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Hyundai denies talks to sell stake in Rotem to Siemens

Apr 20, 2021 (Gmt+09:00)

Hyundai Rotem's commuter train shipped to Taiwan
Hyundai Rotem's commuter train shipped to Taiwan

Hyundai Motor Co. said on Wednesday that it is not seeking to sell a stake in Hyundai Rotem Co., in response to reports that the South Korean carmaker is in negotiations with Germany's Siemens AG to sell Rotem's rolling stock business.

On Tuesday, investment banking sources said the automotive group was in the final stages of talks to sell the loss-making rolling stock division of Hyundai Rotem to Siemens which is seeking a foothold in Asia.

"Unlike the reports, we are not seeking to sell a stake in Hyundai Rotem," Hyundai Motor said in a regulatory filing, without elaborating further. Rotem also repeated the denial in a separate filing, citing its top shareholder Hyundai Motor. But both companies made no mention of Rotem's rolling stock business.

According to the sources on Apr. 20, both Hyundai and Siemens entered negotiations early last year on the rolling stock business carve-out, but have yet to fine-tune the terms and details.

Hyundai Motor is the top shareholder of Rotem with a 33.8% stake valued at around 1 trillion won ($900 million), including a management premium. The National Pension Service is Rotem's No. 2 shareholder with a 5% stake.

To pave the way for the sale, Hyundai Motor was considering splitting off Rotem's operations into three main areas: rolling stock; defense systems; and the plant and machinery, the sources said. The South Korean carmaker's planning and coordination division was spearheading the negotiations. 

The rolling stock division, making up slightly over half of Rotem's sales, was an amalgamation of the railway vehicle businesses of three Korean conglomerates -- Hyundai, Daewoo and Hanjin -- in the wake of the 1997-98 Asian financial crisis. It sells rail cars to emerging markets, including Taiwan.

But the division has been suffering consecutive losses since 2018, topping 300 billion won. Because of the intense price competition, manufacturing costs for railway vehicles have already outweighed sales.

If the reported deal goes through, Rotem's remaining businesses will likely be put on the domestic market, or transferred to its sister companies, according to the sources. For example, the defense systems division, which produces armored vehicles, may be sold to a domestic company, or transferred to Kia Corp., another carmaker under the Hyundai Motor Group, given the difficulty of winning government approval to sell the defense business abroad. The plant and machinery division could be transferred to Hyundai Steel Co.

"Competition between global manufacturers has been intensifying, with Chinese companies emerging as the dominant players," said an industry source. "Further, price competition has undermined the bottom line of Hyundai Rotem, which has a relatively weak market position."

Government subsidies provided to Rotem's competitors from other countries dealt another blow to Rotem, further reducing its chances of winning an order. The overcapacity and the consolidation trend in the global rolling stock industry were also behind Hyundai's decision to abandon the loss-making business, the sources added.

Hyundai Rotem's annual results
:

2018 2019 2020
Sales 2.4 trillion won 2.5 trillion won 2.8 trillion won
Operating profit/loss -196.1 billion won -279.9 billion won 82 billion won


In 2019, the rolling stock division suffered from a 259.5 billion won loss, although this narrowed to an 11.6 billion won loss last year.

Hyundai Rotem's 2020 sales breakdown:

Business Sales  Portion
Rolling stock 1.5 trillion won 52.1%
Defense systems 822.4 billion won 29.5%
Plant and machinery 453.6 billion won 16.3%
Other 57.2 billion won 2.1%


Meanwhile, the possible sale may trigger concerns about transferring Hyundai's original technology abroad, which could lead to the collapse of the country's relevant industries.

(Amended on Apr. 21, 2021 to change the headline and the lead after Hyundai Motor and Hyundai Rotem made regulatory filings.)

Write to Jun-ho Cha at chacha@hankyung.com

Yeonhee Kim edited this article.

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