ANALYSIS: Hyundai hits China road bumps ahead of new plant

SHANGHAI/SEOUL, Aug 30 (Reuters) - Hyundai Motors' plan to open a second car plant in China looks unfortunate as its sales go into reverse, and it needs to cut costs and offer new models to fight global rivals in the world's No.2 autos market.

While rival brands have thrived in China's soaring car market, offsetting sluggish sales at home, South Korea's biggest carmaker is slipping behind as model launches have dried up and it can't cut prices fast enough.

"You don't see many Hyundai cars on the street. They're old and not cheap," said Zhu Min, a 34 year-old hospital doctor in Shanghai, adding: "I'd rather pay 120,000 ($15,870) for a (Ford) Focus than a Sonata as it's more trendy and makes me feel good."

Hyundai had double-digit sales growth in 2006, but shifted just 112,140 vehicles from its Beijing factory in the first half of this year -- a drop of 16 percent -- while the Chinese car market grew 30 percent.

Hyundai now ranks 10th in China, after its local venture briefly topped the sales rankings early last year.

Hyundai missed its 2006 sales target and, with no new models due out soon, is unlikely to hit a target of 310,000 vehicles this year, a company source told Reuters.

By the end of next year it expects a new $1 billion factory, its second, on the outskirts of Beijing to have doubled its China capacity to 600,000 units.

"The second factory is a risk now as it means more capacity amid weaker sales," said Cho Soo-hong, an industry analyst at Hyundai Securities. "It's important for automakers to maintain sales momentum in order to survive."

Hyundai spokesman Jake Jang acknowledges that, for now, China is tough.

"We cannot miss the Chinese market, which has the biggest potential in the world. We must survive there in order to become a real global player," he said.

Analysts don't expect Hyundai's sales to pick up until late next year, when the Korean firm hopes the new Elantra compact car and Sonata sedan, modified solely for China, will steer growth.

SQUEEZED

Analysts have predicted that South Korean marques would likely be the first to be squeezed by discounted Western and Japanese cars on one side and the rise of low-end Chinese models on the other.

"Korean cars are falling quickly out of favour here as European and American brands offer discounts, and the Japanese throw in new models," said Zhao Shengli, an analyst at Galaxy Securities in Beijing.

Hyundai's product portfolio -- the Accent, Sonata, Elantra and Tucson models -- has changed little in the past year.

The Korean firm aims to make an ultra-cheap car priced at $5,000-$6,000 at its Beijing plant, but that will be up against even cheaper Chinese models, as well as planned sub-entry-level cars from Toyota Motor, General Motors, Volkswagen, Nissan Motor and Honda Motor.

All are betting on China -- where rising incomes and discounted prices have made the dream of car ownership a reality for millions of Chinese -- to drive future growth.

Hyundai, however, must do more to compete.

"The company needs China-oriented models to attract more customers," said Stephen Ahn, analyst at Woori Investment & Securities, adding Hyundai should be more competitive on prices by lowering its production costs.

While rivals push cars out of showrooms by slashing prices, Hyundai is hamstrung by its higher production costs as it uses more Korean parts than Chinese components.

"If Hyundai doesn't find a way out of its rut, it will be in serious trouble," said Song Sang-hoon, auto analyst at Heungkuk Securities, noting, however, that the second plant should lower costs and prices through greater economies of scale.

Volkswagen, Europe's top automaker, grew its China sales by 25 percent to 431,369 vehicles in January-June, and has since launched two mid-range sedans -- the Skoda Octavia and Magotan. VW has announced two price cuts this year.

GM cut as much as 10 percent off the price of some of its Chevrolet models in January, and in April launched the Park Avenue, a flagship of its Buick brand. January-June sales at Shanghai GM, a local venture, grew 12 percent -- in stark contrast to falling market share in the United States.

Toyota sales soared 77 percent to 212,000 units, powered by its popular Camry sedan.