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.
Empire
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
Transformation
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.
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