Korean Comeback (Part II)

May 24, 1999

It was one of the most successful launches in U.S. automotive history, but after its initial burst of success, Hyundai Motor America’s star quickly tarnished. Today, it is selling half as many vehicles as it did in the mid-1980s.

Not so for rival Kia Motors. The smallest and shakiest of the Korean carmakers and the second to enter the U.S. market, Kia’s sales have steadily grown as the carmaker has carved out a unique niche for itself among budget-conscious American consumers.

Unfortunately for Kia, its success in the States wasn’t echoed at home. When the Korean economy collapsed two years ago, it barely kept its doors open. After three attempts, Kia was auctioned off to Hyundai Motor Co. Though Ford Motor Co. seemed an eager bidder, industry sources hint the outcome was preordained by Korea’s leaders, intent on keeping Kia in domestic hands.

Hyundai has had to swallow hard, taking on $6 billion of Kia’s debt, even after generous restructuring by lenders. But the real challenge, Hyundai officials admit, is what they are going to do with their new subsidiary.

An adopted orphan

"Our mission is to reinvent Kia," said the company’s president, Kim Soo-Joong. Ironically, as an independent manufacturer, Kia mimicked Hyundai’s product program almost model for model. Now it will focus on becoming a "specialist carmaker." What that means, precisely, even Kia officials can’t say, though the likely focus is light trucks and other youth-oriented niches.

The process could be complicated since Kia now will have to share platforms used by Hyundai. This "platform strategy" has become an industry norm, allowing manufacturers to make common the components customers don’t see, while wrapping them inside unique bodies designed to emphasize each brand’s individual image.

"Last year, we had 23 platforms … and by 2004, it will be down to seven," said Hyundai Motor Co. President Chung Goo Lee, yielding an average savings of 100 billion won, or $900 million, per platform, mostly from improved economies of scale.

But "the savings will be offset by the (Kia) debt service," cautioned Han Kum-Hee, an analyst with the Merrill Lynch International branch in Seoul.

Reinvention or window dressing?

Since the Asian flu swept through Seoul, Korea’s carmakers insist they have taken plenty of steps to reinvent themselves. Kia was one of three carmakers forced to sell out, along with light truck maker Ssanyong and the automotive subsidiary of Korean chaebol, or conglomerate, Samsung. The multi-billion-dollar venture had yet to produce a single vehicle before being sold off to Daewoo.

The question is whether the changes are mere window dressing.

Prior to the economic crisis, Korean automakers proudly boasted of plans to install enough capacity to produce a combined 7 million units annually.

After the automotive shakeout, "the total capacity of the Korean auto industry is about 4 million units," said Kang Byung-Ho, who serves as both president of Daewoo Motor Co. and the head of the Korean Auto Manufacturers Association.

But so far, not a single plant has been closed. Even the Samsung facility may eventually go into production. The seeming cutback is largely the result of eliminating overtime and changing the way capacity is counted, admitted Hyundai CEO Kye Ahn Lee. If real cuts aren’t made soon, he predicted, the Korean industry "will not be able to survive in the 21st century."

Closing plants seems unlikely when even more modest efforts to trim the Korean automotive workforce have been hobbled by widespread protest. Hyundai wanted to trim more than 10,000 jobs, but settled for 1,500, largely through attrition.

The Seoul Motor Show

Despite the obstacles piled up in front of them, Korean automakers were visibly upbeat during this month’s Seoul Motor Show. And there are some good reasons.

Last year, the home market sank 50 percent, on top of the 12 percent decline in 1997. But the Korean economy seems to be shifting back into gear. With money in their pockets, Korean consumers purchased 46.7 percent more new vehicles during the first four months of 1999 than the year before. Exports surged 53.3 percent, much of that volume to North America, where Hyundai is showing signs of a recovery and where Daewoo has begun its own national rollout.

With Korean wages now close to par with European plants in Spain and even Great Britain, manufacturers are racing to automate — and move upmarket. The new Hyundai XG is designed to compete with the likes of the BMW 3 Series, and may reach the U.S. market in 2001.

Can the Koreans survive long term? Conventional wisdom holds only a half-dozen automakers will survive the global shakeout, and if that proves true, "one of them will definitely be Hyundai," declared the automaker’s CEO, Kye. Daewoo officials, on the other hand, continue to negotiate with General Motors Corp. to form a partnership.

Indeed, most observers believe that the Koreans will eventually be absorbed into one of the surviving automotive groups. But first, capacity must be cut, jobs eliminated and productivity sharply increased. Otherwise, they could be in for a rude awakening during the next economic crisis.

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