As its growth in China stutters, Hyundai plans to divert production capacity by exporting cars made there to Southeast Asia, Reuters reports, quoting the Korean carmaker’s Chinese JV partner and two people familiar with the matter.

Here’s the background. Hyundai, along with Kia, was once flying high in China, and was ranked as high as third in the world’s largest auto market. But just as it opened its fifth factory there last year, a diplomatic dispute between South Korea and China saw consumers turn against South Korean goods. The episode did some damage to Hyundai’s sales and brand image.

The newswire points out that diplomatic ties have since normalised, but Hyundai’s recovery has been erratic. Its China sales in July was 30,018 cars, down 40% year-on-year and its lowest monthly total since the 2008 global financial crisis. However, January-July year-to-date sales were up 17%. Before the diplomatic spat, Hyundai-Kia’s market share was 8.1%, now it’s 4.4%. It was as high as 10.5% in 2012.

Putting all eggs in the Chinese basket is risky, and Hyundai is starting to look at ASEAN to diversify, something that Japanese carmakers have long done – our region is a major stronghold of Toyota, Honda, Nissan and the rest of the gang.

“A China recovery will take time. Hyundai needs a survival plan. Hyundai is considering (exporting China-made vehicles) to emerging markets such as Southeast Asia. Europe may also be a consideration,” said one of the people with direct knowledge of Hyundai’s China operations.

Hyundai’s Chinese joint venture with BAIC, Beijing Automotive Industry Holding Co, was more forthright. “Yes, we plan to export cars to Southeast Asia. The earliest could be the end of this year,” a spokesman confirmed, adding that the automaker will decide on models depending on local demand.

Hyundai responded to say that plans aren’t yet finalised. “Our main focus is on further developing our businesses in China, but we are also considering different options which may include exports of China factory-specific models,” the company said in a statement.

Exporting is not the norm as most foreign brand JVs build in China for the domestic market, but the report points out that GM does ship some cars to the US, while market leader Volkswagen has plans to export from China to Southeast Asia. The report mentions the increasing popularity of SUVs as exacerbating the problem for Hyundai, which has relatively few models in that hot sector. The price competitiveness of Chinese brands is also an issue.

In response, Hyundai recently replaced the head of its China JV and gave its R&D vice chairman the added responsibility of overseeing China product development. It aims to sell 900,000 units there this year versus last year’s 785,000, but that target is still almost half of its 1.65 million units capacity in China.

Would this plan work? Should Hyundai export from China to ASEAN, it may avoid higher tariffs in certain countries, compared to CBU South Korean cars. That can be 50% versus up to 78% in Vietnam, for instance. Hyundai is said to be considering building a factory in Vietnam or Indonesia, and it’s unclear if this development changes things. In any case, ASEAN is Japan’s backyard when it comes to cars, and Hyundai-Kia has got its work cut out, CBU China or not.