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Online Extra: Mobis: Hitched to Hyundai's Wagon


By Moon Ihlwan In recent years few auto makers have grown faster than South Korea's Hyundai Motor (HYMTF) Group, which includes Kia Motors (KIMTY) as well as the Hyundai brand. Coming from nowhere in the 1990s, Hyundai is now the world's seventh-largest carmaker.

And no company has benefited more from the Korean automaker's rise than parts manufacturer Hyundai Mobis

. A key affiliate of the largest Korean carmaker, Mobis is Hyundai's sole supplier of spare parts and modules. It's also the highest-ranking Korean company on the 2007 version of the Asia BusinessWeek 50 rankings, coming in this year at No. 42.

Not bad for a company that doesn't have much of a history in the car business. Mobis only became an auto parts specialist in the first two years of this decade. Until 1999, Mobis was best known for making shipping containers, rolling stock, and outdated sport utility vehicles. Formerly called Hyundai Precision Industry, it acquired service parts businesses from Hyundai Motor and Kia in 2000 and by the end of 2001 had sold off all other businesses.

Currency Concerns Don't Damp Optimism Mobis has since been on a roll. Its sales have jumped fivefold to $8.7 billion in 2006 from $1.7 billion in 1999, while its net profit soared to $732 million from $23 million. Mobis stock has surged 17 times, to $105, since the end of 1999, compared with less than a fourfold increase for Hyundai Motor shares and just an 83% rise for the benchmark Kospi stock index during the period.

Now, with a strong won eating into Korean companies' competitiveness overseas, Hyundai's car sales growth in the U.S. and some other export markets has come to a screeching halt. Yet Mobis executives remain sanguine the company will keep expanding to join the league of the top 10 global auto parts makers in three years, up from 19th last year. "Despite turbulence in the auto industry, we are confident we'll post a double-digit annual growth over the next several years," says Mobis Chief Financial Officer Choi Byung Chul. "We can easily exceed our target of achieving $16 billion in revenues in 2010." (See BusinessWeek.com, 4/17/07, "Would You Buy A $30,000 Hyundai?".

The optimism stems from a handful of factors that could mitigate any industry downturn. First, a big chunk of Mobis' profits comes from the sale of parts used for maintaining cars. "This largely depends on how many cars Hyundai and Kia sold in the past five years, and they've had a pretty impressive growth," says Stephen Ahn, auto analyst at brokerage Woori Investment & Securities (WOOIF).

Indeed, the company expects the number of Hyundai and Kia cars relying on Mobis parts for servicing to increase to 26.4 million this year from 17.3 million in 2001. Moreover, Mobis had a fat margin of 19.7% from the sale of spare parts in the first half of this year, a rate which company officials don't expect to fall any time soon.

Room to Run in Modules Then there's a big growth potential in its module business. In recent years, Mobis has forged partnerships with foreign leaders such as Bosch (BCSHF) and Siemens (SMAWF), acquired local brake and lamp manufacturing companies, and swelled the ranks of its research and development engineers to 700 (from 150 in 1999) to boost its capabilities to make state-of-the-art modules for braking, steering, and safety systems.

Such upgrades are essential for Mobis, which wants to sell more parts in the form of semi-assembled kits known as modules. Front-end modules, for example, encompass headlights, radiator, engine-cooling-fan systems, and the bumper fascia and beam. "I see ample room for us to improve profitability in the module business," Choi says. Mobis, which now accounts for some 20% of anti-lock braking systems and headlights fitted in Hyundai Group vehicles, hopes to increase the portion.

Hyundai Mobis is also trying to reduce its reliance on Hyundai and Kia for growth. Last year it began supplying Chrysler (DAI) with chassis frames loaded with engines, transmission, brake systems, and about 300 other components for 2007 model Jeep Wrangler sport-utility vehicles built in Toledo, Ohio. The deal, valued at an estimated $190 million, is the first major module contract Mobis has secured with non-Hyundai group carmakers.

Corporate Governance a Concern Still, analysts don't expect Mobis to have a dramatic growth over the next couple of years, although they see an annual expansion of 10% or so. "The company's technical tie-ups with foreign parts suppliers will limit the scope of its business with overseas automakers" until its licensing agreement expires in 2009, says Kim Jae Woo, auto analyst at Mirae Asset Securities in Seoul.

Another lingering question is the company's corporate governance. Rating company Moody's Investors Service (MCO) has expressed concern about the potential risk of financial support by Mobis to its affiliates due to complicated cross-ownership among Hyundai Motor group companies.

Kia and Hyundai Motor Chairman Chung Mong Koo

control Mobis with a combined ownership of 26.1%. The parts maker in turn is the biggest shareholder of Hyundai Motor, which then owns 39% of Kia. "These arrangements make it difficult to be certain that there is a fully transparent picture in respect of the company," Moody's said in a recent report (see BusinessWeek.com, 2/5/07, "Hyundai's True Trial: Better Performance").

The interdependence among the group companies is poised to deepen as Hyundai and Kia press ahead with their overseas expansion. The two, together, are in the process of adding capacity for 1.5 million vehicles in the U.S., China, India, and the Czech Republic by 2010 on top of their global production of some 3.7 million last year. And Mobis plans to follow in their footsteps to enjoy the captive demand the group is creating. Moon is BusinessWeek's Seoul bureau chief


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