korea relative to its exports to Europe, reinforcing Hyundai and Kia as the most stable brands in Korea.

Japanese vehicles account for close to 80% of the Japanese domestic market, while Eurocentric cars represent about 70% in Germany

The U.Shas lost its previous automotive dominance, while Korean and Japanese vehicles now hold sway in a politically nuanced scenario.

The most concerning reality lies in China’s automotive market, with the domestic brand market share at its lowest among major automotive nations, revealing a disturbing 56% reliance on foreign brands.

In the U.S., meanwhile, stands as Hyundai’s largest market, which also happens to be the world's most lucrativeFollowing the Presidential policies aimed at imposing 100% tariffs on Chinese companies, it appears that Japanese and Korean manufacturers will continue to reap the benefits.

2. The U.S

Market: Plug-In Hybrids as Pivotal

The automotive landscape presents a conducive environment for Hyundai and Kia, urging them to outperform their American and Japanese counterparts in North America by capturing a larger market share, highlighting their potential advantage in electrification.

Currently, electric vehicle penetration in the U.Shovers around 10%, with minimal growth this yearThe share of pure electric cars seems to stagnate, while hybrids take the forefrontCurrently, Japanese and Korean manufacturers excel in hybrid technology, witnessing notable growth amid stagnant overall sales.

Analyzing Kia's footprint, their electric vehicle ratio pales compared to Toyota's nearly 40%, at around 20%, yet the growth of Plug-In Hybrid Electric Vehicles (PHEVs) is undeniable.

The difference between PHEVs and Hybrid Electric Vehicles (HEVs) lies in battery size; while HEVs operate on smaller batteries rendering them less potent, PHEVs, with significantly larger batteries, are proving to be more efficient and versatile

The Dmi technology from China has considerably revolutionized HEVs, having bridged the performance gap previously enjoyed by Japanese hybrids.

PHEVs incorporate larger batteries and fuel tanks, akin to those developed by BYDFurthermore, continuation range vehicles like Li Auto and Aito showcase remarkable growth in their respective sectors.

The global surge towards electrification is significantly steered by China's PHEV technology adoption, placing them ahead of the curve.

Despite pushing HEVs in China, Japanese vehicles’ appeal has diminished, primarily due to the inability of their renowned efficiencies to withstand competition, rendering PHEVs as the most cost-effective route for consumers.

HEVs have historically been dominated by Japanese manufacturers with lightweight batteries and robust engines, yet Hyundai is also a major player albeit second globally in hybrid technology.

When comparing Korea’s position in the PHEV race to China, they are lagging

Meanwhile, due to policy barriers, Chinese companies face hurdles in entering the U.Smarket; and while American brands exhibit ambitions in PHEV segments, they depend heavily on battery supplies from firms like CATL and BYD, which are reluctant to engage due to tariff concerns.

It seems that Hyundai is well-positioned to leverage the current dynamic, capitalizing on protective tariffs to seize market share in North America while banking on their battery advantages potentially allowing them to compete against established Japanese and American brands.

However, pursuing this growth logic is contingent upon the political landscape and the strategic commitment of Hyundai toward PHEV technology.

In the European market, meanwhile, Kia’s electric vehicle ratio remains unchanged while PHEV share is declining, with HEV sales recovering, indicating significant competition from local automakers also focusing on PHEVs like BMW and Volkswagen, while Hyundai operates without direct competition.

When comparing technology positions: German PHEVs < Korean HEVs < Japanese HEVs < Chinese PHEVs suggests that while Korea has opted to follow trends with HEV production, the time remains to be seen if Hyundai-Kia can push their PHEVs forward and carve a distinct space.

Unfortunately, the advent of BYD into the European market via local manufacturing plants poses a looming competition threat, potentially accelerating the entrance of other Chinese automotive players

While Hyundai’s PHEV strategy seems promising, the timeframe for their judgment is limited.

Conclusion

The core argument of Hyundai’s strategy pivots on the confrontational nature of U.S.-China relations in the automotive landscape, intertwined with the complexities of electrification and intelligent advancementsEven amidst advancements in the Chinese automotive sector, global dominance won't fully materialize without scrutiny, and Hyundai-Kia stands as a contender with fewer hurdles to address.

Sadly, in 2023, Hyundai and Kia collectively achieved an operational profit of 113 billion, dwarfing the total of all Chinese automotive companies at only about $50 billion combined

Despite being labeled as imitators, Korean brands with seemingly inferior products are witnessing immense global success, potentially surpassing the second-highest profits.

The situation would vary if German and Japanese companies were to merge efforts; their performance metrics could easily overshadow Hyundai and Kia'sYet, China's embodiment of automotive excellence still begs to be established.

The crux of the issue lies in the fact that Chinese consumers often do not exhibit nationalist tendencies in their purchasesEven with the lower durability and economy of Korean cars, Korean buyers are willing to pay a premium for their vehicles, showing a divergence from trends in Germany and America where status often dictates choices

Hyundai and Kia’s dominance in Korea echoes this sentiment, presenting a clear case of market fortress while pointing out inefficiencies in the Chinese automotive sector.

Yet, the trajectory for Chinese automobiles to solidify and expand their lead in electrification remains optimisticA more cohesive focus on expanding domestic brands could potentially achieve market saturation and exit the phase of excessive competitionHypothetically, should China secure a market share of 80-90% for homegrown brands, the prospects for profitability could vastly surpass the current figuresThe Chinese automotive market, boasting nearly 24 million vehicles sold annually, presents significant opportunities that the right partnerships could unlockUltimately, the collaborative effort of both consumers and manufacturers in China will be compelling in shaping this future.