hyundai motor company hmc went through some difficulties during 1980s and 1990s affected i 0
Hyundai Motor Company (HMC), the largest automobile company in Korea, went through some
tumultuous events since it entered the U.S. auto market in 1986. After a promising beginning, a
“Hyundai Car” became a synonym for a cheap car, suitable only for the lower class or a
cheapskate. The following article illustrates how miserable Hyundai’s U.S. history was:
Back in 1998, the wheels were coming off at Hyundai. Leno and Letterman
regularly made the shoddy Korean car a punch line — to jokes about Yugo. The
home office in Seoul couldn’t even recruit a seasoned American to jump-start the
faltering company. As a last resort, the Korean bosses turned to their corporate
lawyer, Finbarr O’Neill, an affable Irishman with no experience running a car
company. “We were a company looking over the precipice,” says O’Neill. “I
kept my law license intact as my insurance policy.”
1
A few years ago, however, a variety of auto mass media began to publicize Hyundai’s high test
scores for content and performance. People working with Hyundai, as well as customers and
industry analysts were amazed to see the recent rapid improvement of Hyundai cars in quality
ratings and sales. For example, John Wagner, a Hyundai dealer in San Jose, was proud of but
surprised at a news release by the Insurance Institute for Highway Safety (IIHS). It stated that the
Hyundai 2001 Santa Fe sport utility vehicle earned the highest rating in the 40-mph frontal offset
crash tests conducted at the IIHS facilities. He pointed to an
Auto World article, which compared
the Santa Fe with the Ford Escape, the top selling model in the SUV segment, saying, “So if
you’re doing serious cross-shopping, our advice is to escape the compact-SUV crowd in a Santa
Fe.” The highest rating of “5-stars” by the National Highway Traffic Safety Administration
(NHTSA) assigned to the 2002-3 Hyundai Sonata midsize cars was also remarkable. The quality
improvements at Hyundai, combined with its timely marketing strategies, had led to a dramatic
1
Keith Naughton, “Finbarr O’Neill: Kicking Hyundai to High Gear,” Newsweek, January 6, 2003.
Hyundai Motor Company
SM-122 p. 2
increase in sales. Hyundai saw its U.S. sales increase 284,902 cars (a 315.8 percent rise) over
the 1998-2002 period, while the total sales of other automakers increased by 103.5 percent.
Despite this striking growth, however, HMC still observed a considerable discrepancy between
the
actual and perceived quality of Hyundai cars. Optimists in HMC attributed this to an
unavoidable time lag between actual product quality and product reputation, and believed that
time will show the truth. However, many executives felt it was necessary to come up with
effective strategies to help shorten the time lag and eventually make Hyundai’s reputation
comparable to Toyota and Honda. Suk-Jang Lee, a senior manager at the business strategy and
planning team in HMC, said, “We are grappling with how to change Hyundai’s brand identity
from cost-saving car to quality-oriented car, but it is not easy.” On the other hand, some
management groups doubted the wisdom of changing Hyundai’s brand identity due to the
disruptive effects such an action might have.
HMC HISTORY AND ORGANIZATION
2
HMC was established by Ju-Young Chung in 1967 as a subsidiary of Hyundai Corporation, the
biggest Korean
Chaebol3 until the late 1990s. HMC increased its size by acquiring Kia Motors
(another Korean auto company) in 1998, although Hyundai and Kia continued to operate
independently. HMC was the auto sales leader in the Korean domestic market and exported
vehicles to over 190 countries. HMC operated the world’s largest integrated automobile
manufacturing facility in Ulsan, on Korea’s southeast coast. In 1995 and 1996, HMC began
production at its new Chunju plant (in southwest Korea) and Asan plant (southeast of Seoul).
With a total global production capacity of 2.4 million units per annum, Hyundai had acquired the
necessary economies of scale to compete on an equal footing with the world’s leading
automakers. As of 2002, these three plants accounted for 1.9 million units while overseas
capacity was 500,000 units, led by Hyundai’s plants in India, Turkey, and China. Hyundai also
operated eight Korean and four international research centers, including the new Hyundai-Kia
Motors Design & Technical Center in Irvine, California, which opened in February of 2003.
