Hyundai Motor bets big on Hyundai Engineering & Construction

Faced with a need to diversify its business portfolio and to strengthen its competitiveness in the field of eco-friendly growth, Hyundai Motor Group is turning its eyes to the construction sector.

While the country’s second largest conglomerate has more than doubled its assets from the 36 trillion won ($31.9 billion) at the time of its establishment as a separate conglomerate in 2000 to 100.7 trillion won this year, its business portfolio is heavily concentrated on the automotive industry.

At present three of the four top earners Hyundai Motor Co., Kia Motors Corp., Hyundai Mobis Co. and Hyundai Steel are directly involved in the automotive industry.

Due to the nature of its profit structure, the group’s performance is dependent on the conditions in the automotive industry, and as the competition intensifies and regulations become stricter, the rate at which the group’s revenues have been growing has been significantly reduced in recent years.

As such the group is hoping that expanding into the construction sector will be able to offset the effects of slowing growth of its automotive and steel businesses.

“The construction industry has a higher growth rate than the group’s existing businesses, and the demand for eco-friendly overseas projects is increasing,” a Hyundai Motor Group official said.

“In addition, the construction industry can complement the auto industry’s business cycle.”

Although the group already counts a construction company, Hyundai Amco, among its subsidiaries, Hyundai Motor Group is hoping to jumpstart its ambitions for the construction industry by acquiring Hyundai Engineering and Construction.

Hyundai E&C is the country’s top, and the world’s 23rd largest construction company, and laid the foundations for late Chung Ju-young’s Hyundai Group from which the current Hyundai Group and Hyundai Motor Group were spun off.

Hyundai Motor Group submitted last month its bid for a $2.5 billion stake in Hyundai Engineering & Construction.

On Tuesday, the conglomerate announced a plan to invest 10 trillion won in Hyundai Engineering & Construction by 2020, raising the stakes in its competition with Hyundai Group, the other bidder for the builder.

The auto giant set a goal for Hyundai E&C to achieve 120 trillion won in orders and 55 trillion won in sales for 2020.

The plan also envisions that the builder will diversify its business portfolio through stepping up its presence in fields such as harbor works, chemical engineering, water plants, road construction, residential building and real estate, a group official said.

Shifting its business focus to higher value-added projects from heavily construction-centered operation, the company expects to expand its some 90,000 labor force to 410,000 by 2020.

“Hyundai Engineering & Construction will be our new growth engine to become a global general engineering company,” the official said. “We’ll gather our energies to strengthen the country’s capacity in high value-added construction.”

The successful bidder will acquire 34.88 percent, or a little less than 39 million shares, with prices estimated to settle at between 3.5 trillion won to 4 trillion won.

Korea Finance Corp. is currently the builder’s largest shareholder with 11.12 percent of shares.

“Since 2005, Hyundai E&C has grown by more than 20 percent annually, and in addition to being the country’s top builder, its international rankings have climbed from 59th place in 2007 to 23rd in 2009,” a Hyundai Motor Group official said.

In addition to representing the means to give its ambitions for the construction sector a massive boost, the conglomerate says that Hyundai E&C’s incorporation into the group will complete what it calls the “Eco Value Chain.”

“According to the International Energy Agency’s scenario, three areas transport, industry and construction are at the core of plans for reducing greenhouse gases,” a Hyundai Motor Group official said. He added that the group’s efforts in the transport sector would include electric cars and trains while those for the field of industry will take the form of making the steel industry more environmentally friendly.

“By securing those from the construction sector such as eco-friendly buildings and nuclear power plants, the group will be able to significantly expand green businesses and complete the Eco Value Chain.”

In addition to playing a significant role in its plans for the future, Hyundai Motor Group projects that significant synergy effect will be created for both itself and Hyundai E&C if it succeeds in acquiring the builder.

“One of the main problems Hyundai E&C faces is that its overseas portfolio is focused too much on the Middle East. So expansion in South America and other emerging markets is important for the company’s growth,” a Hyundai Motor Group official said.

“In this, Hyundai Motor Group’s global network can be used to accelerate Hyundai E&C’s expansion into new markets, while Hyundai E&C’s presence in the Middle East can work in favor of Hyundai Motor in such markets.”

The conglomerate is also hoping that Hyundai Steel and Hyundai Rotem, the group’s rolling stock maker, will be able to work in concert with Hyundai E&C in overseas projects.

Suggestions for such collaborative projects put forward by Hyundai Motor Group include a package deal between Hyundai E&C and Hyundai Rotem in undertaking overseas railroad projects, and Hyundai Steel providing a stable source of materials for any overseas civil engineering contracts the builder may undertake.

While Hyundai E&C represents an unprecedented opportunity for growth, Hyundai Motor Group says that it is not charging in blind, and that its designs for the construction company are based on sound business planning and experience gained from a series of successful takeovers.

“Starting in 1999 with Kia Motors Corp., the group has carried out more than 10 M&A actions and turned around struggling firms into thriving businesses. Such bold actions have allowed the group to grow at an average rate of 10.9 percent over the past 10 years,” a Hyundai Motor Group official said, citing examples of Kia, Hyundai Card and Hyundai Steel.

According to the company, Hyundai Card has gone from the smallest credit card operator to the second largest while Hyundai Steel has seen more than 6.2 trillion won investment since being taken over by the group.

In contrast, Hyundai Group, the only other bidder for Hyundai E&C, is said to have succeeded in one M&A, and grown at an average rate of 1.8 percent annually over the same period.

 

By Choi He-suk  (cheesuk@heraldm.com)

http://www.koreaherald.com/business/Detail.jsp?newsMLId=20101020000753