Hyundai Motors Corp. globalisation strategy (Noémie Frontère)

Hyundai Motors

Globalization strategy

1967-2013

06/06/2013 Research project: Hyundai globalisation strategy

2

Executive summary

The following report maps out Hyundai Motor Corporation’s (HMC) internationalisation strategy

from its creation in 1967 to the current period. This strategy can be chronologically divided into four

phases according to HMC’s objectives and rationale for expansion at different stages of its existence.

From the research carried out, it appears that HMC’s choices of specific internationalisation patterns

at different stages essentially stemmed from:

- The dynamics of the relationship between HMC, the Hyundai business group and the South

Korean economic and political environment;

- Political, social and nationalistic incentives deriving from the specificities of Chaebol

management and later the influence of the Asian crisis on this management and decision

taking processes;

- Korea’s initial factor dotation, i.e. the prevalence of certain factors over others which pushed

the company to seek knowledge and resources abroad at a very early stage;

- The replication of Japanese strategies (Nissan, Mitsubishi, Toyota).

Due to the complexity of HMC’s environment, strategy over time cannot be illustrated using a single

internationalisation framework. The report therefore discusses two different frameworks – namely

Porter’s diamond and Dunning’s eclectic paradigm – to analyse the company’s strategy at different

stages of its international development.


3

Introduction

Hyundai Motor Corporation (HMC) is a South Korean multi-national automaker which is part of the

Hyundai Motor Group founded in 1967 by Chung Ju-Yung. HMC sells its vehicles in 193 countries

through a network of over 6000 dealerships and showrooms. HMC operates the world’s largest

integrated automobile manufacturing facility with a capacity of 1.6m units annually in Ulsan, South

Korea. HMC was also ranked as the world’s fourth largest automobile manufacturer based on annual

vehicle sales in 2010. Hyundai has set up 6 Research & Development centers in Korea, Germany,

Japan and India.

Like other actors of Korea’s automobile industry, HMC has followed distinct stages of

internationalization. However, HMC’s strategy cannot simply be explained by the ‘stage theory’

introduced by Johanson and Vahlne in 1977 due to the fact that it fails to satisfy two of its basic

assumptions. First, the key force driving HMC from one stage to another was not the experience

accumulated. Second, HMC does not proceed according to physical distance (Lansbury et al. 2007).

Instead, HMC started to be involved in international operations before developing a significant

competitive advantage, and gradually strengthened its firm-specific advantages through learning and

experience in international markets, as we will demonstrate through the early exports stage and the

entry into the US market. In addition, HMC’s subsidiaries were established in various parts of the

world simultaneously (Lansbury et al. 2007).

Another factor which makes HMC’s case unusual is that HMC was born and nurtured in a dynamic

environment influenced by Korea’s economic transition. Between 1967 and 1985, HMC benefitted

from the Korean government’s support and operated like a traditional Korean Chaebol. From 1985

onwards, HMC gained independance from the state and gradually followed the footsteps of its

western counterparts. Thus, it is necessary to apply various theories jointly in analysing HMC’s

internationalization process and strategies in different phases.

In this report, HMC’s internationalization and global strategy is divided into four phases. During

phase one and two, internationalization is driven by country-specific factors. Thus, Porter’s diamond

theory is relevant to explain the influence Korea’s nation-specific advantages had on HMC’s

international strategy. Later on, as firm-specific advantages are finally developed (especially after the

Asian financial crisis) HMC starts to resemble its rivals from developed countries. Therefore,

traditional theories like Dunning’s eclectic paradigm (OLI) become relevant in phase four to explain

HMC’s internationalization.


4

Table of contents

Executive summary ............................................................................................................................ 2

Introduction ....................................................................................................................................... 3

Table of contents ................................................................................................................................ 4

Phase 1: Imports substitution and 'inwards internationalisation' 1967-1975 .................................... 5

1.1. Government influence on the creation of HMC ................................................................. 5

1.2. Hyundai’s involvement in automobiles seen through the lens of Porter’s diamond

framework ...................................................................................................................................... 5

1.3. Learning from international partners ................................................................................. 6

Phase 2: Korea’s first car and the early exports 1976-1985 ............................................................... 7

