Hyundai: Leading the Way in the Global Car Industry

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

The global car industry is one of the largest and most internationalized 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 carmaker 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.

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 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 carmakers to target world markets, where they can achieve economies of scale and maximize sales.

The industry in South Korea

Korea is the largest emerging market in the Asia-Pacific region. Yet the carmaker market in Korea is too small to sustain indigenous carmakers such as Hyundai and Kia. Thus, Korean carmakers 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 carmakers to fund R&D and other ventures. Collectively, Korea's abundance of production factors - cost-effective labor, knowledge workers, high technology and capital - represents key location specific advantages.

Korean consumers are very demanding, so carmakers take great pains to produce superior products. Intense rivalry in the domestic car industry ensures that carmakers 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 buys imported cars in their local currencies. Hyundai owes much of its success to favorable 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 favor. 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 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

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