Case Study - Hyundai: Leading the way in the global car industry

CaseStudy - Hyundai: Leading the way in the global car industry

Theglobal car industry is one of the largest and most internationalised businesssectors. There are 17 major global car companies, each of which produces over 1million cars a year. The Hyundai Motor Company (Hyundai) is South Korea'snumber one car maker and the 10th largest in the world. It sells vehicles inover 190 countries producing about a dozen car and minivan models, plus trucks,buses and other commercial vehicles. Popular exported models in the UnitedStates are the Accent and Sonata, while exports to Europe and Asia include theGRT and Equus. During the global recession in 2008, while most car companiessuffered steep sales declines, Hyundai managed to earn US$1.3 billion - puttingit among the best performers in the global car industry.

The industry

In2009 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 significantexcess production capacity. Although there is a capacity to produce 80 millioncars worldwide, total global demand has been only 60 million a year. There havebeen some acquisitions throughout the industry with Jaguar and Land Rover beingacquired by India's Tata Motors, and Volvo being purchased by China's GeelyMotors. Consistent with new trade theory, the requisite scale compels carmakers to target world markets, where they can achieve economies of scale andmaximise sales.

The industry inSouth Korea

Koreais the largest emerging market in the Asia-Pacific region. Yet the car makermarket in Korea is too small to sustain indigenous carmakers such as Hyundai andKia. Thus, Korean car makers sell aggressively in foreign markets. Fortunately,Korea holds numerous competitive advantages in the car industry. The country isa world centre of new technology development. It has abundant, cost-effectiveknowledge workers who drive innovations in design, features, products andproduct quality. The country also has a high savings rate, with massive inwardforeign direct investment, which ensures a ready supply of capital for carmakers to fund R&D and other ventures. Collectively, Korea's abundance ofproduction factors - cost-effective labour, knowledge workers, high-technologyand capital - represents key location specific advantages.

Koreanconsumers are very demanding, so car makers take great pains to produce superiorproducts. Intense rivalry in the domestic car industry ensures that car makersand car parts producers improve products continuously. The Korean economy isdominated by several conglomerates called chaebol.They include Hyundai, Samsung, Daewoo, LG and SK, and account for about 40 percent of Korea's GDP and exports. These large firms have expanded by borrowingfrom their own banks.

TheAsian financial crisis of 1997 resulted in the Korean government imposingstringent accounting controls on many of these firms. In particular, the mannerin which the Daewoo group collapsed and the subsequent takeover of DaewooMotors’ operations by General Motors (GM) has resulted in a rethink in terms ofstrategy and regulatory control in the car sector. The government cooperatesclosely with the business sector, protecting some industries, ensuring fundsfor others and sponsoring still others. The government promoted imports of rawmaterials and technology at the expense of consumer goods and encouragedsavings and investment over consumption. Partly due to these efforts, Korea ishome to a substantial industrial cluster for the production of cars and carparts. Accordingly the nation benefits from the presence of numerous suppliersand manufacturers in the global car industry.

Inyears past, Hyundai also benefited from a weak Korean won, making the pricesfor home and cars cheaper for customers in Australia, Europe and the UnitedStates who buy imported cars in their local currencies. Hyundai owes much ofits success to favourable international exchange rates.

Background onHyundai

Hyundaiwas founded in 1947 as a construction company by Chung Ju-yung, a visionaryentrepreneur from a peasant background. By the 1970s the firm had become a carcompany and began an aggressive effort to develop engineering capabilities andnew designs. In the 1980s Hyundai began exporting the Excel, an economy carwith a US$4995 price tag, to the United States. This car was an instantsuccess, and Excel exports grew to 250,000 units per year. But problemsoccurred and the car fell from favour. The Excel suffered from quality issuesand had a weak dealer network, which did little to dispel negative imagery orgenerate 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-yearpower-train warranty program, unprecedented in the car industry. The strategywas a major turning point for Hyundai.

