hyundai and kia motors the early years and product development pdf

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Hyundai and Kia Motors The Early Years and

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Hyundai and Kia Motors

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Copyrignt © 2012 By

Donald G Southerton All rights reserved

109876

Library of Congress Cataloging.in-Publication Data Southerton, Donald G 1953-

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Contents

‘Acknowledgements Foreword Chapter1 The Pony Chapter 2 The Excel

Chapter3 Brisato the Pride

Chapter 4 The Pride, Sephia and Sportage Chapter The IMF and Rebirth

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Acknowledgements

‘This book’s content is buit upon considerable historical and contemporary research In crafting this work, Ihave benefited enormously from many, My first thanks must go to the Hyundai and Kia Motors organization for sharing thelr culture and accomplishments,

| also owe @ special thanks to Mark Jun, longtime Hyundai and Kia Motors! senior executive and international automotive authority His ongoing support and assistance is deeply appreciated

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Foreword

‘Considerable content for this eBook came from the forthcoming publication The Hyundai Way, which will provide readers deep insights into the carmaker’s past, present, and fulure Moreover, The Hyundai Way captures for the first time in the English language, Hyundai's unique corporate culture, management model, ‘expectations, and vision,

For more details, see

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Chapter 1 The Pony

‘Since the early 1960s, Korean firms have entered into partnership arrangements with international carmakers, including Nissan (Datsun), Toyota, Mazda, Fiat, and Ford In particular, the Korean government and key industrial groups forged these alliances as the best way to introduce advanced automotive technology to South Korea In 1987, Hyundai Group entered the auto sector as a result of both the founder Chung Ju Yung's early ties to the car repair business and growing government pressure,

Partnering with Ford Motor Company through an Overseas Assembler ‘Agreement, Hyundai looked to assemble Ford compact cars imported as knockdowns (CKD) Ford, in tur, would transfer technology and explicit

knowledge, such as blueprints, technical specications, production manuals, and training of Hyundai engineers,

Interestingly, to accomplish the task Hyundai gathered team members from its ‘construction division who had excellent skills in project management and ‘engineering backgrounds, Hyundal also recruited talent with experience in produclion fom the Korean auto industry Together with support from a team of 10 engineers dispatched from Ford, the Korean engineers, technicians and Construction workers lived together in a makeshift structure near the plant, working 16 hours a day, seven days a week Following the Hyundai model for taking immediate action and leveraging their background as a construction ‘company, the Hyundai Ford plant was operational in 6 months, a record at that time for the 118 Ford assembly plants around the wort

Initial car production at the plant focused on 2 madels—first the Ford Cortina Mark land soon after the Ford Granada Mark Il Production targeted the South Korean domestic market with some limited export and production numbers grew trom 614 ‘cars in 1968 to 7,009 in 1973

‘The Pony Meanwhile by 197, the Korean state-run Economic Planning Board (EPS) formulated The Long-Term Pian for Promotion of the Automobile Industry In a policy-shit from CKD partnerships, the government mandated Korea's four leading automobile companies—Hyundai, Daewoo, Kia, and SsangYong—to ‘submit detalled plans to develop a ‘Korean’ car by 1975,

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the new mandate or face restrictions in their current operations Hyundai, a strong adherent ofthe stale-corporate alliance, soon submitted a master plan for a new plant with a capacity of 80,000 Korean cars per year

To meet the challenge, Hyundai approached 26 fis required technologies in five countries to acquire +10 firms in Japan and Italy for car design

+ 4 firms in Japan and the United States for stamping shop equipment + 5 firms in the United Kingdom and Germany for casting and forging plants + 2 ims in Japan and U.K for engines

+ and 5 U.S and U.K firms for an integrated parts/components plant

‘As with the company's entry into shipbuilding and other technology ventures, Hyundai looked to the West for expertise They soon hired former British Leyland Motor president Sir George Henry Tumbull as their new vice president Tumbul in turn, hired five other top British car engineers: Kenneth Bamett for body design, engineers John Simpson and Edward Chapman, John Crosthwaite as chassis ‘engineer and Peter Slater as chief development engineer

