The Car Industry on a Global Arena
With many competitors battling for market share, car makers such as Toyota, Nissan, Honda, Hyundai, General Motors, Ford, DaimlerChrysler, Renault, and Volkswagen operate on relatively thin margins. The automotive industry has been suffering from excess production capacity. Although there is a capacity to produce 80 million cars globally, total global demand runs at only about 60 million a year. Thus, car manufacturers typically employ only 75 percent of their production capacity.
However the car industry is extremely capital intensive and, with so much competition, firms should use at least 80 percent of their production capacity in order to remain competitive. It is tough to stay afloat under such competitive conditions and the industry has seen numerous mergers and acquisitions in recent years. Consolidation has occurred between Ford and Land Rover, Jaguar and Volvo, and DaimlerBenz with Chrysler, to name a few.
South Korea and the Auto Industry
Against this background, HMC has faced various mishaps. The South Korean economy endured a recession in the late 1990s as a result of the Asian Monetary Crisis. The economy comprises numerous family-owned conglomerates, or chaebol. The combined sales of the nation’s five major chaebols -- Hyundai, Samsung, Daewoo, LG, and SK – amounted to roughly 40 percent South Korea’s GDP and total exports. Over time, these giant firms expanded rapidly, borrowing from their own banks to finance often reckless expansion into unrelated industries. Financial blunders led the Korean government to impose greater transparency and more stringent accounting controls.
In the automotive industry, Kia Motors, Korea’s third largest maker went bankrupt and Daewoo was sold off to General Motors. While domestic demand in South Korea is some two million cars, total productive capacity had reached five million. Exporting was a necessity. HMC’s debt burden had reached five times its equity, and the firm was suffering massive losses. The future was very uncertain. HMC was using less than 40 percent of its total production capacity, with a debt of around $30 billion. In 1998, HMC took control of Kia, becoming the South Korea’s biggest car maker and holding three-quarters of its domestic car market as well as passing Japan’s Mitsubishi and Suzuki in world ranking.
Early Internationalization Efforts
Chung Ju Yung was HMC’s founder. A workaholic from a peasant background, at age 85, Mr. Chung was determined to return HMC to profitability. All his life, whenever he set his mind on something, he would always found a way to achieve it. The Hyundai conglomerate was founded in 1947 in the construction industry, and over the next fifty Mr. Chung expanded his dynasty into car manufacturing, oil refining, electronics, banking, and insurance. HMC was founded in 1967. Mr. Chung passed on his ‘never-give-up’ values to his son, Chung Mong Koo, who took over as Chairman in 1998. The younger Mr. Chung was very detail oriented, and attached great importance to producing quality products. He is often quoted as saying: “Quality is crucial to our survival. We have to get it right, no matter the cost.”
In the late 1970s, HMC had begun an aggressive effort to develop engineering capabilities and new designs. In 1983 HMC started its Canadian operation, the firm’s first foreign investment venture. But the operation proved unprofitable and was shut down after only four years. Despite this disastrous outcome, HMC management learned a great deal from the experience.
Instead of FDI, HMC began exporting to the U.S. market with the Excel as an economical brand with a $4,995 price tag. The car was soon a big success with exports rising to 250,000 units per year. Unfortunately, various problems emerged: the Excel was perceived as a low-quality car and the weak dealer network was not producing enough sales. Consumers were losing faith in Hyundai and the firm’s brand equity began to deteriorate. The U.S. is the largest car market in the world and management had to do something drastic to turn things around.
In response to complaints about product quality, HMC introduced a “10 year warranty” program. The rationale was that, in order to erase any negative image, management had to go beyond the typical guarantee period and offer a very substantial warranty. The strategy was a major turning point for Hyundai, and the firm set about designing and building cars based on much higher quality standards. While still maintaining low prices, HMC was able, over time, to provide substantially extra value to consumers.
Another major step was geographical diversification. Putting lessons from the failed Canadian investment into practice, HMC built a factory in Turkey in 1997, in India in 2000, (with second plant in 2007), and in China in 2002. The main advantage of these plants is the inexpensive, high quality labor available at these locations. The Turkish plant gave HMC a foothold in the Middle East, a market it wants to develop. Turkey’s proximity to Western Europe is also a major advantage. In 2006, HMC had more than ten production plants in locations such as Taiwan, Vietnam, Iran, Sudan, and Venezuela. HMC’s first U.S. plant opened in Alabama in May 2005, with an investment of $1.1 billion and annual production of 300,000 cars.
Automotive industry labor costs make up only 10 percent of total operational costs. In order to be able to gain a competitive edge, therefore, not only must HMC seek out cheap labor, it must also source from locations that can supply low-cost input good (such as engines, tires, car electronics, etc.). The cost-effectiveness of suppliers is a life and death matter in the global automotive industry. HMC is cooperating with DaimlerChrysler to develop new technologies and improved supply chain management. Projects include a new four-cylinder engine and a joint purchasing plan.
By investing in Kia, HMC gained access to the firm’s competitive advantages in R&D and production. During its lifetime, Kia had managed to acquire a substantial base of highly knowledgeable workers, engineers, and design staff. Together, the two firms achieved synergies and economies of scale in R&D, engineering, purchasing, quality control, and marketing. HMC also invested in R&D centers in North America, Japan, and Europe.
Hyundai has been the world’s fastest growing major automaker since 1999. Sales in the U.S. increased by 360 percent from 1998 to 2004. HMC’s growth is coming from international markets. These days the firm generates about a third of its sales from North America and 10 percent from Europe. The firm’s profit margins are among the highest in the industry, worldwide. It has won numerous quality assurance prizes from reliable organizations such as Consumer Reports, J. D. Power and Associates, and the 2005 Total Quality Study. Chairman Chung was named one of most successful businessmen in the world by Business Week magazine.
HMC invests heavily in various value-chain activities. It utilizes FDI to develop key operations around the world. Management chooses foreign locations based on the advantages they can bring to the firm’s global business. R&D is targeted to developing safer, more convenient automobiles of superior quality. HMC is developing environmentally-friendly technologies that emphasize fuel efficiency. HMC conducts market research to help with choosing designs, as well as interior and exterior styling of automobiles.
HMC aims to become one of the top five global car manufacturers by 2010. Hyundai plans to have a 20 percent share of the Chinese market. To that end the automaker has signed a $1.24 billion joint venture with Guangzhou Motor Group, giving HMC access to the commercial-vehicle market in China. With 1.3 billion people increasingly anxious to buy passenger cars and trucks, China will be a major market for HMC. The firm benefits from its proximity to China and management’s understanding of the Chinese culture. Chung Ju Yung’s ‘can do’ spirit prevails throughout the entire HMC network.