SEOUL South Korea's Hyundai Motor Co and Kia Motors Corp have sharply cut vehicle production in China, sources said, as anti-Korean sentiment and competition from Chinese brands play havoc on sales and threaten earnings.
Hyundai and Kia saw their combined China sales slump by 52 percent in March from a year earlier, another person said, endangering not only the automakers' earnings but those of its South Korean suppliers. China, the world's biggest auto market, accounted for over a quarter of the pair's 2016 overseas sales.
A Chinese backlash over the deployment of a U.S. missile defense system outside Seoul has targeted South Korean firms including Lotte Group with boycott calls in state media, protests and suspensions of operations.
The move angered Beijing, although Seoul says the system is a response to North Korea's nuclear threat and is not aimed at China.
While the diplomatic row is a nuisance, the bigger problem for the South Korean carmakers is stiff competition in China and the United States, where their mainstay sedans have lost market share to sport utility vehicles, analysts and sources said.
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.
Hyundai and its smaller affiliate Kia said in a statement that they were "adjusting operations at Chinese plants in line with the market environment", but declined to elaborate on any cuts.
Hyundai had already suspended output at its factory in Hebei from March 24 to April 4.
Operating one shift instead of two shifts is a "drastic, rare move" for the South Korean duo and could cut daily output by more than half, said Lee Myung-hoon, an analyst at HMC Investment & Securities.
The anti-Korean sentiment was unlikely to end soon, he added, citing the example of the year-long backlash against Japan in 2012 over a territorial dispute which forced Japanese automakers to slash production.
"But I don't think the problems will be prolonged because it will have more harm on Chinese partners and local employment," he said.
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.
Hyundai Motor's China sales slumped 44 percent while sales of Kia, which has been in a dispute with dealers in China, suffered a steeper fall of 68 percent, sources said.
The sales downturn came despite the introduction of new models this year and a new Hyundai factory in China in 2016, and could explain some of the production cuts stemming from higher inventories.
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 ended down 2.9 percent and Kia Motors declined 1.4 percent in the wider market, which was down 0.3 percent.
(Reporting by Hyunjoo Jin; Editing by Stephen Coates)