Hyundai Motor Co (KRX:005380) Angers Unions, Agrees to $10 Billion Deal

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By Mark Michaels on September 26, 2014 Company

It was announced earlier today that Hyundai Motor Co, in partnership with its two affiliates, approved the largest property deal in Asia since the financial crisis. The management board of the company agreed to pay the equivalent of $10.12 billion (10.55 trillion won) for a plot of land that will house the company’s new headquarters in downtown Seoul.

The group led by Hundai includes Kia Motors Corp (KRX:000270) and Hyundai Mobis Co. (KRX:012330). The three companies agreed on the price, which was more than three times the appraised amount. This move instigated a sharp sell off in all three of the companies’ shares.

Since today, the equivalent of $11.11 billion, or 11.6 trillion Korean won has been taken off the market values of each of the companies since the announcement of the purchase.

Employees that belong to labor unions, who make up the majority of the workforce of the companies, voted earlier today to instigate a strike next week in an effort to show disapproval of the land purchase.

The property purchase will be used to house a new headquarter building, hotel, and theme park.

According to Hyundai Motor in a regulatory filing today, building an integrated control tower will boost brand value and work efficiency.

The group led by Hyundai actually beat out Samsung Electronics (KRX:005930) to purchase the plot of land in the city’s Gangnam district, one of the most luxurious and high end parts of Seoul. The company plans to sign the deal with the Korea Electric Power Corp later today.

Hyundai Motor’s shares closed today at 187,000 won each, a drop of 1.3 percent – their lowest price in the past seventeen months. Kia Motors saw their stock fall by 0.8 percent, while Hyundai Mobis jumped 0.6 percent.

The price tag of $10 billion for the property is equivalent to selling just under half a million of Hyundai’s Sonata sedans, as well as almost two years of combined wages for the 63,099 employees employed by Hyundai in Korea.

The company will pay 55 percent of the $10 billion price, followed by 25 percent to be paid by Hyunda Mobis Co Ltd, then 20 percent from Kia Motors Corp. The companies did not say whether the approval by the board was unanimous or not.

Every since September 18^th, the management boards of all three companies had approved bidding without knowing the price, which was classified as confidential information.

However, board disapproval is not common at family owned conglomerates in Korea.

Extended Strike

The purchase of the property caused the domestic unions of both Hyundai Motor and Kia Motors to resume their partial strikes this week. The outlook for annual wage talks seems uncertain.

According to Kia’s union, workers are angered by the exorbitant amount of money that is to be spent on the land.

According to Hyundai Motor’s labor union, they will stage a partial strike starting from Monday continuing until Thursday next week.

Hyundai, the fifth largest car manufacturer in the world, has been suffering from strikes in all but a period of four years in the 27 years that the labor union has been I place. However, workers usually make up losses with extra work later in the year.

The halt on work arrives just as Hyundai and Kia plan to construct new manufacturing plants in Mexico and China. These factories are closer to export markets and are in countries where wages are lower than those in South Korea.

The issues of high wages domestically, recurring disputes regarding labor, and a strong currency will most likely put even more pressure on the auto manufacturer to focus on production overseas. Hyundai produced 62 percent of its cars overseas last year, which is a marked improvement from the 20 percent in 2004.

Since annual wage discussions began in early June, union negotiators have fought over a new calculation for wages. Hyundai Motors says that the new calculation methods would dramatically increase the cost of labor.

The company’s employees in South Korea earn an average of 94 million won, or the equivalent to about $90,419 per year. This is not including the company’s executives.