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Hyundai Motor Company (HMC) went through some difficulties during the 1980s and 1990s that affected its market position and brand image, in particular its U.S subsidiary, Hyundai Motor America (HMA). Identify the problems faced by HMC and the strategies i

 

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 Exh

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