The Global Korean Motor Industry

The Hyundai Motor Company's Global Strategy

Russell D. Lansbury, Chung-Sok Suh, Seung-Ho Kwon

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134124008
• Edition: 1
• Topic: Commerce
• Subtopic: Finances d'entreprise

This book examines the experiences of the globalizing Korean automobile industry, with particular focus on the Hyundai Motor Company (HMC), one of the most prominent of the new Korean multinational corporations. It provides an overview of the changing nature of the global automobile industry, before considering in depth the globalization processes that the Korean automobile industry has undertaken.

Tracing the development of HMC as it recovered from the failure of its first venture overseas, in Canada, and tried again in India, the authors explore the similarities and differences between the practices which HMC implemented in India and Korea. They highlight the importance of production systems and employment relations as part of HMC's growth, and argue that if Korean companies such as HMC are to compete successfully as global automobile producers they will need to increase the proportion of overseas production, establish global supply chains and improve co-ordination between head office and subsidiaries.

Based upon extensive fieldwork in India and Korea, this book is a detailed account of the globalization of the Korean automobile industry and Hyundai Motor Company. Its findings will be of importance to all those who seek to understand the challenges faced by firms that attempt to become global players.

1 Introduction

In recent decades, multinational enterprises (MNE) increasingly dominated global production as they expanded their foreign direct investment (FDI) in order to secure global competition advantages and overcome regional market protection. The automobile industry is a prime example of globalisation in which auto manufacturers have developed networks, alliances and cross-shareholdings across regions and nations. From the end of the Second World War until the mid- 1960s, US producers dominated the auto industry with their vast domestic market and expansion into Europe and elsewhere. Yet by the 1970s, Japanese auto firms, led by the Toyota Motor Company, had begun not only to penetrate North America but were also capturing new markets in Europe and Asia. By the end of the 1980s, the Toyota Production System was declared to be the dominant paradigm by the influential book The Machine that Changed the World in which Womack et al. (1990) coined the term ‘lean production’. Toyota demonstrated that it was possible to continuously improve production processes while building relatively cheap models of high quality. During the 1990s, Japanese auto companies shifted their strategy of exporting from Japan to building transplant facilities overseas in order to produce vehicles in other countries. Japanese auto firms gradually outstripped their US rivals in their share of the world market and by the mid-1990s accounted for one third of all vehicle sales in the United States.

The rise of the Japanese auto industry as a dominant global force, and the example of the Toyota Motor Company in particular, revived the concept of the ‘world car’. This first emerged in the 1970s when US companies forecast that great economies of scale could be achieved by the production and sale of the same products across different markets around the globe. Subsequently, however, the lean production system, developed by Toyota, was hailed as the ‘one best way’ to organise the manufacturing of automobiles and other companies were exhorted to either adopt Toyota’s techniques or fall by the wayside in the increasingly competitive world market.

The view that lean production would become the new global paradigm for auto manufacturing had implications for employment relations practices. Lean production has been defined as ‘an interrelated set of technological, organisational and human resource policies that, when implemented together, constitute a new flexible system of work’ (Womack et al. 1990). This is contrasted with mass production which is regarded as a more rigid, supply-oriented system less able to react to changes in market conditions, product life cycles and consumer tastes. Lean production also emphasises the effective utilisation of human resources to avoid excessive labour, which can mean fewer workers undertaking a wider range of tasks. This aspect of lean production has been criticised as both ‘lean and mean’ because there is excessive pressure and stress on the workforce. Concern has been raised by critics of globalisation that multinational enterprises in the auto sector will engage in a ‘race to the bottom’ by reducing wages and conditions and seeking to erode labour standards. There is also a view that lean production is simply an old fashioned ‘speed-up’ production device designed as a new idea in order to more subtly control the workforce, strengthen the role of management and weaken the trade unions (Babson 1992).

