Tuesday, January 28, 2014

Hyundai Way: Hyundai Speed, Part 3

Part 3 Hyundai Heritage

A company’s initial culture is usually determined by its founder’s mindset—the person’s values, beliefs, preferences… Jim C. Collins, author Built to Last and Good to Great

Chung Ju-yung—Hyundai Founder and Honorary Chairman
Growing up in rural Korea during the Japanese Colonial era, the future founder of Hyundai, Chung Ju-yung, exhibited entrepreneurialism early in life. Breaking free from Korean agrarian tradition that the eldest son remain at home to tend the family lands, young Chung’s desire to enter business led to his operating a rice store and then an auto repair business while still a young man. Following the liberation of Korea from Japan in 1945 and unshackled by draconian Colonial rule, Chung Ju-yung re-entered the auto repair business and soon after formed a construction company. He named these businesses Hyundai, which means Modern.

The Early Years
After several years of prosperity and capitalizing on expansion opportunities, Chung Ju-yung was suddenly forced to abandon the Seoul-based auto repair and construction companies in 1950 when North Korea invaded South Korea. Along with thousand of other refugees, Chung Ju-yung and his extended family fled to the last bastion of resistance, the southern coastal city of Busan. There an offer to provide housing for the American military surfaced and soon Chung Ju-yung was back in business as a contractor. No construction job was turned away—big or small.

In the years following the end of the Korean War in 1953, Chung Ju-yung and Hyundai established themselves as a reputable construction company. Working mostly for the Americans and the South Korean government, Hyundai struggled with extremely limited resources to restore Korea’s war-battered infrastructure. A key project drawing considerable public attention was the rebuilding of Seoul’s single bridge spanning the Han River.  The bridge had been destroyed by the South Koreans on the third day of the Korean War to thwart the advancing North Korean army. In the spirit of nationalism, Chung Ju-yung repaired the bridge “at cost.” This drew strong local accolades, while establishing the previously little known Hyundai as a major Korean construction company in the eyes of the public and government.

Hyundai and the “Miracle on the Han.”
Fueled by a wide spread perception of post–war government mismanagement and corruption, by the early 1960s South Korea witnessed a military coup led by General Park Chung-Hee. In the wake of the coup as South Korea struggled to recover from the devastation of the conflict and an ever present and looming threat from North Korea, the new regime saw the need for rapid social and economic development. To spur this rapid economic development the authoritarian South Korean government teamed with a number of the Korean family-run businesses commonly referred to as chaebol (chae= wealth, bol = family). The new regime managed in a quid pro quo relationship, providing the chaebol with subsidies, cheap credit and protection against foreign competition. This arrangement also limited Unions, which kept labor cost low.  Korean chaebol that met the authoritarian government’s bold mandates gained additional work. In a climate where failure was not tolerated and success rewarded, Hyundai was among the most successful. Moreover, Chung Ju-yung gained a reputation for iron-will, determination, and a “can-do” spirit where “even the impossible was possible.”

By the 1970s and 1980s, the South Korean economy began to focus on export-driven heavy industry. Chung Ju-yung continued to diversify the company by entering key sectors, including shipbuilding and auto manufacturing. In many cases, Hyundai divisions were key suppliers to others within the Group—ranging from concrete to steel. By the 1980s, Hyundai was South Korea’s largest and most successful conglomerate with projects across Asia and the Middle East. To many Hyundai symbolized South Korea’s rapid economic growth often referred to as the “Miracle on the Han”—the Han River bisecting the greater Seoul area. Interestingly, and rightfully pointed out to me after one of my lectures, most of Hyundai’s operations were centered in Ulsan on the southeast coast of the peninsula.

