Marketing Strategy and Analysis
The following article is an overview of Hyundai Motor Company. It is expected that you research well beyond this article as you address the exam questions, included below.
Hyundai Motor Group
Snaking over 266 miles from Seoul to the port city of Busan, the Gyeongbu Expressway was one of the proudest achievements of Hyundai Group founder Chung Ju-yung. But when it opened in 1970, some ridiculed South Korea’s decision to build an eight-lane motorway across two mountain ranges, because the poor country only had 60,000 cars.
“What do you know about making cars?” President Park Chung-hee asked Chung at the opening ceremony. According to legend, Chung replied: “I can do it.”
In fact, he had already been assembling cars for two years but no one expected the scale of Hyundai’s transformation over the next four decades. Chung’s expressway is now thronged with millions of cars each year, most of them made by the automotive group he founded. Millions more Hyundai vehicles are now an increasing presence around the world, proof of the company’s evolution into the world’s fifth-biggest carmaker by unit sales.
But now investors are watching closely as the carmaker – the crown jewel of the Hyundai empire – embarks on a new strategy, shifting its focus away from sales growth to the fat profit margins associated with a premium brand.
This is a radical cultural change for a company famed for breakneck growth. With its partner Kia Motors, it lifted sales to 7.1m vehicles last year from just over 2m in 2000. Chastened by Toyota’s experience in the disastrous recall crisis of 2010, Hyundai is looking to fine-tune quality before building up new capacity.
The notion of Hyundai as an upmarket option would have seemed absurd when Chung Mong-koo, eldest son of the founder, assumed the chairmanship of the motor group in 1998. Having started out by assembling Ford vehicles from kits, the company produced its first branded vehicle, the Pony, in 1975.
The Pony enabled Hyundai to enter the export market, but it had little to offer beyond a cheap price. Decades later, Canada’s Globe and Mail named it one of the 10 worst cars ever sold in that country, likening it to “a Honda Civic built in a back alley by an inebriated blacksmith”.
The company’s reputation abroad was still dismal when Chung Mong-koo took the helm – an appointment that he took as a snub, after his younger brother inherited the chairmanship of the parent group. At home, Hyundai faced a struggle to integrate its rival Kia, which it had rescued from looming bankruptcy amid the 1997-98 Asian crisis – a turbulent period that provoked concern about Hyundai’s own finances.
Shedding Hyundai’s “cheap and nasty” image in the world’s biggest car market was vital. “Top management recognised that in order to break through in the US, we needed to overcome the quality issues,” says Cho Won-hong, Hyundai’s chief marketing officer. “We were not a strong player – we were just one of the minor players.”
The turning point came in 1999 with a moment of marketing genius: the introduction of a 10-year, 100,000-mile warranty that was by far the most generous on the market and helped to erode the group’s reputation for shoddy craftsmanship.
Meanwhile, the company established a quality-control division that obsessively monitored every stage of the supply chain. By 2006 Hyundai had become the third most reliable automotive manufacturer, according to JD Power’s quality study, with only Porsche and Lexus performing better.
As they began to shed their “nasty” reputation, Hyundai and Kia cars remained cheap, thanks to aggressive cost controls and a captive network of suppliers. This reaped spectacular benefits after the 2008 financial crisis. Hyundai pulled another marketing masterstroke in the US, offering a money-back guarantee to customers worried about losing their jobs. As other carmakers reeled from the economic turmoil, Hyundai and Kia enjoyed combined global unit sales growth of more than 20 per cent in both 2009 and 2010.
“The world economic crisis of 2008-09 was a stroke of luck: customers started looking for cheaper alternatives, and the guiding principle of ‘good quality at a lower price’ was suddenly striking chords everywhere,” says EngelbertWimmer of the PolariXpartner consultancy.
Since Mr Chung took the reins, annual vehicle sales by Hyundai and Kia have increased more than 600 per cent. But this year, Mr Chung has warned investors in Hyundai and Kia to expect revenue growth of just 4 per cent – the weakest figure for a decade. Does this mark the end of the companies’ years of spectacular growth – or simply the point at which Hyundai starts to fight in earnest for recognition as a quality carmaker?
The hiss of hydraulic pumps fills the air as an army of robots passes sheets of metal between themselves, pressing and cutting them in turn. About 200 tonnes of steel are processed every day at Hyundai’s Asan plant, 100km south of Seoul, with the involvement of just 35 workers at a time. They are relegated to supporting roles, fitting hinges and checking for flaws.
Opened in 1994, the Asan factory is the sophisticated younger brother of Hyundai’s plant in Ulsan, the biggest car factory in the world. Hyundai and Kia’s domestic production is now outweighed by output from a web of foreign factories, which has steadily expanded over the past decade, with 15 overseas plants on four continents.
But that expansion appears to have been put on hold, with no publicly announced plans to add to the factory network, although Hyundai is pondering a fourth plant in China.
This restraint follows Toyota’s bruising recalls, when safety problems forced it to withdraw millions of vehicles. Some blamed the Japanese group’s overly rapid expansion.
“We learnt lessons from the Toyota case,” says Mr Cho. “We’ve been moving very fast for a decade . . . We believe this is the right time for us to build our footprint in terms of quality growth rather than quantity growth.”