The more dramatic forecasts about globalisation of the auto industry have not yet been realised. Attempts to create a ‘world car’ have encountered significant obstacles. The demand for standardised models of automobiles has stabilised and declined. Even some of the Japanese companies which were initially successful in marketing a homogenised product to all their markets have changed to local adaptation of models. It appears that regional rather than global strategies offer considerable opportunities to auto companies and a number have abandoned their previous policies of a worldwide approach to production. The dominance of lean production has also been questioned as local conditions and practices have proved to be resistant to change and demonstrated that there is not necessarily a single set of best practices for assembling motor vehicles. Indeed, while lean production has proved to be a most efficient and effective system in some circumstances, mass production persists and there are also many examples of hybrid combinations of mass and lean production systems.

One of the key features of the changing nature of the global automobile industry is the saturation of traditional markets in North America, Europe and Japan and the expansion of production and growth of sales in emerging markets such as Asia and South America. Annual auto production at a global level has increased from 18 million in the mid-1960s to 44 million in 2004, but the demand for new vehicles in the ‘triad’ markets of North America, Europe and Japan is growing at only 2 per cent per annum. However, vehicle production in newly emerging industrial economies such as China and India have doubled in the past four years and these two countries are likely to be ranked third and fourth in the world league of auto producers within a decade. Although many of the companies which are establishing new plants in China and India are based in the United States and Europe, the ‘big three’ – General Motors, Ford and Daimler-Chrysler – are all encountering financial difficulties and only Toyota appears to be secure. Hence, it may be companies from Japan and relatively new entrants such as Hyundai from Korea which are best positioned to capitalise on new opportunities in China and India.

Whether multinational auto companies are adopting particular production systems in their newer plants in India and China, and how these impact on their employment relations systems, has yet to be systematically studied. However, it is apparent that the strategies pursued by the multinationals are not uniform and cannot be assumed to necessarily follow a predictable course. It is important to pay close attention not just to the espoused policies of different companies but also to how these policies are translated into practices.

Ferner and Edwards (1995) reported that the diffusion of common employment practices within multinational corporations varied according to their organisational characteristics and some were more likely to seek homogenisation than others. Frenkel (1994) argued that similarities which he observed in four plants owned by the same multinational pharmaceutical company could be explained by a combination of factors ‘internal’ and ‘external’ to the organisation. Among the former, he regarded managerial strategies and the relations between head office and subsidiary managers as vital, but their impact was influenced by national industrial relations institutions and other external factors like product markets. Edwards et al. (1999) offered a similar but more sophisticated argument when they highlighted the ‘bi-directional’ relationship between ‘structural factors’ – like markets, production systems and management structures – and ‘political processes’ internal to the organisation – such as the ambitions and strategies of individual managers, and the success or failure of struggles between head office and managers of subsidiary organisations. In their study of several plants of Asea Brown Boveri (ABB) around the world, Bray and Lansbury (2000) found that while there was a general tendency towards harmonisation of employment relations practices, there remained elements of national and local diversity that were unlikely to entirely disappear. MacDuffie’s study of the world auto industry, which examined both production systems and employment relations, also noted how influences from the parent company towards uniformity interacted with factors in the national context which strengthened local differences. MacDuffie concluded that ‘it may make sense to first examine company-level factors affecting the adoption and diffusion of new approaches to work organisation and then to turn to national level explanation to explain residual variation’ (MacDuffie 1995: 106).

It is apparent from these studies that globalisation is not a ‘monolithic juggernaut leading inexorably to common judgements across different national regimes’ (Bray and Murray 2000). Yet clearly there are common pressures arising from the expansion of FDI, the adoption of new production systems and the growing significance of multinational enterprises. Based on their studies of both the auto and telecommunications industries in six countries, Katz and Darbishire (2000) concluded that there were ‘converging divergences’ characterised by the spread of four patterns of workplaces processes: low wages, HRM, Japanese-oriented and joint-team-based approaches. However, they also highlighted differences in the distribution of these patterns at the national level as well as in the extent of variation within countries. While there have been criticisms of the converging divergences approach, Katz and Darbishire’s work highlight the importance of interaction between both convergent and divergent tendencies in employment relations. In a similar vein, Bamber et al. (2004) argue for an integrated approach that focuses on the interaction between market and institutional variables which shape employment relations outcomes.

