The domestic auto industry, which barely got past the unions' summer labor strife risk during this year's wage and collective bargaining talks and was speeding up to normalize production, has run into a major, unexpected headwind: a stronger won (a falling won-dollar exchange rate). Given an industry structure where exports account for as little as the 60% range and as much as above 98% of total sales, a sharp drop in the exchange rate is bound to hit profitability in the second half.
According to the Seoul foreign exchange market on the 8th, on the 7th the won's exchange rate against the U.S. dollar fell intraday to as low as 1,334.7 won. It is the first time in about 1 year and 11 months since Oct. 4, 2024 (1,331.3 won) that the won-dollar rate has entered the 1,330-won level. Compared with the peak on July 1 (1,599.2 won), it plunged 264.5 won in just over two months. Brokerages said expectations for U.S. rate hikes still exist but are insufficient to reverse the weak-dollar trend, and projected the rate could open to the low 1,300-won range.
A stronger won is especially damaging for autos, where exports are a high share. In a cost structure centered on domestic plant production, converting overseas sales proceeds into won inevitably slashes the book sales and profits in hand. On top of that, even the price competitiveness enjoyed during a weaker-won period can erode. If corporations try to defend by increasing sales incentives or lowering export prices to directly absorb foreign exchange losses, it will be hard to avoid deteriorating earnings.
In fact, major domestic automakers are overwhelmingly dependent on overseas markets. For Hyundai Motor and Kia, exports accounted for 63% and 69% of auto sales, respectively, in the first half. For GM Korea, the figure is close to 98%. According to an analysis by Daol Investment & Securities, for every 100-won drop in the won-dollar rate, annual operating profit falls by about 1.9 trillion won for Hyundai Motor and about 1.4 trillion won for Kia, and operating margin for both companies declines by about 1 percentage point.
The problem is that the automakers' fundamentals have already weakened. Hyundai Motor's consolidated operating profit in the first and second quarters fell 30.8% and 20.8%, respectively, from a year earlier, staying in the 2 trillion won range throughout. It sought a rebound on new-model effects in the second half, but domestic and overseas sales in July–August fell 5.1% and 14.2%, respectively, due to labor disputes and strikes, disrupting production.
Yoo Ji-ung, an analyst at Daol Investment & Securities, said, "The production disruption tally from Hyundai Motor's full strike in August is about 50,000 vehicles," and added, "Achieving the initial annual business plan of 4.15 million (global) units looks somewhat difficult."
The brokerage consensus compiled by FnGuide currently shows Hyundai Motor's operating profit rising 21.2% and 78.4% year over year in the third and fourth quarters, respectively, but those figures have yet to reflect the recent sharp drop in the exchange rate. GM Korea has returned to a normal management track this year by investing a total of $600 million in Korea and executing mid-year dividends totaling in the 4 trillion won range, but if the stronger-won phase persists, that momentum will be hard to sustain.
Experts expect the impact of the falling exchange rate to concentrate in the fourth quarter. Kim Yong-min, an analyst at Yuanta Securities Korea, said, "The adverse FX impact on third-quarter results can be partially offset by a smaller size of additional foreign-currency provision," but added, "If there is no FX movement in the fourth quarter after the sharp end-third-quarter drop, the profitability decline of export volumes due to a stronger won will be fully reflected in the fourth quarter." He added, "From a sectorwide perspective, a stronger won can lead to declines in both scale and profit."