Third-quarter earnings reports showed that Hyundai suffered 76% decrease in operating profits. To make matters worse, Standard & Poor’s lowered its rating from “A-” to “BBB+”.

It mentioned that there were several reasons behind Hyundai’s under-performance, such as unfavorable exchange rates, a global trade war, strengthening of environment regulations and conflicts between labor and management.

However, apart from these short-term issues, there are fundamental reasons that Hyundai and Kia Motors are struggling in an ever more competitive automobile industry.

Low productivity and labor inflexibility

Labor strikes at Hyundai Motor Company (HMC) caused losses of 7.5 billion won (US$6.73 million) in the five years from 2013 to 2017. Kia Motors likewise suffered from strikes, resulting in losses of 4.4 billion won worth of production.

These strikes have become annual events, with labor unions demanding higher wages and better working hours even when Hyundai and Kia laborers already have among the highest wages and lowest productivity compared with competing companies such as Toyota. When they go on strike, companies suffer from not just halts in production but other administrative costs as well.

Moreover, Hyundai Motor needs 26.8 hours of labor inputs to produce a car compared with Toyota’s 24.1 hours, GM’s 23.4 hours and Ford’s 21.3 hours. The average ratio of labor wages to net revenue for five auto companies in Korea is 12.2%, compared with 7.8% for Toyota and 9.5% for Volkswagen. The average annual wage for a Korean autoworker is also one of the highest in the world.

All of these – low labor productivity, rigid flexibility and strikes – have not only caused operating losses and but also impaired Korean automakers’ brand images. The inefficiency and intangible losses caused by self-serving labor unions is unlikely to get better any time soon as they are still going out on strike in 2018 and plan to do so in the future.

Hydrogen fuel cells vs electric vehicles

The future of the automobile industry is divided into two potential mainstreams: vehicles driven by hydrogen fuel cells (HFCVs) and electric vehicles. Although it is too early for a decisive verdict on who the winner will be, for now commercialization of electric cars seems to be going faster, led by Tesla. Elon Musk, chief executive of Tesla, has said HFCVs: “Hydrogen is suitable for rockets but not for cars.” But Jim Lentz, CEO of Toyota North America, says his company is betting big on hydrogen-fuel-cell cars.

In fact, electric vehicles are at least three times as energy-efficient as HFCVs, and there is already a well-established electrical-grid system, while going the fuel-cell route would necessitate a brand-new multi-trillion-dollar hydrogen delivery infrastructure. Yet Hyundai has made a bet that fuel cells are the best bet for self-driving cars.

Even putting aside technological advantages such as quick charging times and long driving range available for hydrogen cars, the electric-car industry seems to be ahead of the game in commercialization and setting up infrastructure.

It is too early to tell which will be the ultimate winner. If the electric car wins the race and establishes its infrastructure with economies of scale, HFCVs will have a hard time surviving the wave of change that is sweeping across the automobile industry regardless of their technological advantages.

Management misjudgments

In September 2014, Hyundai Motor Company spent 10.5 trillion won to buy a swath of land from Korea Electric Power Corporation. The bidding price was estimated to be three times competing offers and market consensus price. HMC’s stock price plummeted in the week following the announcement, falling about 17% – and it has never fully recovered – as investors felt that the company’s management was not serious about future technology and was wasting resources that could have otherwise been spent on other core future-related automobile technology.

Even four years later, it now seems that this land purchase at an excessive price had no strategic planning and no justifiable rationale behind it. This incident simply indicates a lack of judgment and preparation for the future from the HMC management.

Moreover, there is difficulty in succession that complicates matters. South Korea has one of the highest inheritance taxes in the world (maximum 50%, and 65% for majority shareholders), which makes it difficult for the heads of any Korean company to be succeeded by heirs. This is also the case for Chung Eui-sun, executive vice-chairman of HMC and the only son and “heir apparent” of Hyundai Motor Group chairman Chung Mong-koo, becoming leader of the company.

The current chairman and CEO, Chung Mong-koo, aged 80, has not appeared officially since December 2016, and Hyundai Motors is thus virtually without strong leadership.

There have always been debates on whether professional managers or family members run companies better. But in critical times like this, companies do need strong leaders who can make long-term plans.

Low R&D investment for future

The ratios of research and development R&D to net sales revenue of HMC and Kia Motors are about 2.4% and 2.7% respectively. Competing firms, on the other hand, such as Volkswagen, General Motors and Honda, have ratios of around 5-6%.

One of the reasons that Samsung succeeded in the semiconductor industry was that it invested heavily in R&D for a long time. It made such investments when it was still not making profits in the 1990s and 2000s, and now it is reaping the harvest by being the best-performing semiconductor maker in the world. Samsung still spends about 6.4% of sales revenue on R&D. On the other hand, low R&D spending of Hyundai and Kia compared with competing companies raises another red flag on future prospects.

Numbers are showing that Hyundai and Kia Motors are struggling. Their stock prices have dipped below 100,000 won, more than halved from their peak in 2012. Their share of the Korean domestic market and operating income have been declining rapidly. They are also struggling in China.

In contrast, the competition in the automobile industry has been intensifying with the advent of the Internet of Things, autopilots, and smart and electric vehicles.

Hyundai Motor invested in hydrogen fuel cell technology that is far from commercialization, and has fallen behind investment in future technology; managers decided to buy a chunk of land instead of investing in the future; labor unions still refuse to increase their productivity and go on a strike every year; and in the meantime, Tesla is leading the future electric-vehicle industry while companies like Baidu, Google and Tencent are aggressively investing in future automobile technology and smart cars.

Stock prices simply show that where the major Korean automakers stand right now, and the future does not seem to be bright.

This article is also published on Joon’s Blog.