‘Turnbull's exit trom his position at British Leyland followed in the wake of the mergerirestructuring of BMH and Leyland Motors, As a parting git, he was, however, allowed any car from the lineup He left with two Morris Marinas, a sedan and a coupe—cars Tumbull had developed, The Hyundai team used the Marinas as a base to develop the Hyundai Pony Turnbull also brought with him the vision of using standard chassis to produce varying cars,

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In addition to Turnbull and his engineering team, the exterior design would come ‘rom the West with noted craftsman Giorgetto Giugiaro and the ltalDesign studio Founded in 1968 by Giugiaro and Aldo Mantovani as Studi taliani Realizzazione Prototpi Sp.A the studio would become best known for its automobile design work, along with offering project management, styling, packaging, engineering, ‘modeling, prototyping and testing services to manufacturers worldwide,

Hyundai's new Pony was a true collaboration of design, engineering, and

production For example, the engine, transmission, and suspension were all from ‘a previous model of the Mitsubishi Lancer Mitsubishi Motors supplied the ‘engines in 1200cc and 1400cr sizes ITAL designed three and five-door

(hatchback) body styles to ft on the basic Marina-styled floor pan,

‘The Hyundai cars borrowed heavily from Cortina design with MacPherson strut front suspension but retained the rear leaf springs Parts costs were kept low by ‘sourcing locally whenever possible Parts also came from Hyundai's Ford Cortina plant supply line (The Ford relationship had been severed in part due to the {government mandate for independent production.)

Hyundai continued its reputation to meet government mandate deadlines and by late 1975 the Pony with 90% domestic content was in production, This made Korea the second nation in Asia, in addition to Japan, to have its own domestic automobile The car was offically released to the public in January 1976

‘The Pony Blueprint

‘The Pony was sold in three-door hatchback, four-door fastback, five-door wagon, and pick-up variants

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Chapter 2 The Excel

‘On February 20, 1986, Hyundai Motor Company began seling the Excel, their latest production model, in the United States Building on the success of the original 1975 Pony and then an updated 1982 Pony Il, by the mid-80s Hyundai ‘was ready to introduce a new front wheel drive X-1 modal They were also confident enough to tackle the world's largest car market—the United States,

Hyundai X-1 Excel

Following a common practice in the automotive industry, the X-1 was badged Under a number of names depending on the market For example, in Korea a sedan version was sold as Hyundai Presto, while in Europe the new X-1 kept the original Pony badge For Americans, the X-1 would be known as the Excel—with a reputation for low cost, breaking sales records and, sadly, a tainted quality image

Beginning in 1976 and prior to launching in North America (with Canada in 1985), Hyundai was exporting the original Pony to a number of markets Today litle Tecognition is given to these overseas operations and the teams that led these ‘efforts Early Pony export markets included + Honduras, Guatemala, Panama, El Salvador, Ecuador, Colombia, Chile,

Argentina, and Paraguay in Central & South America + Egypt, Bahrain, and Oman in the Middle East

+ Nigeria, Gabon, Sierra Leone, and Ivory Coast in West Attica, with Greece in Southeast Europe

To test the Northern European markets, Hyundai opened their first overseas’ subsidiary “Hyundai Motor Holland” in 1978 Presented in January 1979 at the Ral Motor Show held in the Netherlands, the Pony was then introduced locally in,

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Hyundai Motor Holland (Photo courtesy Mark Juhn)

Ina broader context, this international effort was part of the Korean government's ‘push fora strong export-driven economy The X-1 would play an important role in {urthering this plan To produce the new Excel, Hyundal invested an estimated ‘$500 milion in Korean production facilities with an annual capacity of 300,000 cars The Excel launch also marked a new milestone for Korea and Hyundai— ‘sufficient mass production capacity, localization of parts, and the logistics to tackle the world's largest car market Entering the U.S market was critical not only to Hyundai's success but also for the Korean car industry to survve in the global automotive market As today, few small car OEMs can survive when economies of scale are needed to keep cost down and the companies profitable,