2.1. Building the first ‘Korean’ car with international support .................................................. 7

2.2. The urge to export and the example of Toyota .................................................................. 7

Phase 3: Mass production and internationalisation 1986-1997 ......................................................... 9

3.1. Mass production and exports ............................................................................................. 9

3.2. Strategy and rationale behind the entry into the US market .............................................. 9

3.3. Internationalisation of the production ............................................................................. 11

Phase 4: Post the Asian crisis, the global company 1998-2013 ........................................................ 11

4.1. Change in ownership, management, and international strategy ...................................... 11

4.2. Choice of international locations: the OLI framework applied to Hyundai’s modern

globalisation strategy ................................................................................................................... 12

4.3. International operations and entry modes in the recent period: the example of China .. 13

Conclusion ........................................................................................................................................ 14

Appendix .......................................................................................................................................... 15

References........................................................................................................................................ 21


5

Phase 1: Imports substitution and 'inwards internationalisation' 1967-1975

Since the early days of its creation Hyundai Motors Corporation has shown an inclination towards the

United States and Japan. The company has developed its resources and knowledge through several

partnerships. Hyundai’s first phase of ‘inwards internationalization’ is best explained by using

Porter’s diamond framework and understanding the company’s early history.

1.1. Government influence on the creation of HMC

In the late 1960’s Hyundai was a construction group led by Chairman Chung Ju Yung who set himself

the objective of transforming his company into a leading Chaebol by investing in industries which

would improve living standards in Korea (Landsbury et al. 2007). At that time, Korea’s manufacturing

infrastructure was underdeveloped (Kim 2004). However, under President Park Chung Hee, the state

started promoting industrial activities and import substitution for consumption goods as a driver for

economic growth. Cars were specifically a matter of nationalistic pride and the symbol of an

industrialized nation (Steers 1999). Hyundai seized the opportunity to enter the automotive industry

in 1967, taking advantage of heavy government subsidies.

1.2. Hyundai’s involvement in automobiles seen through the lens of Porter’s diamond

framework

The state of Korea’s automobile industry and HMC’s first strategy of inwards internationalization are

best explained using Porter’s diamond framework, illustrated in Figure 1.

It is clear from the diamond that certain aspects of Korea’s domestic environment presented

significant opportunities for a new car manufacturer. The presence of a large, cheap and disciplined

work force, a low cost (‘factor dotation’) and capital-expenditure-intensive business environment

(supported by the government and business group’s financial support) with little aversion to risk

(‘firm profile’) and a very particular approach to decision taking (‘strong and charismatic leadership’).


6

However the major challenge for HMC was a lack of support industries, especially technology

intensive ones producing sophisticated components and specifically engines. In other words, the

‘shallowness’ of industrial clusters especially in the automobile sector forced HMC to

internationalize.

Figure 1: Diamond framework adapted to Korea in the 1960s/70s, based on Porter (1990)

1.3. Learning from international partners

The analysis above highlights the necessity of ‘inwards internationalisation’ for HMC. The company

had to acquire from international players technology, engineering capabilities and components it

could not find at home.

The first step taken in this direction was to assemble cars for Ford UK in Ulsan, Korea in 1968.

However, after a few years Ford required Hyundai to concentrate solely on engines production in

what was to be Ford’s new international supply chain (Seyung 1982). This did not fit in with the

strategy of HMC which ultimately wanted to develop the capability of manufacturing an all-Korean

car. Thus, the partnership ended in 1973.


7

The second approach taken was sending employees to Australia, Japan and the United States in the

early 1970’s to learn all the aspects of the automobile business. Hyundai also needed a new partner

and approached GM, Volkswagen and Alpha Romeo however all three required managing control of

Hyundai’s operations, which was not acceptable to Hyundai’s chairman (Steers 1999). Finally,

Hyundai was able to strike a technical agreement with the Japanese company Mitsubishi which was

then confronted with fierce competition from Toyota and Nissan and was looking for ways to

increase the size of its international operations. Mitsubishi signed a technical licensing agreement

with Hyundai which allowed the Korean company to build ‘its own nameplate cars using technical

designs from Japan’ (Seyung 1982) and also sell some of those cars to the Japanese market through

Mitsubishi dealers, which greatly improved HMC’s technical capabilities.