Hyundai’s automotive technology centers employed approximately 4,100 researchers (of which
100 were located in California), with an annual budget of 5 percent of current revenues.
In February 1986, Hyundai launched its U.S. subsidiary, Hyundai Motor America (HMA), in
Garden Grove, California, and sold its first car, the subcompact Excel, in the U.S. market. In the
early years, Hyundai concentrated its sales efforts primarily on the west and east coasts, as well
as in the southern states. In 1987, Hyundai expanded into the central portion of the United
States, opening a central region office near Chicago. As Hyundai diversified and upgraded its
product line, the company began to build nationwide operations and service networks to more
effectively serve the needs of dealers and customers. In 1988, HMA opened a $21 million,
300,000 square-foot parts distribution center in Ontario, California. A year after that, HMA
opened a $16.6 million, 342,000 square-foot office complex and parts distribution center in
Aurora, Illinois. In 1990, it moved its national headquarters to a new 18-acre site in Fountain
2
This section was written mainly based on the documents provided by HMC.
3
A Chaebol is a conglomerate of many companies clustered around one holding company. The parent company is
usually controlled by one family. OUTTHERENEWS,
http://www.megastories.com/seasia/skorea/chaebol/chaewhat.htm
Hyundai Motor Company
SM-122 p. 3
Valley, California. In addition to corporate offices, this headquarters also housed HMA’s
western regional office. As of 2002, Hyundai had four regional offices and approximately 600
dealerships nationwide.
In April of 2002, Hyundai broke ground in Montgomery, Alabama for its first U.S. automobile
assembly plant, a $1.14 billion investment scheduled to open in 2005 and employ 2,000 people.
The facility, to be built on 1,600 acres, was expected to produce 300,000 vehicles per year at
maximum capacity. Hyundai planed to increase the capacity to 500,000 by 2010. This plant was
regarded by Hyundai and outsiders as a key element in Hyundai’s plan to become one of the
world’s top five manufacturers by 2010. Finbarr O’Neill, the president and CEO of HMA, noted
that Hyundai would “go from having a 4-month pipeline (from Korea) to a much shorter time
period.”
4 Suk-Jang Lee was also full of confidence and emphasized a symbolic advantage:
We have had a terrible experience. In 1989, we built a plant in Quebec, Canada.
But it ended in a total fiasco after only five years of operation. Now, we know
what we learned from this failure. You know, failure teaches success. I believe
Hyundai is not such a fool as to duplicate its mistake. … It is not difficult to
gather that Americans will have a stronger attachment to Hyundai “Made in
USA” than to Hyundai “Made in Korea.” Many in the U.S. younger generations
think Toyota and Honda are American cars. Even some older generations do not
know that Lexus, Acura, and Infiniti are Japanese cars. Building plant in the U.S.
played a key role. Hopefully, our new plant may contribute to producing such
illusion.
The company took a major step to becoming a full-line automotive importer/distributor in 1989
with the introduction of its midsize sedan, the Sonata. In 1995, after 10 years in the U.S. market,
the Excel was replaced by the all-new subcompact Accent. The compact Elantra sedan debuted
in 1991 as a 1992 model, and it quickly became Hyundai’s best-selling model in the U.S. In
1997, Hyundai introduced the sporty Tiburon coupe, which emerged from the Hyundai
California Design Center’s two concept roadsters, HCD-I and HCD-II. In the fall of 2000, HMA
added two new vehicles to its lineup: the Santa Fe sport utility vehicle and the XG300 sedan.
For 2002, the engine displacement of the XG300 moved from 3.0 (XG300) to 3.5 liters (XG350).
As of 2003, Hyundai marketed a full line of vehicles including six models in 16 trim levels (left
and middle columns in Exhibit 1). The vehicles were developed exclusively by HMC and were
fitted with engines and transmissions designed by the Hyundai California Design Center as well
as HMC. The right column of Exhibit 1 lists the models against which each Hyundai model
competes. “We are more likely than other automakers to throw open information on the
competing models to the public and help the potential customers easily compare Hyundai cars
with their competitors. Hyundai cars are obviously underestimated in the U.S. We have to
straighten this out before it gets worse. They should realize that Hyundai cars are competitive
goods,” said Jong-Yun Kim, a manager at the business strategy & planning team in HMC.
