SEOUL -- Hyundai Motor Co. reported an 11 percent drop in second-quarter profits on Thursday, hit by slow domestic sales and higher steel prices, but the fall was less than expected.
While domestic sales, hit by consumer debt and high oil prices, look set for a modest recovery, Hyundai's outlook is clouded by ballooning labor costs and slowing growth in China.
Healthy sales to China and Europe in the June quarter helped offset an 11 percent fall in sales on the home market, where Hyundai has a dominant 42 percent share.
"The results don't look too bad. Inventory levels stabilized and Hyundai did relatively well amid weak local sales," said Song In-ho, a fund manager at Kyobo Investment Trust Management Co.
"The fundamentals remain healthy. Domestic sales will remain weak for a while, but Hyundai sells well in Europe and the U.S."
Exports make up about 60 percent of total sales.
Hyundai, the world's seventh-largest carmaker, earned a net profit of 510 billion won ($437 million) for the quarter to June, down from 570.9 billion won a year ago, but beating analysts' forecast for 492.2 billion won.
Sales rose more than 9 percent to 7.2 trillion won from 6.6 trillion.
Hyundai is expected to post a 2.03 trillion won net profit in 2004, up 17 percent, according to Reuters Estimates, implying its second-half performance will improve over the first six months.
World steel prices, which make up 7 percent of Hyundai's material costs, rose 14 percent in the first half. Analysts said a 10 percent rise in steel prices would typically increase Hyundai's costs by 190 billion won this year.
After a five-day strike this month, unionized workers at Hyundai agreed a pay deal that analysts said would increase labor costs by almost 14 percent this year to 2.9 trillion won.
Allaying some market concern, Hyundai Motor said it had no plans to get involved in supporting sibling firm INI Steel's takeover of bankrupt Hanbo Steel.
Hwang Yoo-no, a director of Hyundai's finance department, told analysts the company expected a modest recovery in domestic auto sales for the second half thanks to new models.
"Domestic economic stagnation, cresting oil prices and household debt all depressed demand for autos," said Hwang. "We expect a modest recovery in local sales during the second half."
There has been some market optimism ahead of next month's launch of an upgraded version of the EF Sonata, a top seller in Korea, while the new Tucson, a smaller version of the popular Santa Fe sport utility vehicle, is set to debut abroad later this year after hitting showrooms in Korea in April.
The outlook for exports is less certain.
Car sales in China, which accounts for about 10 percent of Hyundai's total exports, fell for a third straight month in June as Beijing moved to cool its red-hot economy, prompting carmakers to cut prices.
Hyundai sold 56,000 units in China in the first half, almost treble its sales in the same 2003 period.
Hyundai and affiliate Kia Motors Corp. last month unveiled plans to invest more than $1 billion extra in China, the world's fastest growing automotive market, where Hyundai has set a goal of producing 600,000 units per year.
Hyundai ranks seventh in the United States, which accounts for close to a third of sales, with a 2.4 percent market share, just after Nissan Motor Co. and above Mitsubishi Motors Corp.
The South Korean firm has set a goal to become one of the world's top five auto makers by 2010.