Phase 2: Korea’s first car and the early exports 1976-1985

The transfer of technology and engineering capabilities resulting from the partnerships discussed

above influenced the second phase of HMC’s international development.

2.1. Building the first ‘Korean’ car with international support

In 1974 legislation required Korean auto manufacturers to build ‘citizen cars’. HMC still lacked

specific capabilities and turned to Europe to contract Italian designer ItalDesign (working for Alpha

Romeo and Fiat) and a British automobile executive to become HMC’s vice president. More

Europeans were hired consequently at top engineering or design positions, de facto

internationalising the company from inside which was rare in the Korean context. Thanks to its new

European resources, HMC was the first Korean company ever to get a loan from European banks and

used Mitsubishi’s technology to build Korea’s first national car: the Pony.

2.2. The urge to export and the example of Toyota

HMC’s first decision to export came from Chairman Chung Juyung, under political pressure by the

Korean government. The decision was controversial across HMC’s top management. The Pony was

still acknowledged to be of ‘dubious quality’ and its success in Korea stemmed from prohibitive tariffs


8

imposed on foreign car manufacturers willing to enter the Korean market. HMC’s British vice

president believed Hyundai was not ready to take on competition from international players (Clifford

1994).

However, the diamond framework discussed earlier helps understand why Hyundai started exporting

early on in its history. The general business context was highly favourable to exports and, combined

with relatively low domestic demand, the strength of Hyundai’s international networks on which

HMC could draw, the low risk aversion of Chaebols and strong financial backing from the government

created an incentive to move quickly into exporting regardless of the risks associated.

Chung’s initial target markets included Africa (Nigeria), Taiwan, South America (Peru, Ecuador) and

Saudi Arabia. In a close replication of Toyota’s strategy two decades before (see Figure 2), Chung’s

objective was to test Pony’s endurance and performance in as many ‘markets, climates and road

conditions’ as possible where it would not suffer from strong competition posed by European,

American and Japanese companies. Hyundai also aspired to gain export knowledge through this

exercise. The results were positive in terms of learning: the company had to make many adjustments

and the quality of the cars significantly improved. However HMC was still financially supported to a

large extent by the rest of the Chaebol (Clifford 1994).

1955-1964 1965-1974 1975-1984 1985-1994

Toyota

First exports through distributorship agreements: Dubai 1955 Middle East 1957 Africa 1957-1962

Japan economic boom& exports orientation. Mass production, US as the major export target (lower segment)

… …

Hyundai … …

Phase 2: First exports through distributorship agreements: Latin America Middle East Africa

Phase 3: Korea economic boom & exports orientation. Mass production, US as the major export target (lower segment)

Figure 2: Comparison of early internationalisation strategies of Toyota and Hyundai (first two

decades, Toyota data from Toyota Motor Corporation 1988)


9

Phase 3: Mass production and internationalisation 1986-1997

Capitalizing on the experience acquired during phase two and still replicating a strategy adopted by

Toyota two decades earlier, Hyundai decided to scale up its international activities starting from the

mid-1980s.

3.1. Mass production and exports

In the early 1980s – at a time when Korean domestic sales barely reached 250,000 cars a year –US

based General Motors (GM) announced its decision to build a new American factory that would

assemble 300,000 cars a year. Hyundai analysed GM’s plans and also decided to build a 300,000 cars-

a-year factory at a much lower price, which would enable the company to manufacture a new

compact model entirely dedicated to ‘real’ exports, targeting the lower end of western markets

(Steers 1999). In 1985 ‘Pony II’ was successfully exported to South America, Canada and Africa and

Hyundai took a lead on its domestic rivals (Kia and Daewoo).

At the same time Korean exports in general were significantly increasing in value and per GDP (see

Exhibit A1) and Korean companies were gaining recognition worldwide. The Hyundai group itself was

becoming a major MNC. Following Toyota’s example (see Figure 2), HMC decided to target the

industry benchmark as well as the largest market of all: the United States. It was a question of status

for Hyundai and Korea itself, proving the company had become an international player able to

compete against the Western auto makers and that the country was now an emerging economy.

3.2. Strategy and rationale behind the entry into the US market

The move into the US market was similar to that of Toyota and other Japanese companies two

decades before Hyundai: the first target was the lowest, most price-sensitive segment of the market

with ambitions to move upstream in the long term.