The extended Chung family, which included Chung Ju Yung, his brothers, in-laws, children, and nephews, oversaw a considerable empire. Over time some of the brothers and brothers-in-laws eventually formed their own Groups. These included the Halla Group (cement, construction, auto parts), the Sungwoo Group (cement, auto parts, accessories, batteries, resorts) Korea Flange (flanges, forging, auto parts), Hyundai Industrial Construction and Development (housing construction), Hyundai Oil Refinery, and the KCC Group (auto paint and glass).  In turn these affiliated Groups provided products and services as preferred or exclusive suppliers.

These Chung family business ventures actually follow Korean norms with the eldest son (jang ja), in this case Hyundai, assuming responsibility for younger siblings and their families (the affiliated family owned companies). This norm still impacts business in 2014 as the Hyundai Motor Group continues to support and nurtures the smaller companies.

Nation-Builder to Philanthropy
Late in life, with his family members and a loyal team of experienced managers running day-to-day operation of what had grown into a business empire,
Chung Ju-yung’s interests shifted from nation building to philanthropic activities. In the 1980s, his influence and determination were key to South Korea securing the 1988 Olympic Games. Moreover, Honorary Chairman Chung was among the first South Koreans to break the bonds of Cold War mentality and worked to promote economic and cultural relations with North Korea, China, and Soviet Russia.

Transition and Family Succession
Prior to Chung Ju-yung’s death in 2001 and amid pressure by the government for Korea’s large industrial groups to spin off unrelated divisions and focus on core businesses, the Hyundai Group restructured. In a complex re-structuring move holdings were divided among family members into several smaller Groups.
Six new Hyundai Groups emerged. Of note the eldest surviving son Chung Mong Koo assumed control over the Hyundai Motor Company with 10 auto-related affiliates including Kia Motors, Hyundai Precision (MOBIS), Incheon Steel (Hyundai Steel) and Hyundai Capital.

Consolidating the automotive and steel-related businesses, Chung Mong Koo became chairman of the Hyundai Motor Company. This marked a new era of leadership and direction for the carmaker. Most significant was the new HMC chairman’s hands-on approach to management and issue resolution that would lead to a dramatic improvement in quality and global expansion.

Over the next ten years, some of former Group’s firms struggled to recover and ended up in receivership and were sold in the wake of the 1997 IMF Crisis. Interestingly, with today’s solid growth of HMG and Hyundai Heavy Industries (HHI), one of the groups formed in the 2001 spin-off, some of the companies have been re-acquired.   (Hyundai Autonet and Hyundai Engineering and Construction by the Hyundai Motor Group and the Hyundai Corp. by Hyundai Heavy Industries)  Re-acquisition activities will probably continue into 2014

Chairman Chung Mong Koo
Following family expectations the third son of the elder Chung, Chung Mong Koo, joined the Hyundai Group after graduating college. By the mid 1970s he was personally involved in the launch of a new division within the Group—Hyundai Precision and Industry Company LTD. With the growth of Korea’s export industry and increased transportation via ocean transport ships, Chung Mong Koo recognized the growing demand for ocean-going containers. In this new venture, Hyundai Precision’s approach was to establish a standard for containers, while also gaining a competitive advantage through new production technology and product development.

This quest to enter the shipping container market soon became reality. From March 1977 to August 2000 the total production of Hyundai Precision would be 2.66 million TEU (Twenty-foot Equivalent Unit, a measure used for capacity in container transportation)—and 30% of the world supply.  Along with Hyundai Precision’s early success, Chung Mong Koo soon developed a unique culture within the Hyundai Group—one that strove for entrepreneurial growth and incorporated cutting edge production technology. Some milestones stand out.                   

110 Days
With the need to ship its own products, Hyundai Group had considered manufacturing containers since 1975. Recognizing the demand just within the Groups as well as demand from the overall growth of the Korean export industry, Chung Mong-Koo boldly embraced the business with the conviction that timing was right to be highly successful. Once committed, construction on a container production facility began on November 10, 1976.  Initially this date would become known as 110—an abbreviation for November the 11th month and day 10 of the month.  However, within the company 110 took on a broader more significant meaning—the plant's construction was completed in only 110 days.