Expectations within the Hyundai organization and their United States subsidiary were high in the months leading to the U.S, launch In particular, car dealers ‘actos the U.S were eager to acquire a low cost import brand Hyundai Motor ‘America would receive over 2.000 applications for 150 dealerships,

Record Sales

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Its affordable (Butyoutdneverknowit)

1986 Hyundai Motor Ad

‘The Excel was popular and perceived to be competitive when compared to the ‘growing number of Japanese imports of the mid 1980s Sadly, quailty issues soon surfaced Common complaints were that the body panels were wavy, the paint faded and window cranks were often fauly As a result of consumer perception, sales dropped and a number of dealerships abandoned their franchises Frankly, this is no surprise Americans with their love of cars have long been harsh on models not lving up to expectations That sald, the attacks on the Excel never ‘approached those against the Yugo or even American models, for example the Ford Edsel ofthe 1950s In reality total sales by the end of the second year were considerable at 263,610 vehicles in a down US car market

Lessons Learned

Despite a dectine in sales and tarnished image, rather than dropping out of the world's largest automotive market Hyundai would leam from the Excel By the late 1990s and early 2000s and with leadership changes at Hyundai Motor Company, the OEM would invest heaviy in the long-term R&D, design, manufacturing, and ‘quality oftheir vehicles More significantly, a bold "10-year, 100,000 mile

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Chapter 3 From the Brisa to the Pride Kia Motors is one of the world's fastest moving global automotive brands It has ‘earned a reputation as an industry leader in design styling along with a fll ine of {fuel-efficient vehicles that have earned critical acclaim and dramatically increased consumer awareness Interestingly, the carmaker had early roots as a Korean biaycle and motorcycle manufacturer Inthe early 1960s, the Kia Motors Company moved beyond bicycles and

motorcycles to produce a highly practical K3E0 three-whee!utlity truck Across much of Asia, similar vehicles met a demand for reliable low cost commercial ‘transportation that could transport goods and products often in tight urban areas, Based on the Mazda Mazdago design, the K360 also signaled Kia Motors’ long technology alliance with the Japanese automaker with a number of cars and tucks eventually licensed from Mazda

During this era of budding Korean economic development, strong technology ties with foreign partners were common For example, other Korean fitms entered into partnership arrangements with international carmakers, including Nissan (Datsun), Toyota, Fiat, GM, and Ford Korean industrial groups desiring to enter the car sector forged these alliances to gain advanced automotive technology and know-how In addition, the government implemented strong trade protectionism in an effort to bulld a selt-suficient import substitution economy In particular, the Korean Automotive Industry Promotion Law required cars to be manufactured

locally versus imported from foreign markets

‘When pressured by the government to produce Korea assembled cars, Kia Motors leveraged their strength as an engineering-based company and chose not to assemble compact cars imported as knockdowns (CKD), unlike Hyundai, Asia Motors, or Shinjin Automotive Company Instead, Kia set up a full-scale production plant with considerable local sourcing of parts,

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Brisa Pickup

In conjunction with manufacturing the Brisa pickup, Kia Motors also began production of t-iter gas engines, While the competition sourced engines from their foreign partners, this marked the first Korean company to manufacture its ‘own engines Inthe frst year of production, 65 percent ofthe parts in the Brisa, including the engine, drive shaft and clutch, were manufactured in Korea This local sourcing was strongly encouraged by the Korean Government and the ratio of locally produced parts increased steadily over the years

In the fall of 1974, the frst Kia Brisa S-1000 four-door sedans rolled off the Sohari production line Overall the Brisa was a success with 75.987 sold between 1974 and 1981 In 1975 the Brisa pick-up also became the first Kia to be exported when ‘a number were shipped to Oatar in the Middle East

Brisa Sedan, Sohal Plant

‘ll Shock Notably, what spurred the Brisa's early success was actually its small 1000c° ‘engine displacement Starting in 1973, an international oil shortage forced

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between GM and Shinjin Motors Juhn shared that with high gas prices Korean Consumers favored the Kia Brisa and its smaller more economical engine over ‘GM Korea's first production model, the Chevrolet 1700 with a larger 1700ce ‘engine, Juhn points out, I could say the oll shock brought good luck to Kia but GM Korea struggled."

