CLOSING CASE Hyundai: Leading the Way in the Global Auto Industry The automotive industry is one of the largest and most international- Hyundai. Korea holds numerous competitive advantages in the car ized business sectors. Some 20 major global automotive companies industry. The country is a world center of new technology devel- produce more than one million cars a year. Hyundai Motor Company opment. It has many cost-effective knowledge workers who drive s South Korea's leading automotive manufacturer and, based on innovations in design, features, production, and product quality. the number of cars sold, the fifth largest in the world after Toyota, The country also has a high savings rate, with massive inward FDI, Volkswagen, GM, and Renault-Nissan. In 2014, the company sold which ensures a ready supply of capital for carmakers to fund R&D about eight million vehicles globally. Its global market share was and other ventures. Collectively, Korea's abundance of production about 10 percent based on the number of vehicles manufactured in factors in cost-effective labor, knowledge workers, high technology. 2013. It sells vehicles in 187 countries, producing about a dozen car and capital represent key location-specific advantages. and minivan models, plus trucks, buses, and other commercial vehi- Korean consumers are demanding. so carmakers take great cles. Popular models in the United States are the Accent and Sonata, pains to produce high-quality automobiles. Intense rivalry in the do- whereas exports to Europe and Asia include the GRD and Equus. mestic auto industry ensures that carmakers and auto parts produc- The Industry ers improve products continuously. The Korean economy is dominated by several conglomerates, During the recent global recession, global automotive sales declined to called chaebols. They include Hyundai, Samsung, LG, and SK, of near-record lows. Automotive industry profits suffered due to signifi- which Samsung Group and the Hyundai Motor Group accounted for cant excess production capacity. Although there is capacity to produce more than 33 percent of South Korea's GDP in 2012. The Korean 80 million cars worldwide, total global demand fell to only about government has imposed stringent accounting controls on many of 60 million. Global automobile production reached to 90 million cars these firms. The government cooperates closely with the business and commercial vehicles in 2014. A wave of consolidations followed sector, protecting some industries, ensuring funds for others, and spon- across the globe in light of the excess capacity. Hyundai acquired a soring still others. The government promoted imports of raw materials 34 percent interest in Kia Motors, then Korea's second largest auto- and technology at the expense of consumer goods and encouraged maker. Indian Tata Motors acquired Jaguar and Land Rover from Ford savings and investment over consumption. Partly due to these efforts, Company for $2.3 billion. In 2010. Ford Motor sold its Volvo brand to Korea is home to a substantial industrial cluster for the production of a Chinese automobile company, Zhejiang Geely Holding Group. cars and car parts. The nation benefits from the presence of numerous Consistent with the new trade theory, the required scale com- suppliers and manufacturers in the global automotive industry. pels automakers to target world markets also, where they can achieve economies of scale and maximize sales. In 2015, for ex- Background on Hyundai ample. Ford announced it is building two new production facilities Chung Ju-yung, a visionary entrepreneur from a peasant back- in Mexico. Beginning in 2016. Hyundai will expand production in ground, founded the Hyundai Engineering and Construction China by building two additional plants there. Company in 1947 and, 20 years later, Hyundai Motor Company. The Industry in South Korea By the 19705, the firm had begun an aggressive effort to develop engineering capabilities and new designs in the auto industry. In Despite its large size, the motor vehicle market in South Korea 1986, Hyundai began exporting the Excel, an economy car priced at (Korea) is insufficient to sustain indigenous automakers such as $4.995, to the United States. An instant success, the car model soldmore than one million units globally. However, the Excel suffered channels, marketing assets, and the ability to overcome government- from quality issues and a weak dealer network. Buyer confidence imposed obstacles. For example. Hyundai enjoys a partnership with waned in the late 1990s. In response, Hyundai initiated intensive Shell to improve supply chain management. Compared to Japanese or quality improvement programs and introduced a 10-year warranty Western rivals, Hyundai has superior cost advantages in the acquisition feature to its customers. This was unprecedented in the auto indus- of high-quality inputs. try at the time. It was a major turning point for the firm. Although Japanese auto giants such as Toyota and Honda rely Geographic Diversification heavily on U.S. sales for their profits, Hyundai is more diversified. In 2014, North America accounted for 36 percent of Hyundai's exports, In 1997. Hyundai built a car factory in Turkey, giving the firm followed by the Middle East and Africa markets. Total global sales convenient access to key markets in the Middle East and Europe. increased about 5.8 percent, and Kia, the affiliate of