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    Hyundai: Leading the way in the global car industry The global car industry is one of the largest 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 make and the tenth largest 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 vehicles in the United States are the Accent and Sonata, while exports to Europe and Asia include the GRD and Equus. During 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 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. Although there is capacity to produce 80 million cars worldwide, total global demand has been only about 60 million a year. Consolidations and divestitures have followed, including the acquisitions of Jaguar and Land Rover by India’s Tata Motors, and Volvo’s purchase by China’s Geely Motors. Consistent with new trade theory, the requisite scale compels car makers to target world markets, where they can achieve economies of scale and maximise sales. The industry in South Korea South Korea (‘Korea’) is the largest emerging market in Asia-Pacific region. Yet, the car market in Korea is too small to sustain indigenous car makers such as Hyundai and Kia. Thus, 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 innovation sin design, features, production and product quality. The country also has a high savings rate, with massive inward foreign direct investment, which ensures ready supply of capital for mar 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 advantages. Korean consumers are very demanding, so car makers take great pains to produce superior products. Intense rivalry in the domestic car industry ensures that car makers and car parts producers improve products continuously. The Korean economy is dominated by several conglomerates called chaebol. They include Hyundai, Samsung, Daewoo, LG and SK, and account for about 40 per cent of Korea’s GDP and exports. These large 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 particular, the manner in which the Daewoo group collapsed and the subsequent takeover of Daewoo Motors’ operations by General Motors (GM) has resulted in a rethink in terms of strategy and regulatory control in the car sector. The government cooperates closely with the business sector, protecting some industries, ensuring 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 these 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 numerous 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 favourable international exchange rates. 2 Background on Hyundai Hyundai was founded in 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 1980s Hyundai began 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. But problems emerged and the car fell from favour. The Excel suffered quality issues and a weak dealer network, which did little to dispel negative imagery or generate substantial new sales. Buyer confidence waned in the 1990s. Hyundai’s brand equity weakened. In response to these quality complaints, Hyundai initiated major quality improvement 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 within a few years became the country’s bestselling brand of imported cars. In 2002 Hyundai launched a factory in China, doubling production. Hyundai is aiming for 20 per cent share of the Chinese car market. The firm also 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 improve consumer awareness and drive sales in new markets. Hyundai uses FDI to develop key operations around the world. Management chooses locations based on the advantages they bring to the firm. By 2006 Hyundai had established plants in Iran, Sudan, Taiwan, Vietnam, Venezuela, and numerous other countries around the world. The firm also has R&D centres in Europe, Japan and North America. It has distribution centres and marketing subsidiaries at various locations that deliver parts to its expanding base of car dealers worldwide. Hyundai also 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 allow Hyundai access to foreign partners’ 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 YS 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 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. A recent marketing innovation is the ‘Assurance Program’, under 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 required to reimburse Hyundai. 3 Recent events Like other car makers, Hyundai also has problems with excess capacity. In 2009, due to unwanted inventory, the firm slowed production at its Alabama plant in the Unity States and laid off hundreds of employees at regional headquarters in the United States. It also cut production by some 25 per cent at plants in Korea. But 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 many global firms struggle to stay afloat during a crisis, Hyundai is seeking to expand. Hyundai sees the crisis as an opportunity, wityh plans to emerge even stronger. Hyundai has improved 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 1. What are the roles of comparative and competitive advantages in Hyundai’s success? Illustrate your answers by providing specific examples of natural and acquired advantages that Hyundai employs to succeed in the global car industry. 2. In terms of factor proportions theory, what abundant factors does Hyundai leverage in its worldwide operations? Provide examples and explain how Hyundai exemplifies the theory. In what ways does Hyundai’s success contradict the theory? Justify your answer. 3. Discuss Hyundai and its position in the global car industry 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 Hyundai’s international success? 4. The Korean government has been instrumental to Hyundai’s success. In terms of national industrial policy, what has the government done to support 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 a strong car industry? 5. Consistent with Dunning’s eclectic paradigm, describe the ownership-specific advantages, location-specific advantages and internalisation advantages held by Hyundai. Which of these advantages do you believe has been most instrumental to the firm’s success? Justify your answer. 6. In terms of its various advantages, discuss how Hyundai may influence the future of the global car industry. Do you think Hyundai will become a leader among the world’s car makers? Justify your answer. Sources: ‘Hyundai Floors it in the US’, BusinessWeek, 23 February 2009; M. Ihlwan, D. Kiley and I. Rowley (2008), ‘No Crisis for Samsung, Hyundai and LG/, BusinessWeek, 22 September; M. Ihlwan (2009), ‘Business: Sui Genesis; Hyundai’s Surprising Success’, The Economist, 7 March; ‘Hyundai’s Halo: Car of the Year Award’, BusinessWeek, 13 January 2009; M. Ihlwan (2009), ‘Hyundai Motor Company’, Hoover’s Company Records, 17 February; ‘Weak Currency Eases Pain vof Korean Exporters’, BusinessWeek, 26 January 2009; M. Ihlwan (2007), ‘World Motor Vehicle Production’, OICA Correspondents Survey, Paris; ‘Driving Change’, The Economists, 27 January 2005; R. M. Steers (1999), Made in Korea, New York: Routledge; ‘Hyundau Revs Up’. Time Asian Edition, 25 April 2005, pp. 27-30; ‘The Car Company in Front’, The Economist, 27 January 2005.



