Sources: Hyundai Motor, Kia Motors Cut China Output Amid Diplomatic Tensions

South Korea’s Hyundai Motor Co and Kia Motors Corp have slashed vehicle production in China, sources said, as diplomatic tensions and competition from Chinese brands play havoc on sales and threaten earnings.

China, the world’s biggest auto market, accounted for over a quarter of the pair’s 2016 overseas sales but their March sales there were smashed by anti-Korean sentiment and competition from the likes of Geely Automobile Holdings Ltd.

Hyundai and Kia saw their combined China sales slump by 52 percent in March from a year earlier, Yonhap news agency reported on Tuesday, endangering not only the automakers’ earnings but those of South Korean suppliers.

Political tensions have soared since late February when South Korea’s Lotte Group agreed to provide land for a U.S.

missile defense system outside Seoul. The move angered Beijing, although Seoul says the system is a response to North Korea’s nuclear threat and is not aimed at China.

South Korean firms including Lotte Group have been targeted in a Chinese backlash involving boycott calls in state media, protests and suspensions of operations.

But analysts and sources said the row was just another headache for the South Korean carmakers, whose long-term challenge has been how to compete in China and the United States where their mainstay sedans have lost market share to sport utility vehicles.

“China is not the goose that lays the golden egg for Hyundai anymore,” said Lee Hang-koo, a senior research fellow at Korea Institute for Industrial Economics & Trade.

Hyundai’s problems were a result of its “failed global strategy,” he added.

 SHIFT CUTS Kia Motors has cut production shifts at its China factories, two of the sources familiar with the matter told Reuters.

Hyundai also had eliminated a second shift from its three factories in Beijing starting mid-March, one of the people said.

The sources declined to be identified because the matter was not public. The automakers declined to comment on Tuesday.

Hyundai had already suspended output at its factory in Hebei from March 24 to April 4. It was unclear how the shift cuts would affect employment.

Hyundai Motor has four passenger car factories in China, with one more plant scheduled to commence production later this year. Kia, Hyundai’s smaller affiliate, has three.

Poor consumer sentiment towards South Korean products in China had likely dragged down overseas sales in March, the companies said on Monday without putting a number on the falls.

One source said Kia Motors’ China sales likely more than halved in March from the year prior.

In the United States, Hyundai Motor posted a sales fall of 8 percent and Kia Motors slumped 15 percent in March from a year earlier. The U.S. market declined 2 percent in March.

Hyundai Motor shares fell 2.6 percent and Kia Motors declined 0.8 percent in the wider market, which was down 0.1 percent as of 0310 GMT.

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