The Japanese car companies were competing on the compact segment while giants like GM and Ford

were catering to the middle and higher end of the market. HMC decided to introduce a subcompact


10

car, the Hyundai Excel, priced around $5,000 while Japanese compacts were priced over $6,000

(Clifford 1994). HMA (Hyundai Motors America) was established in 1985 in California with staff from

different Hyundai branches and new Americans recruits. Excel was initially a huge success.

1986 1987 1988 1989

Excel sales in the US (unit) 168,000 264,000 263,000 188,000 Excel sales expectations 100,000 200,000 300,000 400,000

Figure 3: Excel’s introduction to the US market: sales and forecast (HMC 1990)

In 1988, to support the US venture HMC purchased a manufacturing site in Bromont (Quebec) to

assemble cars for the American market with higher quality standards than in Ulsan. Bromont was

Hyundai’s largest manufacturing facility behind Ulsan with an initial capacity of 100,000 cars a year.

However, in the late 1980’s, the company started relying more heavily on Korean subcontractors

instead of European and Japanese ones. Those turned out to be less experienced, which affected

Hyundai’s image. Furthermore, HMA’s strategy continued to be devised solely in Seoul, a situation

which became unacceptable to American managers and along with rising cross-cultural issues, led to

a decline in HMA’s sales (see Figure 3).

Following the ‘move then learn and adjust’ approach and learning from the difficulties faced in the

US market, the company decided to focus on higher quality and stronger R&D and accelerate its

move upstream. In 1991 the company created its first engine, solely developed by HMC, as well as its

first electric car.

Figure 4: Impact of the US experience on R&D expenses during phase 3 of HMC’s internationalisation

0

10

20

30

40

50

1975 1978 1982 1984 1986 1988 1990 1992 1994

R&D, US$ million


11

3.3. Internationalisation of the production

On the production side the situation got more difficult for HMC at the end of the 1980s. As Korea was

transitioning from a developing country to a developed one, wages were increasing and Korean firms

struggled to compete on the low cost segment they were previously dominating (Chang 2003). They

were confronted with the same situation as their Japanese counterparts were a decade ago when

the Japanese Yen appreciated resulting in a wages increases.

Confronted with higher production costs and new trade conditions (NAFTA, EU), Hyundai and other

Korean automobile companies had to make three adjustments to their strategy (Lansbury et al.

2007):

- Assemble in North-America (Bromont) and the EU (Czech Republic);

- Move up in terms of market segment and quality to tackle competition from new emerging

economies with lower labour costs (China, Indonesia);

- Set up labour intensive activities offshore in South-East Asia.

In 1995 HMC therefore started internationalising its manufacturing in South East Asia, specifically

Indonesia, Malaysia and the Philippines as well as Egypt. In 1997, a plant was opened in Chennai,

India, with a capacity of 200,000 vehicles per year (Economic Times 2009).

Phase 4: Post the Asian crisis, the global company 1998-2013

In 1997-1998, Korea faced a serious economic crisis which resulted in IMF intervention, largely

affecting Hyundai and other business groups. An illustration of the impact of these changes on the

firms’ environment is presented in Appendix A3 as a ‘revisited’ version of Porter’s diamond.

4.1. Change in ownership, management, and international strategy

Between 1997 and 1999 Korea’s corporate sector was restructured (as part of the ‘Big Deal’).

Business groups were encouraged to concentrate on their core businesses and striped off from

different subsidiaries which were grouped on the basis of the industry they belonged to. The aim was


12

to reduce industrial overcapacities resulting from previous government subsidies. Hyundai was

divided into smaller and ‘independent’ units that were more attractive to foreign investors, as the

Korean state was no longer in a position to support the Chaebols financially. This situation had a

tremendous influence on HMC’s internationalisation strategy which started to resemble closely to

that of western automobile companies with similar investors.

Korean businesses in general started favouring efficiency and profitability over growth and were

more cautious when making investments overseas (Lansbury et al. 2007). In 1998 Hyundai took over

a highly leveraged Kia Motors and started to recover from the crisis. It re-started its strategy of global

production and opened new plants in China (1999), Indonesia (2000), Brazil (2000) and the US (2002).