Hyundai Motor Next, Hyundai opened a plant each in China and India. The firm Group, increased its presence in China and North America. Europe also established a plant for commercial vehicles through a 50-50 accounted for only 9 percent of Hyundai's sales in 2014. joint venture with Guangzhou Motor Group in China. In addition to gaining access to low-cost. high-quality labor in emerging Recent Events markets, Hyundai hopes its presence in local showrooms will improve Hyundai continues to launch new marketing campaigns and re- consumer awareness and drive new sales. placed General Motors as the official automotive sponsor of the Hyundai uses FDI to cultivate markets around the world. Academy Awards. Hyundai's Elantra model was named the North Management chooses locations based on the advantages they bring American Car of the Year at the 2012 Detroit Auto Show, and the to the firm and has substantial production facilities in Brazil, China, Hyundai Genesis was a finalist for the award in 2015. To boost sales the Czech Republic, India, Russia, Turkey, and the United States. in Canada, the company launched an advertising campaign in 2015 Hyundai also has R&D centers in Europe. Japan, and North America. called The H-Factor as part of its new brand positioning strategy. It has distribution centers and marketing subsidiaries at various loca- The company's Assurance Program, by which buyers can return their tions that deliver parts to its expanding base of car dealers world- recently purchased cars if they lose their job within one year of pur- wide. Hyundai also has regional headquarters in Asia, Europe, and chase, also appeals to buyers. North America. To guarantee control over production and market- Hyundai has pursued internationalization aggressively, and ing. the firm has internalized many of its operations. whereas many global firms struggle to stay afloat, Hyundai is seek- To remain competitive. Hyundai employs inexpensive, high-quality ing to expand. Hyundai saw the global recession as an opportunity. labor. Engines, tires, and other key inputs are sourced from low-cost sup- It improved quality and increased sales against all odds. Given its pliers. The firm has entered various collaborative ventures to cooperate focus on quality. energy efficiency, cost control, and customer sat- in R&D, design, manufacturing, and other value-adding activities. These isfaction, perhaps Hyundai is the new standard-bearer in the global allow Hyundai access to foreign partners' expertise, capital, distribution auto industry.AACSB: Reflective Thinking Skills, Analytic Skills, Multiculturalism, and Diversity Case Questions and internalization advantages Hyundai holds. Which of these 5-4. What are the roles of comparative and competitive advantages advantages do you believe has been most instrumental to the in Hyundai's success? Illustrate your answers by providing firm's success? Justify your answer. specific examples of natural and acquired advantages that Hyundai employs to succeed in the global automotive industry. Sources: "Hyundai to Build Fourth & Fifth Chinese Plants," Automotive 5-5. In terms of factor proportions theory, what abundant factors Manufacturing Solutions, March/April 2015, p. 11; "2012 Hyundai Elantra: does Hyundai leverage in its worldwide operations? Provide Why it Won Car of the Year Award," International Business Times, January examples and explain how Hyundai exemplifies the theory. 9, 2012, www.ibtimes.com; "Hyundai Motor Company," Hoover's Company In what ways does Hyundai's success contradict the theory? Records, 2015, http://www.hoovers.com; "2014 Production Statistics," Justify your answer. OICA, 2015, http://oica.net; Chris Reiter; "The Contender," Bloomberg 5-6. Discuss Hyundai and its position in the global car industry in Businessweek, January 30, 2012, pp. 21-22; In-Soo Nam, "Hyundai Plans to Expand in China," Wall Street Journal, December 31, 2014, p. B3; Gabe terms of the determinants of national competitiveness. What Nelson, "New Product, New Marketing Are Key for Hyundai," Automotive are the relationships of the roles of demand conditions; factor News, January 25, 2015, p. S006; New York Times, "Tata Motors Finds conditions; related and supporting industries; and firm strat- Success in Jaguar Land Rover," August 30, 2012, http://www.nytimes egy, structure, and rivalry to Hyundai's international success? .com/2012/08/31/business/global/tata-motors-finds-success-in-jaguar-land- 5-7. The Korean government has been instrumental to Hyundai's rover.html; Reuters, "Peugeot Citroen CEO Says Will Build Minicar with success. In terms of national industrial policy, what has the Toyota," September 19, 2013, http://www.reuters.com/article/2013/09/19/ government done to support Hyundai? What can the govern- us-toyota-peugeot-idUSBRE9810U220130919; Hyundai Motor Company, ment do to encourage future success at Hyundai? What can worldwide.hyundai.com/WW/Corporate/ CorporateInformation/History, the government in your country do to support development or retrieved May 3, 2015. maintenance of a strong auto industry? 5-8. Consistent with Dunning's eclectic paradigm, describe the Note: This case initially was written by Nukhet Vardar, Yeditepe University, Turkey, and updated by Carol Sanchez, Grand Valley State University, ownership-specific advantages, location-specific advantages, Michigan, and by Ilke Kardes, Georgia State University