Geographicaldiversification

In1997 Hyundai built a factory in Turkey, giving the firm convenient access tothe Middle East and Europe. Next, Hyundai opened a plant in India and within afew years became the country's best-selling brand of imported cars. In 2002Hyundai launched a factory in China, doubling production. Hyundai is aiming for20 per cent share of the Chinese car market. The firm also partnered withGuangzhou Motor Group, winning entry to China's huge commercial-vehicle market.In addition to gaining access to low-cost, high-quality labour in emergingmarkets, Hyundai hopes its presence in the local showrooms will improveconsumer awareness and drive sales in new markets.

Hyundaiuses FDI to develop key operations around the world. Management chooseslocations based on the advantages they bring to the firm. By 2006 haveestablished plants in Iran, Taiwan, Vietnam, Venezuela, and numerous othercountries around the world. The firm also has R&D centres in Europe, Japanand North America. It has distribution centres and marketing subsidiaries atvarious locations that deliver parts to its expanding base of car dealersworldwide. Hyundai also has regional headquarters in Asia, Europe and NorthAmerica. To guarantee control over production and marketing, Hyundai hasinternalised many of its own operations.

Toremain competitive, Hyundai employs inexpensive labour and sources imports -engines, tyres, electronics - from low-cost suppliers. The firm has enteredvarious collaborative ventures to cooperate in R&D, design, manufacturingand other value-adding activities. These allow Hyundai access to foreignpartners’ know-how, capital, distribution channels, marketing assets and theability to overcome government-imposed obstacles. For example, Hyundaipartnered with Daimler-Chrysler to develop new technologies and improve supplychain management. Compared to Japanese or Western rivals, Hyundai has superiorcost advantages in the acquisition of high-quality inputs.

WhileJapanese car giants such as Toyota and Honda rely heavily on US sales for theirprofits, Hyundai is more diversified. In 2008 the US market accounted for only14 per cent of Hyundai’s total sales, while China, India, Russia and LatinAmerica represented a combined 35 per cent of its sales.

Hyundairecently launched its first luxury model, the Genesis. The Genesis was named‘North American Car of the Year’ at the 2009 Detroit Auto Show, trumpingindustry favourites such as Audi A4, Jaguar XF and Cadillac CTS-V. The Genesiswas noted for its luxury touches, smooth ride, high-quality and US$33,000price.

Arecent marketing innovation is the ‘Assurance Program’, under which a buyer canreturn a recently purchased car if he or she loses their job within one year ofpurchase. The program even pays the customer’s lease payments for up to 90 dayswhile they search for a new job. Owners who elect to keep their cars are notrequired to reimburse Hyundai.

Recent events

Likeother car makers, Hyundai has also experienced problems with excess capacity.In 2009, due to unwanted inventory, the firm slowed production of its Alabamaplant in the United States and laid off hundreds of employees at regionalheadquarters in the United States. It also cut production by some 25 per centat 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.

Hyundaihas pursued internationalisation aggressively. While many local firms struggleto stay afloat during a crisis, Hyundai is seeking to expand. Hyundai sees thecrisis as an opportunity, with plans to emerge even stronger. Hyundai hasimproved quality and increased sales against all odds. Given its focus onquality, energy efficiency, cost-control and customer satisfaction, perhapsHyundai is the new standard bearer in the global car industry.

Source:Thiscase was adapted from Cavusgil et al (2012, pp.171-73)

Case Study Questions

1. What are the roles of comparative andcompetitive advantages in Hyundai’s success? Illustrate your answers byproviding specific examples of natural and acquired advantages that Hyundaiemploys to succeed in the global car industry.

2. In terms of factor proportions theory, whatabundant factors does Hyundai leverage in its worldwide operations? Provideexamples and explain how Hyundai exemplifies the theory.

3. Discuss higher Hyundai and its position in theglobal car industry in terms of Porter's Diamond model. What is the role offirm strategy, structure and rivalry, factor conditions, demand conditions andrelated and supporting industries to Hyundai’s international success?

4. Consistent with Dunning’s eclectic paradigm,described the ownership-specific advantages, location-specific advantages andinternalisation advantages held by Hyundai. Which of these advantages do youbelieve has been most instrumental in the firm's success? Justify your answer

each answer has to be for around 500 words