Labor Unions

Hyundai's largest-ever labor strike to weigh on South Korean economy

Hyundai's labor strike could weigh on South Korean economy

Hyundai Motor, the world's fifth-largest automaker, is no stranger to worker strikes but the current episode—its biggest ever—is raising alarm bells.

The company's labour union in South Korea conducted its first nationwide, full-day walkout in 12 years on Monday over demands for wage increases. The strike is expected to continue until next week depending on the company's response, a union spokesman told Reuters.

For the past three decades, Hyundai workers have gone on strike nearly every year but this year's stoppage is particularly severe, according to statistics from brokerage Kiwoom Securities.

  • Unionized members have gone on strike 21 times and engaged in 27 rounds of wage negotiations so far this year, a new annual record.

  • That's resulted in a production loss of 117,000 cars, worth more than 2.5 trillion won ($2.5 billion), Hyundai's largest strike-related output loss.

  • Because this week's strike is illegal, there is a "no work, no pay" policy in effect. Income loss is estimated at about 2 million won ($1,790) per worker, the highest ever recorded.

Impact on Hyundai

This week's events are sure to dent the company's third quarter earnings, due October 1, and while the direct impact is expected to be limited, the outlook is not rosy.

Hyundai's operating profit will likely to take a 2.5 percent hit from strike-related losses, said Daniel Yoo, head of global wealth management at Kiwoom. The relatively mild overall impact on earnings meant Hyundai does have more room to increase labour costs and end the current deadlock, he continued.

But because recent earnings growth has been poor, bosses may be wary to give into worker's demands, Yoo suggested. The company's second quarter net profit fell 2.6 percent on year, the 10th straight quarterly decline.

"Korea's overall corporate earnings peaked in 2011 and there hasn't been much earnings growth since then so you can't blame management," Yoo said.

The larger, impact, however, could be on the company's reputation.

"Hyundai's image is currently having a hard time; there's a perception that the firm is behind the curve when it comes to electric cars so this strike is magnifying the negative image," Yoo said.

Why Hyundai Motors' labor union negotiations will be tricky

Wider implications

The strike "will throw a cold blanket over the slight recovery pace of the country's exports," South Korea's Ministry of Trade, Industry and Energy warned in a statement this week.

"The labour side should end the strike and make efforts to normalize operation, while the management should do its best to complete negotiations with the union to minimize the impact on the local and entire economy," the ministry said.

As Korea's largest carmaker, Hyundai, and its sister company Kia Motors, dominate the domestic auto industry, which makes up around 12 percent of Korea's manufacturing industry and 14 percent of total exports. Hyundai's output losses from the strike could further weigh on the nation's already-vulnerable exports, which declined for 19 out of the past 20 months.

If left unresolved, the labor dispute could delay exports of Korean vehicles worth $1.3 billion, the Korea Herald reported, citing the government.

Labor Minister Lee Ki-kwon said on Wednesday that the government would consider all possible measures to end the strike given its impact on the broader industry and national economy, the Korea Herald reported.

Hyundai's deep-rooted issue of compensation is symptomatic of labour market challenges in South Korea, Trinh Nguyen, senior economist for emerging Asia at Natixis, explained.

Management proposed in August to increase monthly wages by 58,000 won ($52), in addition to a 350 percent bonus and a one-time cash payment of 3.3 million won ($3,000), for each worker, Yonhap News reported. But nearly 80 percent of union members rejected the deal.

Asia's fourth-largest economy is experiencing a decline in the working-age population, a factor that gave employees leverage over companies, Nguyen pointed out.

Current developments could also pose weighty consequences on the future of Korean manufacturing.

"At the moment, 40 percent of Hyundai's production is within Korea. But given the challenges the firm face regarding production and profitability, it will likely consider off-shoring more production in the future," Nguyen said.

Even outside the auto industry, workers have demanded changes to existing wage conditions. On Tuesday, the Korean Public Service and Transport Workers' Union began an all-out strike to protest the government's merit pay system.

The country's labour unrest has pushed several firms, including Samsung Electronics, to move factories into lower-cost countries such as Vietnam, Nguyen said. "Increasingly, other Korean firms will be pushed to do so to remain competitive globally."

—Follow CNBC International on Twitter and Facebook.