4
“Hyundai Counts on U.S. Assembly Plant to Boost,” Autoline, May 14, 2002.
Hyundai Motor Company
SM-122 p. 4
EVOLUTION OF HYUNDAI LEADERSHIP AND STRATEGY
Similar to the business divisions of other Korean
Chaebols, HMC was born under the
authoritarian, charismatic leadership of Ju-Young Chung, the founding chairman of HMC, and
consequently with a unified and centralized management structure. Since the initial ownership
structure was totally controlled by Ju-Young Chung and his heirs, the management and
ownership of HMC completely overlapped. Its strategic goals and decision-making processes
were dominated by the Chung family’s centralized dominance and emperorship. However, such
a patriarchal ownership and management structure allowed HMC to pursue more autonomy over
its external relationships. For example, when HMC entered into a strategic alliance with Ford,
Ju-Young Chung declined to transfer his managerial authority to Ford. Also, in 1974, HMC
picked Mitsubishi, rather than a member of the U.S. Big-3 or Toyota, as its joint venture partner
because this made it easier for HMC to secure strategic autonomy over its own technological and
market development. In addition, the full financial and personnel support from HMC’s mother
company, the Hyundai Engineering & Construction Company, which was also owned and
managed by the Ju-Young Chung, provided him with leverage to steer HMC his way. A person
who worked with HMC from 1985 to 1996 said (on condition of anonymity)
5:
Not all executives are affiliated with the Chung family. We had a bunch of
talented professional managers. But they never objected to Chairman Chung’s
directions. More precisely, it was impossible to present different opinions from
Chung’s. Anyone who raised questions against Chung’s decisions should have
been prepared to be fired the next day. … I would even say that Hyundai’s entry
to U.S. market was led by Chairman Chung’s personal ambition. I agree that
without Chung’s strong drive, Hyundai’s entry to U.S. could be delayed until its
technology is comparable to the Japanese or European automakers. In fact, we
needed an expansion strategy until the late 1980s in order to be the #1 Korean
automaker and this strategy fitted well with what we call “Chung’s mode of
bulldozer leadership.” But it also seems to be true that we learned that projects
initiated through personal ambition lead to poor preparation.
6
After successfully seeing HMC enter the North American market, Ju-Young Chung handed over
the Chairmanship of the Hyundai group and HMC to his younger brother, Se-Young Chung, in
1987. The new leadership infused HMC with a different organizational culture from Ju-Young
Chung’s regime. Se-Young Chung tried to inspire HMC with the new spirit of “harmonious
human relations, autonomous management, responsibility management, and equal opportunity,”
7
and thus drive out the previous owner-oriented emperor leadership by delegating responsibility
and authority to professional executives and managers. The change in leadership also led to a
change in strategic focus. From 1987 to 1988, Se-Young Chung redesigned the HMC
organization with the goal of “improvement in production efficiency” by reshuffling or merging
5
Subsequent quotes in this section are from this interview unless otherwise noted.
6
Ju-Young Chung (1915-2001) made the Hyundai Chaebol Korea’s biggest business empire and is called “King
Chairman” by Korean people. His emperor leadership was also reflected in his presidential candidacy in 1992
when his campaign funds and personnel came from Hyundai. “I was not a Hyundai employee that time. I was an
election campaigner,” said a senior manager on condition of anonymity.
7
Hyundai Motor Company, Challenge for 30 Years and Vision for the 21st Century, 1997.
Hyundai Motor Company
SM-122 p. 5
the division of job functions. The most noticeable change in the organization chart was
converting from a functional organization to a divisional organization, which aimed for efficient
control and evaluation, developing management motivation and ability, improving the capability
to cope with market diversification and cost reduction. These changes allowed HMC to
downsize.
The “democratization of Hyundai” was also affected by the political democratization movements
in Korean society during the late 1980s. Despite the positive effect of this societal change, most
Korean
Chaebols faced a sequence of labor-management disputes. HMC was not an exception.