The case study reported in this book traces the emergence of the Hyundai Motor Company (HMC) from a complete knock down (CKD) assembler, under an agreement with the Ford Motor Company in 1968, to one of the world’s top 10 manufacturers. In 1976, HMC produced its first originally designed model, the Pony, using a low-cost strategy. Less than 10 years later, in 1985, HMC opened its first overseas plant in Canada in order to assemble the mid-sized, front wheel drive Sonata model.

Like Korea’s other major family-owned conglomerates, known as the chaebols, HMC increased its FDI in Asia during the early 1990s as part of its growth strategy. Until the mid-1990s, HMC focused mainly on exporting domestically produced vehicles but realised that it needed to move off-shore if it was to become a major international competitor. HMC adopted the strategy pioneered by the Japanese auto companies, more than a decade earlier, of entering at the lower end of the market and moving upwards. Gaining a secure market share was more important than creating short-term profit, and HMC was willing to commit considerable financed resources to achieve success. HMC sought to introduce some elements of the Japanese management system but it adopted a mass production system rather than the lean production principles pioneered by Toyota. HMC opened its first overseas plant in Canada in 1985 but closed it in 1993 after prolonged operational and industrial relations problems. In 1996, HMC established a 100 per cent-owned subsidiary in Chennai, India, and constructed a plant designed to build 120,000 passenger cars a year.

The objective of this case study is to analyse the experience of Hyundai Motors India (HMI) as an example of a Korean firm seeking to ‘produce beyond borders’ and become a global company. It traces the development of HMI from 1996 to 2001 in order to examine the inter-relationship between FDI, production systems and employment relations in a Korean company attempting to ‘go global’. It explores the similarities and differences between production systems and employment relations applied by Hyundai in India in comparable plants in Korea. It seeks to assess the extent to which the company has adapted its system to local circumstances as part of its global strategies of investment and manufacturing. This will provide insight into the approaches adopted by a major Korean Chaebol as it extends its activities on a global scale.

2 The global auto industry

The development of integrated global manufacturing in the automobile industry depends on a variety of factors associated with product markets and production processes. The location decisions of multinational enterprises (MNEs) are also a vital consideration. Debate exists about how far global manufacturing has actually occurred in the automobile industry. The concept of a ‘world car’ pioneered by the Ford Motor Company was based upon relatively standardised products being built from standardised component parts, common production systems across countries and location decisions that would yield cost advantages in economies of scale and specialised plants.

The question as to the extent to which automobile production has become globalised may be assessed by referring to UNCTAD’s transnationality index. This index is calculated as the average of three ratios. These are the share of a company’s foreign assets to total assets, the share of overseas sales to total sales and the levels of employment abroad compared to total employment (UNCTAD 1999). It may come as a surprise that according to the transnationality index the automobile industry is less internationalised than various other industries, including food production, chemicals and electronics.

Nevertheless, the automobile industry is typically considered to be at the forefront of globalisation. Evidence supporting this view includes: the intricate network of alliances and cross-shareholdings among automobile companies, within nations and regions but also between regions (Vickery 1996), intensified merger and acquisition activity in the 1990s involving both end-producers and automobile input suppliers (PricewaterhouseCoopers 2000a; World Trade Agenda 2000), the trend towards technologically motivated cooperation agreements, which was caused, inter alia, by end-producers entering into new forms of partnerships for the design of principal components and subsystems (UNCTAD 1999: 25) and the significant role of intra-firm trade, for example, of US-based automobile multinationals (UNCTAD 1999: 443).

The growth in demand for automobiles around the world varies considerably. As shown in Table 2.1, traditional markets for automobile production, such as Europe and North America, have grown by approximately 1.5 per cent in recent years. By contrast, emerging markets such as China have been growing by an annual rate of almost 19 per cent and are still expanding. These emerging markets, while attractive in terms of the number of consumers, also present challenges for the manufacturers due to the heterogeneity of demand. The supply side of the automotive industry has seen a number of automotive manufacturers form global alliances in order to gain an increased share of both traditional and new markets, to research and design cross-platform vehicles, to achieve economies of scale and ultimately, to protect shareholders’ value. Other issues on the supply side include the globalisation of components and parts manufacturing, and the resultant impact that this has had on local industry and labour markets, the increased access to technology and research and development (R&D), the management of supply chains, the shift from mass production to lean production and the localisation of production facilities.

