Friday, February 24, 2006

Hyundai Kia and the Wage Freeze Issue

This past week the Korean press has addressed both sides of the Hyundai-Kia labor wage issue. As I've noted, it's been a carefully watched topic for months, which has surfaced in heated debate with this week's wage freeze announcements by Hyundai Kia top management.

This Chosun Ilbo editorial cites concerns from a Korea perspective... (you may wish to look at Businessweek's take on the issue, although I don't entirely agree with BW....controlling the union is still a huge issue.)


Chosun Ilbo
Some 11,000 managerial staff with Hyundai Motor and affiliate Kia Motors have voluntarily agreed to a salary freeze this year. Their decision encouraged officials at other subsidiaries of the Hyundai Automotive Group to announce a wage freeze, led by top executives including chairman Chung Mong-koo.

Hyundai Motor has been accused of passing losses caused by the falling U.S. dollar against the won on to its 2,000 suppliers, most of them small and medium-sized companies, by demanding that they reduce the prices of auto parts by 10 percent on average. The company says that is inevitable if it is to stay afloat since the falling dollar and high oil and raw material prices are threatening the company'’s profitability.

A closer look at the company's situation reveals why it feels so anxious. Even though it recorded its highest ever profits last year, operating profits from production and exports declined by as much as 30 percent from 2004. The operating margin, which stood at 8-9 percent until a few years ago, dropped to 5.1 percent, and sales, which had been rising for the last seven years, also decreased for the first time last year.

More seriously, the global car market is saturated. While the number of cars sold is barely increasing, the entry of China and India into the market is raising global manufacturing capacity to some 24 million cars in excess of demand. This is why carmakers such as General Motors and Ford are tightening their belts, closing down many factories and laying off tens of thousands of workers.

Hyundai Motor is losing ground in the competition to develop future products like hybrid cars. Toyota, GM and Ford are investing three times as much in research and development as Hyundai and Honda twice as much to develop hybrid models.

The carmaker'’s trade union, which has gone on strike almost every year, needs to sit down with the company and think about how they can survive the competition together. The most important factor is building trust between the two sides. Toyota was able to do business without strikes for 50 years and froze wages for a record five years because its union and management remain in constant dialogue.

That is why Hyundai management needs to heed union complaints that it is unilaterally pressuring workers by announcing the salary freeze for managers without consulting them first. It could also consider alternatives to an unconditional freeze, such as offering performance-related bonuses.

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