The HMCs first labor union was born at the Ulsan plant in 1987 and took the main role of
conveying employees’ voices to the management group. Although Se-Young Chung emphasized
that “the stable, constructive, labor-management relationship is the starting point for sustaining
growth,” HMC was drawn into the unprecedented vortex of labor strikes in 1987 and 1988,
which resulted in huge sales losses.
Moving toward the horizontal leadership required some pain. Workers’ voices
had been restrained by the previous authoritarian leadership. The new leadership
listened to their complaints and claims. This is good for HMC in spite of the
unavoidable losses. However, the intangible big problem was a loss in confidence
in Hyundai from outsiders. Dealers abroad were making phone calls to HMC
every day to complain about supply delays and consumers didn’t want to drive
cars produced by an insecure company. The image of Hyundai that Se-Young
wanted was that of a “trustworthy company” and he thought that his horizontal
leadership would have a positive effect. But this panned out badly, at least until
the mid-1990s.
In fact, HMC’s labor union had been regarded as the symbol of the Korean labor movement and
had always been in the vanguard of national walkouts. This certainly contributed to the
advancement of management-labor relations in Korea, but presented HMC with many difficulties
in implementing its strategic decisions.
In 1996, Se-Young Chung transferred the title of Chairmanship to his son, Mong-Kyu Chung.
Mong-Kyu Chung inherited not only the title but also the leadership style of his father, which
allowed HMC a smooth transition with little organizational turmoil. Furthermore, he exerted
much effort to make Hyundai a reliable company in the world, and not just in Korea. He
established a new vision for achieving a position in the world top-10 automaker ranking in the
21
st century by occupying four percent of the world auto market. Thus, the primary strategic
focus was placed on “the improvement of brand image and consumer satisfaction through more
intensive product quality movement, value management, and market globalization.”
8 Mong-Kyu
Chung also introduced the team system into the organization, along with greater emphasis on
performance-based compensation. From 1996 through 1998, the labor-management dispute also
quieted down, which many people attributed to “the persistent humane attitude” toward
employees over two generations, though such leadership was not working well in its early stages.
8
Ibid.
Hyundai Motor Company
SM-122 p. 6
The 1997 East Asian crisis dealt a heavy blow to Korean
Chaebols. Half of the top 30 Korean
Chaebols
, including Daewoo, went into bankruptcy in 1997 and 1998. The Hyundai group also
suffered a liquidity crisis. In response to requests from the IMF and foreign companies, the
Korean government began to pursue a major reform of the
Chaebol system and pushed Chaebols
to improve their managerial transparency and professionalism, and spin off unrelated businesses.
The Hyundai group was also pressed into an unprecedented restructuring of its businesses.
Almost 70 affiliates of the Hyundai group were spun off in 1999 and 2000. However, the
Hyundai group was susceptible to public criticism because its restructuring was focused mainly
on the distribution of property among the Chung family, rather than on the rationalization of
management.
9 Among others, HMC was the prime cash cow of the Hyundai group and was
allotted to Mong-Koo Chung, chairman from 1999, first living son of Ju-Young Chung, and
older cousin of Mong-Kyu Chung. “He is the image of his father. He has led HMC to a more
hierarchical decision-making structure and he revived the bulldozer type of ‘can do’ leadership.
HMC faced several contexts asking for a timely decision-making, and his leadership helped it
work out.” However, his strategic direction and organizational structure were not entirely
different from the previous ones. In pursuit of the global top-five in 2010, he continued to
emphasize the improvement of product quality, management transparency, and brand value. The
current organization chart is shown in Exhibit 2. One emerging challenge to the new leadership
was how to cope with the warlike labor-management disputes. HMC suffered from nearly seven
weeks of labor strike in summer 2003 and caved in to virtually all the union’s demands to end
the strike. In particular, HMC allowed the labor union to participate in key management
decisions.
10 “It will be interesting to see how Mong-Koo Chung’s leadership deals with the
union’s veto on important decisions.”
EVOLUTION OF THE HYUNDAI PERFORMANCE IN THE U.S.