Subject Business Pages 7 Style APA


Hyundai: Leading the way in the Global Car Industry

Question 1

            The comparative and competitive advantages have played a significant role in Hyundai’s success through many ways. First, when compared to location of other automobile industries, this company is situated in a country which favors it excessively. Korea is a country that is considered the world center of new technological development. Other countries do not possess a similar characteristic, and thus companies have to seek support from other regions, which leads to extra expenses. Second, the availability of a high savings rate, with the massive inward Foreign Direct Investment (FDI) has also enhance the success of Hyundai since it gets capital to enable it to conduct research and development among many other factors. Third, a weak Korean won has represented a competitive advantage for Hyundai as it exports cars to countries whose customers purchase them in their local currency. Therefore, when compared to competitors, this company enjoys a greater profit margin. Lastly, the company enjoys a great presence in various countries, which expose it to emerging markets hence creating competitive advantage. This is because it is capable of easily accessing the target market with no problems.

Question 2

            When considering the factor proportions theory, there are various abundant factors that Hyundai leverages in its worldwide operations. These include cost effective labor, knowledgeable workers, and high technology. Hyundai exemplifies the theory in that the capital-labor ratio is larger in Korea. Therefore, the company has sufficient capital, but faces inadequate labor. This is why it exports the final products, but choses to hire a cheaper labor force from other countries so as to maintain its competitive advantage.  The country in which the company is located in is capital-abundant. Hyundai’s success contradicts the factor proportion theory as Korea features a high savings rate, with an inward FDI. Government restrictions on imported goods, therefore, do not support the theory as the country cannot benefit as much from imports as it does with exports. Hyundai is still very successful despite the fact that it is not solely dependent on imports, or trade with a country that is labor abundant. If the theory was not contradicted, Hyundai would need the support of imports to enable it to succeed.

Question 3

            Hyundai is being challenged by various competitors, all of whom are battling for market share in this industry. Car makers including Nissan, Toyota, Honda, General Motors, Ford, Renault, DaimlerChrysler and Volkswagen are all competitors who operate on a relatively thin margin. According to Porter’s diamond model the position of Hyundai in the global car industry is determined by four factors. First, firm strategy, structure and rivalry encourage better positioning of a company these are the same factors which have enabled Hyundai to be the leader in its industry. They all give it competitive advantage over all the other car making companies. Second, factors condition is yet another contributor to the position of Hyundai in its industry. Porter’s diamond model suggests that a country creates its own important factors. This is exactly what has happened in Korea. The country features a shortage in labor force, which is why it has made great efforts to improve its innovation. This, as a result, acts in favor of Hyundai which benefits from the comparative advantage that occurs. Third, demand conditions in Korea also support better placement of Hyundai at the top of its industry in that it creates pressure for innovation and product quality. Other companies, therefore, are also forced to keep up with product quality even though they may now have to also deal with higher production costs. Lastly, related and supporting industries such as the car parts industry also supports better positioning of Hyundai at the top of its industry in that it is better placed in the country where obtaining cost effective and innovative inputs is easy. Other companies do not have a similar privilege.

Question 4

            When considering its national industrial policy, the Korean government has done various things to support Hyundai. First, the government has ensured the development of an industrial structure which is conducive for innovation. The car making industry relies on innovation to ensure the products produced will always satisfy the constantly changing needs of consumers. Second, it has supported the development of world standard production facilities and infrastructure. This has happened by how it offers funding and sponsorship for these facilities. Third, at the expense of consumer goods, the Korean government has opted to promote the import of raw materials and technology for the auto industry. Therefore, the company constantly has sufficient supply of what it needs to develop products. Fourth, the government has encouraged investment over consumption, and lastly, it pushes for exports heavily.

            Although so much has already been done, there are various things which the government can take into consideration to encourage future success of the company. First, instead of an inward FDI, the Korean auto market should be opened up to more foreign investments. Second, it should try to gain access to the Chinese market which is an upcoming lucrative market. Third, the government should understand that the country’s auto industry is no longer an infant industry, and thus needs more adverse changes to make it perform even better.

            To support development or maintenance of a strong car industry, the Indian government can take various steps. One, the government should encourage an environment whereby innovation and entrepreneurship is welcomed. Second, the government should offer the players of the industry with lower rate loans so as to encourage their growth. Third, the government should invest heavily in the education of company owners, research and development, as well as in infrastructure. This way, the players will be better placed to make effective decisions to boost performance.

Question 5

            The owner-specific advantages of Hyundai are trademarks and brands, technology patents, managerial skills, and the access to significant finances. The company benefits from these factors, compared to its competitors. Internationalization advantages, on the other hand, come about when considering how the company can cross national borders without having to share its profits with foreign companies. There various reasons why Hyundai chose to internalize. One, It enables the company to constantly watch out for product quality from the start of production all the way to the end. Two, it encourages greater net returns for the company, ad lastly, it enables it to keep control over operation knowledge. Location specific advantages, on the other hand, are partnerships with companies that enable it access to emerging markets, such as Guangzhoo motor group; the availability of region-skilled low-cost labor, natural resources and even cheap capital; the presence of the LSA-built factories in turkey and even the Middle East, and many others.

            Considering all these factors, the conditions work towards the favor of Hyundai, none is more instrumental than the other. This is because each group of advantages brings forth a unique set of benefits for the company.

Question 6

            When considering the various advantages present for Hyundai, the company may influence the global car industry by making it more difficult for new entrances to be made. This is because the competitive advantage will be so high, new members will have a high time keeping up. In future, Hyundai will become a leader among the world’s car makers due to the support it obtains both from its country, and the various advantages it has over its competitors.


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