Case study:
Hyundai: Leading the way in the global car industry:
The global car industry is one of the biggest and most internationalised business sectors. There are 17 major global car companies, each of which produces over one million cars a year. Hyundai Motor Company (Hyundai) is South Korea’s number one car maker and the tenth biggest in the world. It sells vehicles in over 190 countries, producing about a dozen car and minivan models, plus trucks, buses and other commercial vehicles. Popular exported models in the United States are the Accent and Sonata, while exports to Europe and Asia comprise the GRD and Equus. Throughout the global recession in 2008, while most car companies suffered steep sales declines, Hyundai managed to earn US$1.3 billion—putting it among the best performers in the global car industry.
The industry:
In the year 2009 global car sales fell to near-record lows due to the global recession, which started in late 2008. Industry car profit has suffered due to significant excess production capacity. Though there is capacity to produce 80 million cars worldwide, total global demand has been only around 60 million a year. Consolidations and divestitures have followed, comprising the acquisitions of Jaguar and Land Rover by India’s Tata Motors, and Volvo’s purchase by China’s Geely Motors. Consistent with latest trade theory, the requisite scale compels car makers to target world markets, where they can accomplish economies of scale and maximise sales.
The industry in South Korea:
South Korea (‘Korea’) is the biggest emerging market in the Asia-Pacific region. Yet, the car market in Korea is too small to sustain indigenous car makers like Hyundai and Kia. Therefore, Korean car makers sell aggressively in foreign markets. Fortunately, Korea holds numerous competitive advantages in the car industry. The country is a world centre of new technology development. It has abundant, cost-effective knowledge workers who drive innovations in design, features, production and product quality. The country as well has a high savings rate, with massive inward foreign direct investment, which makes sure a ready supply of capital for car makers to fund R&D and other ventures. Collectively, Korea’s abundance of production factors—cost-effective labour, knowledge workers, high technology and capital—represents key location-specific benefits.
Korean consumers are much demanding, so car makers take great pains to produce superior products. Intense rivalry in the domestic car industry makes sure that car makers and car parts producers enhance products continuously. The Korean economy is dominated by several conglomerates, termed chaebol. They comprise Hyundai, Samsung, Daewoo, LG and SK, and account for around 40 per cent of Korea’s GDP and exports. These big firms have expanded by borrowing from their own banks.
The Asian financial crisis of 1997 resulted in the Korean government imposing stringent accounting controls on many of these firms. In specific, the manner in which the Daewoo group collapsed and the subsequent takeover of Daewoo Motors’ operations by General Motors (GM) has resulted in a re-think in terms of strategy and regulatory control in the car sector. The government cooperates closely with the business sector, protecting some industries, making suring funds for others and sponsoring still others. The government promoted imports of raw materials and technology at the expense of consumer goods and encouraged savings and investment over consumption. Partly due to such efforts, Korea is home to a substantial industrial cluster for the production of cars and car parts. Gyeonggi Province emerged rapidly as the centre of Korea’s car parts industry. The nation benefits from the presence of many suppliers and manufacturers in the global car industry.
In years past, Hyundai also benefited from a weak Korean won, making prices for Hyundai cars cheaper for customers in Australia, Europe and the United States who buy imported cars in their local currencies. Hyundai owes much of its success to the favourable international exchange rates.
Background on Hyundai:
Hyundai was founded in the year 1947 as a construction company by Chung Ju-yung, a visionary entrepreneur from a peasant background. By the 1970s the firm had become a car company and began an aggressive effort to develop engineering capabilities and new designs. In the year 1980s Hyundai start exporting the Excel, an economy car with a US$4995 price tag, to the United States. The car was an instant success, and Excel exports grew to 250 000 units per year. However problems emerged and the car fell from favour. The Excel suffered from quality issues and a weak dealer network, which did little to dispel negative imagery or produce substantial new sales. Buyer confidence waned in the late 1990s. Hyundai’s brand equity weakened. In response to these quality complaints, Hyundai initiated main quality enhancement programs and introduced a ten-year power-train warranty program, unprecedented in the car industry. The strategy was a major turning point for Hyundai.