‘Steady Growth By 1976 Kia also strengthened its position in the commercial vehicle sector by purchasing Asia Motors based in Kwangju, South Korea Asia Motors

manufactured heavy trucks, buses, and a line of military vehicles In addition, to meet growing demand in Korea for cars, Kia even started CKD assembly of the Flat 132 sedan, along with the Peugeot 604, a larger model sedan,

Government Intervention

Despite Kia's successes, government intervention imposed new mandates over much of the growing Korean economy Direct competition was regulated across ‘many sectors of industry, In 1981, Kia Motors was told to stop producing cars and concentrate instead on light commercial vehicles In turn, more light truck and van models were added, including the 1-ton Bongo, the Ceres pick-up and some larger truck models

Ford Alliance

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Chapter 4 The Pride, Sephia, and Sportage

Political and economic forces had long impacted the growth of the South Korean carmakers, including Hyundai, Daewoo, SsangYong, and Kia Motors Despite the ‘country's economic success In the 1960s and 1970s, the growth model South Korea pursued was nat immune to new challenges that would hit the country In Particular, two events would have significant impact on the country's economy: the 1987 democratic transition and the Asian financial crisis of 1997-98,

Kia Motors, which had grown into Korea's second largest carmaker, would soon ‘experience both international success and its own demise—the latter leading to @ “second chance" under parent company Hyundai Motor

New Strategy

By the mid 1980s, Kia's strategy looked overseas They planned to fil the void at the low-cost end of the automotive market which was siowly being abdicated by the Japanese brands pursuing sales of more expensive models with higher profit ‘margins Compared to rival automakers in Japan, and also Eurape and North ‘America, Kia's competitive advantage was its lower-paid South Korean worktorce—which translated into lower-priced cars

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T988 Ford Festiva (Kia Pride) Second Generation

By the early 1880s, a second model based on the Ford Festiva was developed jointly between Kia and Ford This model retained most of the drivetrain of the

previous model with a more rounded body style This second generation model ‘was slightly longer, wider, more aerodynamic, and suspended by MacPherson struts in the front and a torsion bar axle in the rear Preduction of this model was in parallel to the first generation Festiva The new model was introduced in 1993

‘as the Ford Aspire in North America and Kia Avella in South Korea and other markets, Sephia

‘Along with many Korean companies Kia Motors began to suffer during the late 1980s and early 1990s from labor problems Dismayed with low pay and poor ‘working conditions, South Korea's workers rebelled during this period Union strikes forced many companies to significantly raise wages The labor uprising ‘was actually just one part of a much larger movement begun in the 1980s to dismantle South Korea's authoritarian poitical and economic framework ‘Seeing growth as a solution to not only rising labor costs but also strong

‘competition from rival Hyundai and Daewoo, in 1992 Kia developed the Sephia, a ‘compact four-door sedan The first generation Sephia was loosely based on the Mazda Familia (BG), The car quickly became the bestselling automobile in South Korea,

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Meanwrile Kia invested heavily in the early 1990s to expand their production capacity This expansion included a steel plant and a second manutacturing facility in Hwasong

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Chapter 5 The IMF and Rebirth

Few events in recent history have impacted South Koreans as significantly as the 1997-98 Asian financial crisis, commonly called the IMF Crisis Thousands of koreans lost their jobs and itesavings as the crisis rocked the foundations of most Korean industrial groups or chaebol In fact, no fewer than five major chaebol failed early in the crisis amid others who had to petition for bankruptcy In the end, ‘as many ae 18 ofthe largest 30 chaebol would risk bankruptcy, and no more than ‘a handful of the top 30 groups were seen as financially sound

For Kia Motors the IMF Crisis would be devastating Although overseas sales and ‘growth were steady, by early 1997 with ever-increasing development and labor costs, Kia found themselves heavily in debt

Perhaps of equal concern, Kia's dificulies were also a signal of problems throughout the South Korean automobile industry The big three Korean