Instead of high capital expenditure HMC emphasized marketing and branding. A 2012 the famous

global advertisement ‘Live Brilliant’ proved HMC’s alignment with Western standards and its move

upstream (HyundaiWorldWide2012).

4.2. Choice of international locations: the OLI framework applied to Hyundai’s modern

globalisation strategy

One of the characteristics of the modern auto industry is a change of orientation from traditional and

now saturated markets to emerging markets where the biggest potential lies today and where

manufacturers can expect to lower their production costs.

Global manufacturing in the auto industry is also a trending phenomenon. Modern geographical

expansion depends on markets and production processes (globalized production of components and

parts). The increasing ability to carry on R&D activities in emerging countries and the question of

labour cost influence the international locations of manufacturing facilities.

Hyundai’s modern strategy and the particular choice of countries in which it operates are analysed

through the OLI framework presented in Appendix A5.


13

4.3. International operations and entry modes in the recent period: the example of China

In the late 1990s strategic alliances became the biggest trend in the industry. Korean companies

chose to partner with western MNCs for technology purposes and entered into joint venture

agreements with companies in emerging countries for local assembly, marketing and sales.

While Hyundai under-bodies are today widely standardised, upper-bodies are designed to suit

regional needs: today’s car markets are strongly regional. Tariffs and shipping costs push to localize

assembling activities close to the final market. This is often done through a wholly owned subsidiary

or a joint-venture with a local player.

In May 2002, HMC initiated a joint venture with Beijing Automotive Industry Holding Corp. (BAIC).

The Chinese government approved the joint venture ‘Beijing Hyundai’ in October 2002 (HMC 2013a).

In fact, BAIC’s slow management delayed the approval, which was far different from Korea’s ‘chop-

chop’ nature, and it eventually caused some delays in the market entry (Barnet, Rhee and Kim 2008).

In order to maintain acceptable quality standards, Beijing Hyundai supported local suppliers with

technical and managerial training, and it ultimately helped Beijing Hyundai to build a strong local

supplier network (Barnett et al. 2008). Beijing Hyundai also invested in distribution channels focusing

on specific cities and regions (Barnett et al. 2008).

In 2003, Beijing Hyundai launched the first product, ‘EF Sonata’ and sold of 50,000 units in first year

which took three years for Honda (HMC 2013). In wake of the 2007 crisis, Beijing Hyundai launched a

second plant in China, ‘Sichuan Hyundai’ which completed HMC’s global production network, across

Korea, U.S., China, India and Europe, (Barnett et al. 2008). Beijing Hyundai experienced a rebound in

2008, and its market share has been growing since (see Exhibit A4).


14

Conclusion

HMC’s strategy has been influenced by various factors during the different periods considered (as

illustrated in Appendix A6) and thus, different frameworks can be used to explain the stages of its

internationalisation. The following table sums up the entry modes and rationale for HMC till today.

Creation 1967-1975 1976-1985 1986-1997 1998-2013

Rationale for internat-ionalisation strategy

Korean political support X X X X

Business group support X X X (X) Korean economic environment as developing country

X X X (X)

Korean economic environment as ‘developed’ country

(X) X

Japanese example (especially Toyota)

X X

Need for external labour X X

Need for other external resources and knowledge

X X X X X

Need for new markets X X

Risk diversification X

HMC international strategy -

Imports substitution ‘inwards international-isation’

Exports and domestic manufacturing

Exports and international manufactur-ing

Global supply chain and markets

Target countries

Korea

Nigeria, Taiwan, Peru, Ecuador, Saudi Arabia…

South America, Canada, Africa, Benelux, US, India…

Global

Figure 5: List of major factors influencing HMC’s internationalisation strategy from 1967 to 2013


15

Appendices

A1. Economic Growth, Exports and Exports/GDP in Korea

A2. Top Ten Automakers’ Ranks in China Market and Their Sales Performance

A3. Porter’s Diamond revisited: the rebirth of the Korean automobile industry post the

Asian crisis

A4. Market Share Trend of Beijing Hyundai

A5. OLI framework applied to HMC in phase 4

A6. Hyundai’s internationalization strategies projected on a world map


16

A1. Economic Growth, Exports and Exports/GDP in Korea

Source: Mah (2007)

A2. Top Ten Automakers’ Ranks in China Market and Their Sales Performance

Source: Barnet, Rhee and Kim (2008)