“Hyundai is the Marv Albert of the auto industry – it’s gone from success to oblivion to
success”
11 in the 17 years it had been doing business in the U.S., according to one commentator.
Mong-Koo Chung said Hyundai’s U.S. history substantiated the philosophy of his father, Ju-
Young Chung, the founding chairman of HMC: “It is failures rather than successes that teach us
invaluable lessons…. It is not necessary to remember one’s success. Those should be
remembered by others instead. Rather, we should remember our losses and failures…. Those
who forget their failures will fail again and again.”
The Initial Stage (1986 to 1988)
The U.S. customers’ response to Hyundai’s first car was immediate: they sold like hotcakes. Just
seven months after its debut in February 1986, HMA sold its 100,000th Excel. Total 1986 sales
were 168,882, an industry record for an import car distributor in its first year. Hyundai sales
averaged 1,431 units per dealer, another sales record in the U.S., despite having dealers located
in only 31 of the 50 states. In 1987, Hyundai sales continued to soar reaching a record number
9
Ki-Won Kim, “Study on the Development of Korean Chaebols,” Paper Collection of the Korea National Open
University, August, 2000.
10
Hyun-Chul Kim, “Hyundai Deal Provokes Business,” Korea Herald, August 7, 2003.
11
Fred M. H. Gregory, “Hyundai Santa Fe: South Korea’s Biggest Automaker Adds a Big Mac to Its Menu,” Car
and Driver
, October 2000.
Hyundai Motor Company
SM-122 p. 7
of 263,610 units and a 2.58 percent market share (Exhibit 3). Jong-Yun Kim attributed
Hyundai’s initial sales success to a favorable market structure:
The timing of our entry to the U.S. market was ideal in terms of market
segmentation. At that time, most automakers tended to produce high-end, highpriced
cars. It left a huge vacuum in the entry-level market. They needed a car
that fills in the hole. First-time car buyers such as college students and young
couples wanted a car that could satisfy their low budget. That’s the Excel.
Suk-Jang Lee added lack of information on “who is Hyundai” as another reason:
At the time, few Americans had ever heard of Hyundai and its products. Many of
them thought Hyundai was a new Japanese automaker. Some people even
regarded Hyundai as a new subsidiary of Honda because their logos are not so
discernable at the first glance (Exhibit 4) and their pronunciations sound very
similar. You know, the corporate symbol is the centerpiece of the company
identity. Therefore, Americans trusted Hyundai believing that its quality would
be comparable to Japanese cars. This was an unexpected consequence.
Moreover, there were few public and private agencies, which tested the Excel in reliable ways,
and they did not quickly make public the test results. This led potential customers to make
buying decisions by relying more on available information such as price than on hidden quality
information. “We enjoyed a honeymoon with customers. They liked our cars without knowing
us well. It gave us the blockbuster sales. But the honeymoon did not last long,” said Jong-Yun
Kim.
The Troubled Years (1989 to 1998)
It did not take long for customers to realize the Excel had severe quality problems. It was not
uncommon to see one stopped on the street with its engine blown. They often observed that car
bodies rusted fast and air conditioners did not work on hot days. In 1989, Hyundai’s sales fell to
183,261 units, a decline of 30.66 percent (Exhibit 3). Such a big drop in sales was a heavy blow
to Hyundai’s business in the U.S. HMA lost two COOs during the latter half of 1989. Dealer
profits plummeted, and a number of showcase Hyundai dealerships closed in 1989. Difficulties
in finding lenders to finance Hyundai consumer loans forced Hyundai to create its own financing
arm in 1990.
To make matters worse, J.D. Power and Associates
12 began to publicize its rating of Hyundai
cars in 1990. As shown in Exhibit 5, Hyundai cars received an average quality score of 2.0 in
1990, the minimum possible.
13 A joint edition of The Detroit News and Detroit Free Press
12
J.D. Power & Associates is a global marketing service firm established in 1968, and had been regarded as one of
the most popular car rating sources in the U.S.
13
The yearly quality ratings shown in Exhibit 4 were based on “Initial Ratings,” which had been released by the J.D.
Power Consumer Center. The “Initial Ratings” consisted of six scores across different criteria, and were obtained
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