Meanwhile, as construction crews were laying foundations and erecting the building’s steel girder framework, Hyundai Precision sales teams were taking orders for containers.  High demand for the containers drove the team to complete the construction in record time

The Pony
Building on the successful manufacturing of shipping containers, Hyundai Precision soon looked for other expansion opportunities. With Hyundai Motor Company’s launch of the Pony, Hyundai Precision became a supplier of automotive wheel parts. With HMC’s entry into the North American car market in 1986 with the export of the Pony II (sold as the Excel), car parts manufacturing also became a growing business for Hyundai Precision. As demand for vehicles increased globally, so, too, did the demand for auto parts.

Through the eighties Hyundai Precision continued to pursue new opportunities. For example, the Asian Games and the Seoul Olympics in 1988 presented the need for locally manufactured sailing yachts.  Hyundai Precision met this challenge to craft domestically build yachts for the competitions.  To meet the demand for other locally sourced and produced products, Hyundai Precision added the manufacture of golf carts, military vehicles, aircraft and even high tech rolling stock (trains)

The 1990s
In the 90s, the business strategy at Hyundai Precision shifted from labor-intensive to technology-intensive production. In addition to building upon their automotive and container business, part of this new strategy looked to the high tech machine tool business.

Under Chung Mong Koo’s leadership the company laid out what would be a cutting-edge strategy to establish itself in industrial tooling.  Recognizing its late entry into the tooling market, Hyundai Precision sought to overcome this disadvantage through a technology-based business model with  (1) direct and distributor sales (2) financial support to customers, (3) a comprehensive lease sales program, (4) a 24 hour customer and parts center, and (5) post-sales service. Success would also hinge on both domestic Korean and export sales across the Americas, Southeast Asia, and Europe plus international quality certifications.

With the implementation of their strategy, Hyundai Precision Machine teams met the challenge—to become a high-tech business with global sales and distribution, along with market know-how. (Chung Mong Koo would later follow this model with Hyundai Motor Company.)

The Galloper
In addition to supporting Hyundai Motor Company as a Tier I supplier, Hyundai Precision looked to introduce its own four-wheel drive vehicle to the Korean market.  In August 1988 the company developed the J-car project with a team from America’s Roush Enterprises. This became X-100 ECS ROUSH. However, the response to the prototype by U.S. consumers was poor. Undaunted Hyundai Precision turned to Mitsubishi for production support. A Mitsubishi model (Pajero) was selected. The Pajero would be rebranded and locally manufactured as the Galloper.

In 1991, the Hyatt Hotel in Seoul was the site of the launch for the Galloper. At the time, no one felt the Galloper could dislodge the Ssangyong Korando, the popular and dominant SUV in the Korean market. That said, it would take only a year for the Galloper to beat out the Korando.

Soon, the Galloper was a hit not only in Korea but also in Europe and Asia. This success was a result of a number of international high profile promotional and marketing activities, including the Galloper participating in long distance off road rallies—and placing well.

Record Sales
The bold Hyundai Precision sales and promotion strategy proved successful. Between 1997 and 1998 Galloper sales increased by five times. Within a broader context this success occurred during the 1997 Asian fiscal meltdown, commonly referred to as the IMF Crisis. In contrast at the same time the highly anticipated launch of the Samsung Group’s automotive division in the domestic Korean market proved dismal.

Impact of the IMF Crisis
With the exception of Hyundai Precision Galloper’s success in 1997 and 1998, the South Korean economy suffered greatly during the IMF Crisis.  As noted earlier, amid calls by the South Korean government, the public, and global banking for wide spread reforms, the Hyundai Group and Hyundai Precision underwent substantial restructuring.  For example, over the next several years, Hyundai Precision’s military, railroad car and machine tool businesses would be transferred to ROTEM.  This restructuring would lead to the birth of MOBIS and a vision to be a top 10 global automotive parts company

Prompted by the IMF, but driven by world automotive industry trends….

