Quick name the world’s fourth largest car maker!
What did you come up with? Ford? Renault? Would you believe that the right answer is Hyundai?
If like me you associate Hyundai with its earliest entries in the US market (like the Excel), that might surprise you. Even if you can look past those woeful models, North America leads one to under-appreciate the Korean car maker. In 2009, Hyundai sold 675,000 vehicles in the US. On the one hand, that represented a 9% increase in US sales (while the rest of the industry sank 21%). On the other, Honda (# 6 in the world) sold a little over one million vehicles in the US. Thus, sitting in Chicagoland, it is easy to guess that Honda is bigger.
So how did Hyundai go from selling Excels to a blossoming power house? That is the focus of a Globe and Mail feature (How Hyundai became the auto industry’s pacesetter, Apr 29). It points to a number of factors. First, it truly sells globally, marketing cars in over 190 countries. Second, it took its experience in North America to heart and refocused the company on quality.
The experience was similar in the U.S. when the front-wheel-drive Excel was introduced in 1985. The car was priced at less than $5,000 (U.S.), was voted one of the year’s 10 best new products in a Fortune magazine survey, and sold more than 168,000 units in its first year. But sales started skidding in 1988. Part of the explanation for the slide is that American consumers didn’t know anything about Hyundai at the start, says Finbarr O’Neill, who joined Hyundai Motor America as general counsel in 1985, and was CEO from 1998 to 2003. “People just assumed the vehicles were Japanese quality,” he recalls. They weren’t.
Cutting corners on quality to compete on price was not just a short-term tactical error but a mistake in long-term strategy. “Hyundai’s philosophy was to generate sales volume—as much as we could,” says Hyundai Canada CEO Steve Kelleher, who joined the company in 1986, heading the parts department. “But our technology was so far behind. We were buying some of it from other manufacturers—licensing it.” …
Executives in Seoul were humiliated by their company’s shabby reputation. But they learned from their mistakes. In the 1990s, they committed themselves to quality, an intense work ethic, and a centrally directed long-term plan that is now shifting into high gear just as many of Hyundai’s rivals in Detroit and Japan are faltering.
That emphasis on quality has paid off. Hyundai since the early 2000s has hung with the likes of Honda and Toyota in both JD Powers and Consumer Reports quality surveys. It should also be noted that much of that improvement came from aping competitors. The article notes that Hyundai’s spending on R&D is basically at the industry average (as a percent of revenue). Rather than being at the cutting edge of technology development, they have learned from competitors, adapting the most promising technology.
Other parts of Hyundai’s success also have a decidedly operational focus. Hyundai routinely prices its cars 5% to 10% less than competing models. Part of that advantage comes from cheaper labor costs (estimated at about $6 per hour less than UAW wages) but, as the article notes, cheap labor ain’t necessarily docile labor; Hyundai has faced several strikes in recent years. Also, labor costs become less relevant as Hyundai moves upmarket and offers more technologically loaded cars. The company offers says its costs saving stem from three main factors:
The company says three of those efficiencies are its mature and highly competitive parts suppliers in Korea, its own proprietary technology (which it owns and therefore doesn’t have to pay to license), and its centralized control of worldwide production, with “the very latest information technologies.”
There is also how they structure their network of facilities and a strong focus on automation. Hyundai owns the largest auto plant in the world:
If you get to the city of Ulsan, 300 kilometres to the southeast [of Seoul] on the Sea of Japan, see how the sheer enormity of Hyundai’s highly centralized manufacturing overwhelms you. Here the company operates the world’s largest auto plant, spread over 1,233 acres, producing up to 5,600 cars a day. The place has its own port, capable of docking three 50,000-ton ships at once. …
The five factories that make up the [Ulsan] complex can produce up to 1.6 million vehicles a year. But executives and industry analysts say that even Hyundai’s newer plants use up fewer labour hours per vehicle than its major competitors. On a recent visit to the Asan plant, about 100 kilometres south of Seoul, where Sonata and Azera sedans are made, there were only handfuls of workers on long stretches of the assembly line—they were overseeing robots. And the company says its Sonata plant in Alabama, which opened in 2005, requires even fewer workers per car.
So what is ahead for Hyundai? There seem two real issues. One is their move upmarket. They are launching cars this year that aspire to compete with Lexus and European luxury brands. There is every reason to believe they are capable of delivering the goods. Toyota, Honda, and Nissan have all managed to leverage mass-market prowess into successful luxury brands. Hyundai, however, is not launching a separate brands. They are betting that people will pony up $60,000 for cars with an H on the grill. They are also counting on the same set of dealers to distribute and service the cars. I can’t imagine that the dealers are overly pumped about mixing a luxury car (and luxury expectations) with the volume cars that are their bread and butter. (One dealer in the article basically says as much.)
I think a bigger issue is their management structure. It seems that everything is tightly controlled from Seoul. This works great for monitoring whether parts are coming in on time and how product is moving. But it also has the risk of separating decision makers from market realities. To put this in perspective, here is the most interesting line in the article:
How does Hyundai build cars so cheaply? Management in Korea wouldn’t share cost data. Even Hyundai Canada CEO Steve Kelleher and former Hyundai Motor America CEO Finbarr O’Neill say they don’t know those numbers
If you are unwilling to share cost data with senior regional executives, how are these people involved in decisions and does anyone listen to them? What many have argued about Toyota’s recent troubles is that senior leadership was too disconnected from what was happening in the US and other markets. While this may not have led to actual flaws in cars, it is certainly consistent with the PR disaster that unfolded. It will be interesting to see if Hyundai can maintain its growth without falling into a similar trap.