Rivals have noticed Hyundai’s quality improvements. At the 2011 Frankfurt Motor Show, Volkswagen chief executive Martin Winterkorn was filmed angrily grappling with the steering-wheel adjuster of Hyundai’s i30 hatchback. “It doesn’t rattle. BMW can’t do this. We can’t do this,” he complained.
“We had a solution, but it was too expensive,” replied Klaus Bischoff, head of design at VW. “Then how can they do it?” MrWinterkorn asked.
The answer to his question lies partly in Hyundai’s status as the flagship company in South Korea’s second-biggest chaebol conglomerate. The exterior panels of Hyundai and Kia vehicles are made from metal supplied by Hyundai Steel, and hammered into shape by Hyundai Hysco. Hyundai Mobis provides parts ranging from bumpers to airbags. Hyundai Glovis transports the finished vehicles to consumers who can buy them with financing from Hyundai Capital.
“Imagine two Golf-like cars, one sold on a European model and one following the Korean way,” says MrWimmer. “The Korean model produces a vehicle with an approximately €4,500 saving for the end customer.” But maintaining a strategy focused on undercutting the competition would be “giving up too early”, he adds. “Their aspiration needs to be to go into premium.”
The increasingly sleek design of Hyundai and Kia vehicles has moved two formerly “nondescript brands . . . into a new echelon”, says Larry Dominique, president of the research group ALG. That has helped Hyundai’s Genesis sedan start to make inroads at the cheaper end of the premium market. But Mr Dominique adds that customers tend to be younger and less well-off than buyers of BMW and Mercedes vehicles, which still offer superior performance.
Even as their reputation strengthens, Hyundai and Kia remain vulnerable to embarrassing slip-ups. In November they admitted overstating the fuel efficiency of more than 1m cars sold in North America. Six months later they recalled more than 2m vehicles in North America and South Korea after discovering problems with a brake light switch.
“Unfortunately, recalls are part of the business,” says Philippe Houchois, an analyst at UBS. “I don’t think that they’ve done worse than their peers.”
One area in which they lag behind competitors conspicuously, however, is in labour relations at their domestic plants, which have suffered regular walkouts by workers over the years. Three successive years without strikes raised investors’ hopes – but last year brought Hyundai’s costliest ever strike, with lost production of Won1.7tn ($1.5bn). A partial walkout by weekend workers has brought further losses of about Won1.6tn over the past three months.
Some investors also worry about corporate governance at a company where the chairman’s authority is unquestioned. Critics say the $4bn acquisition of Hyundai Engineering & Construction in 2011 was motivated more by family pride than by shareholder value. Those voices will grow stronger if Chung Eui-sun, the chairman’s son and heir apparent, fails to measure up to his 75-year-old father. But the younger man was president of Kia from 2005 to 2009, when the company’s turnround began in earnest.
At a Hyundai research centre south of Seoul, scientists have little time for short-term concerns. This year Hyundai became the first carmaker to achieve assembly-line production of hydrogen fuel cell vehicles.
“We don’t think we will earn a profit with our fuel cell technology within 10 years,” says Lim Tae-won, head of the company’s fuel cell research team. But Hyundai leads its rivals in this field and expects to build 1,000 fuel cell versions of its ix35 car by 2015.
“This is Korean culture. We are always looking for some accomplishment,” says Mr Lim. “We have a dream to be one of the best automotive companies in the world.”
Chung Mong-koo rarely makes public remarks. But his unchallenged authority over Hyundai Motor Group’s strategy means that when he does speak, investors hang on every word.
Such was the case on May 3, when the chairman was quoted in South Korean media as saying he would “look into whether there are possibilities” to expand production overseas. Shares in both Hyundai Motor and Kia Motors jumped nearly 3 per cent.
The market reaction reflected concerns that production limits were hurting profits. Hyundai expects its market share in the US to decline for the second straight year because it is unable to squeeze additional vehicles from its Alabama factory, which is already operating above capacity.
“You hate to lose that momentum,” says Larry Dominique, president of the research group ALG. “If people were shopping for Hyundai and now they get a Ford or a Nissan, that’s a customer Hyundai won’t get a chance to conquer for another five years.”
Kia is nearing completion of a third Chinese factory, and Hyundai’s vice-chairman recently hinted about a fourth plant there. Significant expansion in South Korea – which still accounts for nearly half of both groups’ production – appears out of the question, given the high labour costs and relatively low productivity of the existing plants. “Their slowing growth is purely a function of capacity constraints,” says Lee Hyung-jin, of Baring Asset Management.
Simon Mundy, Financial Times Limited
Part A – Compulsory Question (55 marks)
Question 1: Hyundai Motor Group
1. The motor vehicle industry is a particularly difficult industry to enter. Why is this? 5 marks

2 Outline the early strategies that Hyundai employed to enter the world of automobile manufacture following the establishment of the company in 1967. 10 marks

3 How has Hyundai managed to establish itself as a world-class brand in the last twenty years? 15 marks

4 Why do you think Hyundai decided to acquire a controlling share of Kia, a brand that had just declared bankruptcy, in 1997? 5 marks

5 What have been some of the key features of the Hyundai marketing strategy? 10 marks

6 What have been Hyundai’s key strategies to develop a global brand? 10 marks