By 1999, Chung Mong Koo had assumed control of HMC in addition to his leadership role at Hyundai Precision. Adding to his responsibility, HMC had also acquired Kia Motors—an early casualty of the Asian financial crisis that ripped across the Korean economy. Having experience in the Hyundai Motor’s after-sale service early in his career, Chung Mong Koo was not without some insights into the car division. Since its founding in the mid 1970s, HMC had focused solely on growth. Indicative of Korea industry at that time, this focus was to produce as many cars as possible—as fast as possible. In turn, product quality and customer satisfaction suffered.  From his experience working with consumers at Hyundai Motor’s After Sales division, Chung Mong Koo knew the damage shoddy products could bring to the Hyundai reputation, not to mention the high cost of warranty repairs.

When Chung Mong Koo began sharing his intention to turn Hyundai Motor Company into a top-five automaker, few outside the company took him seriously. Hyundai, like many family-controlled Korean companies, was hierarchical and at times slow to change if there was a perceived risk.  More significant, managers rarely cooperated with one another and division chiefs ran their operations as personal fiefdoms. It was a company of silos.  "When a problem occurred, each division would blame other divisions," says Lee, Hyun Soon, former Hyundai-Kia Motors Vice Chairman and Chief Technology Officer. [1]

Chung Mong Koo's first step was to replace the former top management with engineers and those with whom he had worked closely at Hyundai Precision. He formulated a strategy to challenge Toyota for quality.  Extensive work with a number of top global consulting firms, such as J.D. Powers, and benchmarking of the world's best automotive companies followed.  He also sent teams to America to study weather, road conditions and driver habits.  Quality control staff increased tenfold to 1,000 and they reported directly to him.  Employees were encouraged to offer suggestions and were rewarded.  For example, one worker reported the Sonata and XG350 Grandeur sedans had differently designed spare tire covers.  Sharing a common cover saved Hyundai about $100,000.00 per year.

Chung Mong Koo quickly earned a reputation for an obsession with quality.  For example, several years ago a new Sonata launch in Korea was delayed for two months with 50 issues that senior management wanted improved. Employees in the Asan factory worked feverishly to correct these items.  One was a tiny error in the size of the gap between two pieces of sheet metal near the headlight. The problem was not visible to the human eye and was narrower than 0.1 millimeter. However, numerous managers and employees worked on the problem for 25 days before it was solved. This obsession with quality continues today with the Chairman relentlessly reinforcing the quality mandate to management and teams globally as they strive for zero defects.

Turning Point
Initially, the HMC post-IMF restructuring was a combination of fiscal cuts across the company along with consolidation of duplicate services, such as R&D and parts manufacturing between the two Hyundai and Kia brands. A new marketing plan for the brands was also launched with Kia focusing on the younger and stylish consumer and Hyundai targeting an older, more mature customer. Over the next few years HMC also moved to fully integrate the core and support businesses of Hyundai Motor, Kia Motors, Hyundai Precision (renamed as MOBIS), ROTEM, Incheon Steel (Hyundai Steel), Glovis (logistics), and Hyundai Capital.  This positioned HMC for a new era of growth and global success.

Concurrent with and benefitting from the restructuring, Hyundai Motor had begun production of its first SUV.  Introduced for the 2001 model year, the Santa Fe became a milestone for the company. The SUV was developed during restructuring and was a huge hit with the American buyer. Marking a trend we see today, the Santa Fe was so popular that Hyundai dealers had trouble at times meeting demand

In the next article in the series, Part 4 will focus on Hyundai corporate culture, new and old—values that link Hyundai heritage, the Founder Chung Ju Yung, and current chairman Chung Mong Koo.

[1] Time, Monday, Apr. 18, 2005 Hyundai Revs Up, Michael Schuman

Copyright 2014

No comments:

Post a Comment