17

A3. Porter’s Diamond revisited: the rebirth of the Korean automobile industry post the Asian crisis

A4. Market Share Trend of Beijing Hyundai

Source: HMC (2013b)


18

A5. OLI framework applied to HMC in phase 4

OLI framework applied to Hyundai’s current international operations to analyse the choice between exports and

local subsidiaries (data from company’s 2011 Annual Report)

A6. Hyundai’s internationalization strategies projected on a world map

Presence of: Internalization

advantages

Location advantage

(factor dotation)

Manufacturing factors Market factors Technology and talent

Entry mode Exports Local production and

assembling subsidiaries

Sales subsidiaries R&D centres

Europe/

Middle East/

Africa

170 countries,

no particular

factor dotation

Russia, Czech Republic,

Ukraine, Turkey, Egypt,

Sudan

Russia, Norway, UK,

Spain, France, Italy,

Germany, Czech

Republic, Poland

Germany

America Brazil, Venezuela, Mexico,

US

Canada, US Canada, US

Asia-Pacific Korea, Taiwan, China, India,

Pakistan, Vietnam,

Malaysia, Indonesia

Korea, Japan, China,

Australia

Korea, Japan, China,

India


19


20

Source: report and company data


21

References

Barnett, W., Rhee, M. and Kim, J.G. 2008 ‘Hyundai Motor Company in China’, Stanford Graduate

School of Business, viewed 31 May 2013, <gsbapps.stanford.edu/cases/documents/IB91.pdf>

Clifford, M. 1994, Troubled Tiger: Businessmen, Bureaucrats, and Generals in South Korea, M.E.

Sharpe, New York

Economic Times 2009, ‘10 years of Hyundai in India’, 11 March, viewed 1 June 2013,

<http://articles.economictimes.indiatimes.com/2009-03-11/news/27640511_1_santro-xing-hyundai-

motors-india-bvr-subbu>

HMC 2013a Company Information, viewed 31 May 2013,

<http://www.hyundai.com/kr/cpy/company.do>

Hyundai Motors Corporation 2012, Annual Report 2011, viewed 15 May 2013,

<http://worldwide.hyundai.com>

HMC 2013b Investor Presentation February 2013, viewed 31 May 2013,

<http://worldwide.hyundai.com/wcm/idc/groups/sggeneralcontent/@hmc/documents/sitecontent/

mdaw/mdcx/~edisp/hw071209.pdf>

Johanson, J. and, Vahlne J. 1977 ‘The Uppsala Model Revisited’, Journal of International Business

Studies, vol. 8, no. 1, pp. 23-32

Kim, H.A. 2004 Korea’s Development under Park Chung Hee: Rapid Industrialization, 1961-79, London

and NY: RoutledgeCurzon, pp.1-280.

Lansbury, D. Suh C. and Kwon S. 2007, The global Korean motor industry : the Hyundai Motor

Company's global strategy, Routledge, London

Mah, J.S. 2006 ‘Export Promotion and Economic Development: The Case of Korea’, Journal of World

Trade, 40(1), pp. 153-166.

Mah, J.S. 2007 ‘Industrial Policy and Economic Development: Korea’s Experience’, Journal of

Economic Issues, 41(1), pp. 77-92.

Porter, M. 1947, The competitive advantage of nations, Macmillan, London

Seyung C. 1982, Interview in the Asian Wall Street Journal, 23 April 1982

Steers, M. 1999, Made in Korea: Chung Ju Yung and the rise of Hyundai, Routledge, New York

Toyota Motor Corporation 1988, Toyota: a history of the first 50 years, Toyota City: Toyota Motor

Corporation, New York

http://worldwide.hyundai.com/wcm/idc/groups/sggeneralcontent/@hmc/documents/sitecontent/mdaw/mdcx/~edisp/hw071209.pdf

http://worldwide.hyundai.com/wcm/idc/groups/sggeneralcontent/@hmc/documents/sitecontent/mdaw/mdcx/~edisp/hw071209.pdf

Hyundai Motors Corp. globalisation strategy (Noémie Frontère)

Business

hmcs strategy

creation of hmc

hmcs international strategy

hyundai globalisation

companys strategy

global strategy

hmcs objectives

hmcs subsidiaries