Geographical diversification:
In 1997 Hyundai built a factory in Turkey, giving the firm convenient access to the Middle East and Europe. Next, Hyundai opened a plant in India and in a few years became the country’s best-selling brand of imported cars. In the year 2002 Hyundai launched a factory in China, doubling production. Hyundai is aiming for 20 per cent share of the Chinese car market. The firm as well partnered with Guangzhou Motor Group, winning entry to China’s huge commercial-vehicle market. In addition to gaining access to low-cost, high-quality labour in emerging markets, Hyundai hopes its presence in local showrooms will enhance consumer awareness and drive sales in new markets.
Hyundai employs FDI to develop key operations around the world. Management selects locations based on the advantages they bring to the firm. By 2006 Hyundai had established plants in Iran, Sudan, Taiwan, Vietnam, Venezuela, and many other countries around the world. The firm as well has R&D centres in Europe, Japan and North America. It has distribution centres and marketing subsidiaries at different locations that deliver parts to its expanding base of car dealers worldwide. Hyundai as well has regional headquarters in Asia, Europe and North America. To guarantee control over production and marketing, Hyundai has internalised many of its operations.
To remain competitive, Hyundai employs inexpensive labour and sources inputs—engines, tyres, electronics— from low-cost suppliers. The firm has entered various collaborative ventures to cooperate in R&D, design, manufacturing and other value-adding activities. These permit Hyundai access to foreign partner's know-how, capital, distribution channels, marketing assets and the ability to overcome government-imposed obstacles. For example, Hyundai partnered with DaimlerChrysler to develop new technologies and improve supply chain management. Compared to Japanese or Western rivals, Hyundai has superior cost advantages in the acquisition of high-quality inputs.
While Japanese car giants such as Toyota and Honda rely heavily on US sales for their profits, Hyundai is more diversified. In 2008 the US market accounted for only 14 per cent of Hyundai’s total sales, while China, India, Russia and Latin America represented a combined 35 per cent of its sales.
Hyundai recently launched its first luxury model, the Genesis. The Genesis was named ‘North American Car of the Year’ at the 2009 Detroit Auto Show, trumping industry favourites such as the Audi A4, Jaguar XF and Cadillac CTS-V. The Genesis was noted for its luxury touches, smooth ride, high quality and US$33 000 price.
The recent marketing innovation is the ‘Assurance Program’, beneath which a buyer can return a recently purchased car if he or she loses his or her job within one year of purchase. The program even pays the customer’s lease payments for up to 90 days while they search for a new job. Owners who elect to keep their cars are not needed to reimburse Hyundai.
Recent events:
Like other car makers, Hyundai as well has problems with excess capacity. In the year 2009, due to unwanted inventory, the firm slowed production at its Alabama plant in the United States and laid off hundreds of employees at regional headquarters in the United States. It as well cut production by some 25 percent at plants in Korea. However the firm continues to launch new marketing campaigns, and replaced General Motors as the official car sponsor of the Academy Awards.
Hyundai has pursued internationalisation aggressively. While most of the global firms struggle to stay afloat during a crisis, Hyundai is seeking to expand. Hyundai sees the crisis as an opportunity, with plans to emerge even stronger. Hyundai has enhanced quality and increased sales against all odds. Given its focus on quality, energy efficiency, cost-control and customer satisfaction, perhaps Hyundai is the new standard bearer in the global car industry.
Case questions:
Question 1: What are the roles of comparative and competitive advantages in Hyundai’s success? Explain your answers by providing specific examples of natural and acquired advantages that Hyundai employs to succeed in global car industry.
Question 2: In terms of factor proportions theory, what abundant factors does Hyundai leverage in its world-wide operations? Give examples and describe how Hyundai exemplifies the theory. In what ways does Hyundai’s success contradict the theory? Justify your answer.
Question 3: Discuss Hyundai and its position in the global ca rindustry in terms of Porter’s diamond model. What is the role of firm strategy, structure and rivalry, factor conditions, demand conditions and related and supporting industries to the Hyundai’s international success?
Question 4: The Korean government has been instrumental to Hyundai’s success. In terms of national industrial policy, what has the government done to support the Hyundai? What can the government do to encourage future success at Hyundai? What can the government in your country do to support development or maintenance of the strong car industry?
Question 5: Consistent with Dunning’s eclectic paradigm, describe the ownership-specific benefits, location-specific advantages and internalisation advantages held by Hyundai. Which of such advantages do you believe has been most instrumental to the firm’s success? Justify your answer.
Question 6. In terms of its differnt advantages, discuss how Hyundai might influence the future of the global car industry. Do you think Hyundai will become the leader among the world’s car makers? Justify your answer.