Business Behaviour (the case of home work are in the attachment)

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CASE: SM-122

DATE: 11/14/03

Mooweon Rhee prepared this case under the supervision of Professors William Barnett and James March as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 2003 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business.

HYUNDAI MOTOR COMPANY

We are disappointed when what we did is undervalued. But that’s the time we feel the need to do something.

—Mong-Koo Chung, Chairman and CEO of Hyundai Motor Company

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.

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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 ORGANIZATION2 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. 3A 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

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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.

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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.

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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 21st 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.

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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.

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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, high- priced 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 Associates12 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 Exhibit 4 were based on “Initial Ratings,” which had been released by the J.D.

Power Consumer Center. The “Initial Ratings” consisted of six scores across different criteria, and were obtained by J.D. Power from consumer ratings of vehicles after they had owned them for a few months. Among the six criteria, “Mechanical Quality,” “Features & Accessory Quality,” and “Body & Interior Quality,” which were taken from the Initial Quality Study (IQS), were selected because these three criteria directly reflected problems with a

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reported that the IQS (Initial Quality Study) showed Hyundai finished last out of 29 sales divisions, with 230 problems per hundred vehicles. The Excel was among the bottom 10 car models. The Excel models were also rated the worst cars overall for injury claims based on the analyses of insurance coverage and claims data by the Highway Loss Data Institute. The quality ratings provided by Consumer Reports also gave Hyundai cars a bottom score of 1.0 in 1991 (Exhibit 6).14 A senior manager in Consumer Reports said on condition of anonymity, “Why don’t you guess why Hyundai could get a good score in 1990? Hyundai car owners didn’t want to admit that they had made a big mistake. They just pretended that they had the ill luck to see a problem only in their car. But they gave it up in 1991.” All this made “Hyundai cars” a synonym for shoddy products. Shortly after becoming the executive vice president of HMA in 1990, Rodney Hayden “got a definite feeling that the image was ‘cheap price,’” he said in an interview. “I wanted to change that to ‘quality that was affordable.’”15 Although Hyundai tried to regain the momentum it had in its first three years by introducing a new package of lineups, promotions, advertising, maintenance, financing, and dealer incentives, it was a hard trek. One week after being picked to head HMA’s new customer satisfaction department, vice president Jack Collins left the company for Infiniti. One source familiar with Hyundai at that time attributed the attrition to tension between HMC and HMA: “The Koreans refuse to commit the resources necessary to turn Hyundai around. ‘Korean Management’ is an oxymoron.”16 Hyundai’s early success gave the HMC management unrealistic ideas about what it could accomplish in the U.S. market. Hyundai attempted to diversify its product mix, but it was not very successful. Although the Elantra debuted in the U.S. in 1991 to bridge the gap between the subcompact 1.5 liter Excel and the family-sized V-6 powered Sonata, it posed a danger to Excel sales because the differentiation between the Excel and the Elantra (powered by a 1.5 liter standard engine versus a dual overhead cam 1.6-liter optional engine) was not great enough to be perceived by the public. HMA also planned to introduce a prestige car in order to escape from the cheap car image, but HMC ignored this plan because its success in domestic sales was enough to satisfy its goal. “We were a bit satisfied with our great success in domestic market. In 1992, our goal in the U.S. market was to maintain our share, not to increase it,” said Suk-Jang Lee. Given this, Doug Mazza, who inherited HMA in January 1993 as a new executive vice president and COO, put less emphasis on sales reports and more on customer satisfaction and quality control. His efforts were aimed at raising Hyundai’s IQS scores, but he was disappointed with the next year’s score (Exhibit 5). In 1993, a USA Today article headlined, “Dealers: Hyundai

vehicle during that ownership period. J.D. Power Consumer Center reported the scores of each model across these three criteria on a four-point scale: ‘5”: among the best; “4”: better than most; “3”: does not really stand out; and “2”: the rest. The case writer first calculated the mean of the three scores for each model and then created an “IR score” in a …