‘automakers—Hyundai, Kia and the Daewoo Motor Company-—had created more ‘capacity than needed for the once rapidly growing Korean domestic market ‘Adding to the pressure were plans by the Samsung Group to enter the car market, ‘bulding a state of the art plant with the assistance of Nissan,

|When the IMF Crisis ripped through the region, Kia's debt load made the

automaker extremely vulnerable Strapped for cash, Kia looked to the government for an emergency loan Meanwhile, an increasing number of Korean companies began to suffer similar financial challenges and they too, sought government, assistance,

Inreaction to the crisis, intemational credit agencies downgraded the ratings of Korean banks This led to a tightening of credit, which made it nearly impossible for debt-laden companies, Kia included, to borrow additional funds As the ‘economic situation grew worse across South Korea, domestic car sales plummeted, further impacting Kia's dwindling revenue and cash flow

By October 1997 it was clear that additional funding for the beleaguered Kia would nat be forthcoming from private banks, With few options, the government took ‘over the company and placed Kia in a receivership in order to stave off Danktuptey and jab losses

Looking deeper

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Motors—and most Korean chaebol—ot seeking market share regardless of the impact on financial markers, such as high debt-equty ratios and cross loan {uarantees to afiiates To gain a better understanding we need to look deeper First, the company’s profitability surfered prior to the IMF Crisis In particular ‘excessive domestic market competition was triggered by Daewoo'sinterest-tree sales campaigns from the early 1990s Kia also carried a growing burden of debt ‘aS 2 resull of over-expansion of production capacity in Its domestic and overseas

plants Moreover, Kia made huge investments to develop and then ramp-up production of their own passenger car models, the Sephia and Sportage Next, following the model of Korea's most successful industrial groups, such as Hyundai, Daewoo and Samsung, the company sought to diversify their core business by acquiring a steel-manufacturing firm (renamed Kia Special Steel) ‘establish a constructing company (named the Kisan), and form a trading company (named Kia Intertrade) Most of these new affiliates operated at huge losses and contributed significantly to the mother company's financial crisis

In addition, and rarely discussed, was the adversarial and costly takeover attempt by the Samsung Group Kia management barely defended themselves against Samsung's M&A attempts More damaging, Kia's vulnerability was widely ‘exposed to the finance community during the takeover attempt, causing a sharp drop in their stock market value between 1996 and 1997

Finally, as a smaller professionally managed and not family-run company, Kia was viewed more harshly by the Korean banks than larger, mare diversified and

politically connected Hyundai, Samsung and Daewoo In fact, unlike Kia, the larger chaebol were seen as Yoo big to fal” and so critical to the Korean economy that the government would take extreme measures to support and bolster them financially

Rebirth

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Chapter 6 The Road to Recovery

‘The 1997-96 IMF Crisis forced dramatic restructuring across South Korea's car industry, Daewoo Motors, once a market leader, fell with the demise of the mother ‘group and GM acquired their Korean manufacturing facilities Samsung's budding car division was sold to Renault, while SsangYong Motors entered into 2 Protracted receivership In contrast, Kia Motors was given anew start—the merger with Hyundai Motor Company set the stage for both brands to leap forward

New Management

For Hyundai and Kia Motors, new management came at a time of considerable restructuring of the company and was led by Chung Mong Koo, the son of the Hyundai Group founder Initially, the restructuring was a combination af fiscal cuts ‘across the company along with consolidation of duplicate services, such as R&D ‘and parts manufacturing, between the two 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

Following his famiy’s hands-on management style, Chung Mong Koo personally not only oversaw the merging of Kia's operations with Hyundai Motor but also ‘encouraged employees and inspected quaily as he toured production lines Earler in his career, Chung Mong Koo had managed a number of Hyundai Group ‘companies, including the automotive after-sale service division From his

‘experience working with consumers, Chung Mong Koo knew the damage to the Hyundai reputation because of shoddy products, not to mention the high cost of warranty repairs Quality was set as a top priority and the management team formulated a strategy that benchmarked the world's best car brands, mandated

higher production standards, and declared that poor workmanship was not acceptable

