Case Study – 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 1 million cars a year. The Hyundai Motor Company (Hyundai) is South Korea’s number one car maker and the 10th 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 models in the United States are the Accent and Sonata, while exports to Europe and Asia include the GRT 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.
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 a capacity to produce 80 million cars worldwide, total global demand has been only 60 million a year. There have been some acquisitions throughout the industry with Jaguar and Land Rover being acquired by India’s Tata Motors, and Volvo being purchased 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
Korea is the largest emerging market in the Asia-Pacific region. Yet the car maker market in Korea is too small to sustain indigenous carmakers 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 innovations in design, features, products and product quality. The country also has a high savings rate, with massive inward foreign direct investment, which ensures 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 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. Accordingly 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 the prices for home and 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.
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. This car was an instant success, and Excel exports grew to 250,000 units per year. But problems occurred and the car fell from favour. The Excel suffered from quality issues and had a weak dealer network, which did little to dispel negative imagery or generate substantial new sales. Buyer confidence waned in the late 1990s. Hyundai’s brand equity weakened. In response to these quality complaints, Hyundai initiated major quality improvement programes and introduced a ten-year power-train warranty program, unprecedented in the car industry. The strategy was a major turning point for Hyundai.
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 best-selling 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 the 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 have established plants in Iran, 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 own operations.
To remain competitive, Hyundai employs inexpensive labour and sources imports – 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 Daimler-Chrysler 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 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 their 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.
Like other car makers, Hyundai has also experienced problems with excess capacity. In 2009, due to unwanted inventory, the firm slowed production of its Alabama plant in the United 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 local 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 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.
Source:This case was adapted from Cavusgil et al (2012, pp.171-73)
Case Study 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.
3. Discuss higher 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. Consistent with Dunning’s eclectic paradigm, described the ownership-specific advantages, location-specific advantages and internalisation advantages held by Hyundai. Which of these advantages do you believe has been most instrumental in the firm’s success? Justify your answer