By Joyce Lee
SEOUL (Reuters) - South Korean automaker Hyundai Motor Co <005380.KS> said on Wednesday it will begin production at its fifth factory in China in August, as it hopes to reverse a sales slump in the world's biggest auto market where a diplomatic spat has hit Korean goods.
The plant in Chongqing is part of efforts to strengthen competitiveness by making compact sedans and sport utility vehicles (SUV) tailored to Chinese tastes, the automaker said in a statement.
"The Chongqing factory will produce high-quality new models for the Chinese consumer, and make Hyundai an automaker that encompasses eastern and western China," Vice Chairman Chung Eui-sun said in the statement.
The announcement comes months after South Korea angered China by agreeing to deploy a U.S. missile defense system to counter threats from North Korea. China objected that the system's radar would be capable of penetrating its territory, sparking a popular boycott of Korean goods and services.
Analysts said the impact has led to factories being under-utilized, prompting concerns of oversupply.
"Hyundai's Chinese sales weakened quite a bit," said analyst Lee Jae-il at Eugene Investment & Securities. "There is concern of oversupply, but since the target market is different, Hyundai can be expected to minimize any overlap," he said, noting the new factory was Hyundai's first in mid-western China.
Hyundai's China sales fell 64 percent in June compared with the same month a year earlier, while those at affiliate Kia Motors Corp <000270.KS> dropped 58 percent.
The impact of the diplomatic dispute added to the pair's other problems in China. Weak brand perception and the lack of a line of SUVs - an in-vogue market segment - left Hyundai-Kia's market share at an eight-year low last year.
Hyundai's new factory will add to one in Changzhou and three in Beijing. When completed in late August, its annual Chinese production capacity will be 1.65 million vehicles.
(Reporting by Joyce Lee; Editing by Edwina Gibbs and Christopher Cushing)