Table 2.1 Production trends by original equipment manufacturers in the automobile industry by regions, 2001–2007

Changes in the worldwide automotive industry

The past decades have witnessed major changes in the world automobile industry. In the mid-1960s, the ‘big three’ US auto companies (General Motors, Ford and Chrysler) were ‘kings of the road’ with a vast domestic market under their domination and almost half the total world production of motor vehicles (Kochan et al. 1997). The combined output of all European automobile plants accounted for 40 per cent of the world’s automobiles, although these included plants owned by US auto companies. The Japanese auto companies, which would emerge as major players in the 1970s and 1980s, produced less than 10 per cent of vehicles in the total world automobile market by the mid-1960s.

International trade between auto-producing countries in the 1960s was still small scale and involved mainly niche specialty products. Domestically produced vehicles still accounted for 90 per cent of sales. When GM and Ford began to extend into Europe they did not export vehicles from the United States but developed parallel and independent manufacturing operations in Britain and Germany. By the late 1960s, Ford Europe had pioneered a new kind of multinational factory network with final assembly lines in one European country fed with gear boxes, engines and parts that had been assembled by Ford plants in other European countries. When the European companies began to penetrate the US market with smaller cars, the American manufacturers retaliated by developing their own range of smaller cars, known as ‘compacts’ (see Williams et al. 1994).

By the 1970s, manufacturing autarchy had been eroded as trade barriers were lowered and differences in product size and packaging were reduced. The liberalisation of world trade under the General Agreement on Tariffs and Trade (GATT) and the creation of regional free trade zones forced auto companies both to share domestic markets with new foreign entrants and to compete with other firms in virtually all major markets. Market fragmentation began in the United States with small fuel-efficient European imports in the wake of the oil crisis during the early 1970s, despite resistance by US manufacturers. By the end of the 1970s, the ‘big three’ US auto companies (GM, Ford and Chrysler) had lost substantial market share to Toyota, Honda and Nissan. As the volume of international auto trade increased, the losers were the United States and the United Kingdom. The winners were Japan and Germany, which escaped the limits of their national markets and managed to export more than half their total output. Exports by British carmakers collapsed from 38 per cent in 1979 to 7 per cent in 1990, while Germany consolidated its position as a major exporter of cars by expanding their sales in both the European and North American markets. Overall, while less than 20 per cent of cars produced by the major manufacturing markets entered into international trade in 1960, it had increased to one-third by 1990, most of which was due to Japanese and German auto exports.

The 1980s saw the ascendancy of Japanese carmakers as they gained market shares in North America and established a stronger production presence in Europe, Australia and parts of Asia. Efficiency and high quality, based on the Toyota Production System or ‘lean production’ as it became popularly known, set the tone of the debate for how automotive manufacturers would compete well into the new millennium. In North America, the ‘big three’ were facing severe competitive and financial crises (Kochan et al. 1997). Likewise, European manufacturers faced a competitive crisis from Japanese manufacturers and a campaign was led by Peugeot to prevent Japanese companies from building plants in Europe or increasing imports to the EU (MacDuffie and Pil 1997).

Although the past three decades have included a number of takeovers and mergers between the international auto producers, the end of the 1990s witnessed the development of strategic alliances based on cross-shareholding rather than acquisitions and mega mergers. Six major alliances, centred on GM, Ford, Daimler–Chrysler, Toyota, Renault and Volkswagen, accounted for 83 per cent of world output in terms of 1998 units. Except for Toyota, each alliance included one or more major allied enterprises. It has been predicted that these alliances will shape the future of the industry, but it should be noted that many alliances are fragile and further changes are inevitable as evidenced by the break-up of the BMW–Rover alliance and difficulties in the merger between Daimler Benz and Chrysler.

Since the late 1990s and following the Asian economic crisis of 1997–1998, other auto manufacturers have begun to catch up to the Japanese producers. During the 1990s, Jap...