Hyundai's Bold Move

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By 1998 the situation in the U.S worsened, This was due in part to the fallout of the IMF Crisis in Korea rippling into Hyundai's overseas operations and also to the discontent among Hyundai customers and dealers over quality issues, In a bold move ata historic dealer conference, Hyundai Motor America announced ‘America’s Best Warranty—a 10 year, 100,000 mile coverage of the brand Industry experts have long suggested the warranty marked the turnaround of Hyundai in the U.S market Mark Jun, Hyundai Motor America’s CEO at the time of the announcement notes, “When Hyundai announced the 10 years 100,00 miles warranty in October, 1998, it was like buming its boat, ro way out If the ‘crew could not put out the fre, they [Hyundai] would bum and die.” Junn further ‘explained that the warranty compelled the OEM to improve quality or the company ‘would suter huge financial consequences covering the warranty repairs

Santa Fe

‘Concurrent with the restructuring, Hyundai began production of is first SUV Introduced for the 2001 model year, the Santa Fe became a milestone for the ‘company, not only since it was developed during restructuring, but also because the SUV was a huge hit wth the American buyer Marking a trend we see today, the Santa Fe was so popular that Hyundai dealers had trouble at times meeting demand For Hyundai Motor America, the Santa Fe was a needed addition to the brand's US subsidiary with ust four models in ts line up (the Accent, the Elantra, the Tiburon, and the Sonata)

2001 Hyundai Santa Fe Kia Motors

‘So, how did Kia Motors fare? Removing itset from court receivership just 22 months after itnearly went bankrupt, Kia was in full recovery and showing a profit by 2000 In part, this was due to synergy of the merger and "tough restructuring,” ‘as noted by Unm Sung-yong, a former Kia Motors’ vice-president Providing some

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remarked, "Everyone had to go through restructuring during the IMF crisis But ‘ours was the toughest

‘That said, sales domestically and abroad drove much of the recovery—thanks to the popularity in Korea of the Carnival, Carstar, and Carens minivans, and in the ‘overseas markels, he U.S included, to the Sephia and Sportage

Expectations

Internally Chung Mong Koo replaced Kia's old leadership with handpicked and trusted Hyundai management Expectations were for these teams to make Kia profitable and efficient as soon as possible For example, after his tenure as Hyundai Motor America CEO Mark Juhn retumed to HMC HQ in Seoul By late 2000 he was transferred to Kia Motors as COO for the Export Division Meeting the challenge, Jun frst addressed operational issues In particular, the existing process for ordering and supplying distributers with vehicles was labor intensive ‘with unpredictable lead times and huge back orders Seeking an innovative solution, Jun and his team developed a streamlined production order processing system, the KDCS (Kia Distributor Communication System) The new system provided a dependable method for distributors to track their orders and reduce (COO Juhn's next mission was building the brand image and enhancing global awareness While pondering how to improve Kia's brand recognition Juhn came upon the idea to contact the promoters of the Australian Open Tennis

Tournament, one of world’s top tennis events The Open was looking sponsors so with Chairman Chung Mong Koo's approval Kia became a major sponsor of the Grand Siam tennis tournament,

‘The event was abig hit in Australia and for Kia's distributors and dealers worldwide As Junn had hoped, associating the brand with such a high profile ‘event boosted brand recognition along with company-wide pride among teams and management

Rio

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12000 Kia Rio Conclusion

‘To conclude, from the 1960s to early 2000s, political and economic forces impacted the growth and development of the South Korean carmakers, including Hyundai and Kia Motors In adition, the brands at times partnered for technology ‘and design with Ford, Mazda, and Mitsubishi, along with expanding rapidly in Korea and into new international markets Despite the failure of Kia Motors to survive the IMF Crisis, the merger with Hyundai led to integrated technology research, development, and

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About the Author

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Endnotes

"The hatohback model version of he X-1 was also sold inthe Mitsubishl Motors nthe U.S tom 1987 to 1998 as he Mitsubishi Precis, " iterestnl, Mazda's st production Familia was syed by a young Giorgeto Guglro who would goon to design rival Hyundai Mot’ Pony