Prior to its acquisition of a majority stake in Kia in 1998, Hyundai was ranked twelfth in the world in terms of production volume. Since then, the South Korean manufacturer has leapfrogged BMW, Renault, Fiat, Nissan and Honda to claim seventh position. It now aims to force its way into the top five by the end of the decade. Gareth Davies reports on how the company plans to achieve this ambitious target
In 1998, Asia was in the grips of a major economic crisis. The situation sent vehicle demand plunging and caused Hyundai Motor, South Korea's largest vehicle manufacturer, to report its first loss in twenty years. However, Hyundai's problems paled in comparison to those of South Korea's second and third largest vehicle manufacturers, Daewoo and Kia.
By 1999, the automotive unit of Daewoo alone was US$15.8bn in debt, while Kia had seen its arrears snowball to more than US$5bn. Both vehicle manufacturers clearly needed a buyer and, despite the uncertain economic conditions, Hyundai saw its opportunity. Although Hyundai's joint bid with DaimlerChrysler for Daewoo failed, South Korea's largest vehicle producer successfully led a consortium to acquire a majority stake in Kia. The modern Hyundai Motor Company had been born.
Since then, the newly formed company has gone from strength to strength. In 1999, the Korean vehicle market rebounded and Hyundai returned to profit. By 2001, the company had reported record worldwide sales of nearly 1.6m units, aided by the bankruptcy of its main domestic competitor, Daewoo Motor, and the long uncertainty over that company's future. This helped the Hyundai brand's share of the domestic market to rise from 39% in 1998 to about 45% in 2002, while Kia's domestic market share grew from 15% to 25% during the same period.
Hyundai's success has not been confined to its domestic market. Particularly noteworthy has been the company's development in the United States, where a total of just 168,000 Hyundai and Kia models were sold in 1997, compared with more than 612,000 units in 2002. Meanwhile, in Europe, Kia has become the fastest growing brand in terms of new registrations and plans to sell 500,000 units in the region in 2005, up from an estimated 125,000 units in 2003. This type of growth has seen Hyundai catapult from being the twelfth largest vehicle manufacturer in the world in terms of production volume in 1997, to its current lofty position of seventh.
Of course, Hyundai's competitors will have watched the South Korean's rampage through the ranks with some anxiety, as in some cases it has inevitably contributed to the erosion of their own shares in strategically important markets. Indeed, this concern would have reached new heights when Hyundai announced its intentions to boost output to 5m units per year and thereby ensconce itself in the top five by 2010. Hyundai now plans to achieve this goal by 2008.
Nevertheless, the route to the top five will not be an easy one for Hyundai, especially as many of its competitors will themselves be striving for growth, or at least improved performance, in the second half of the decade. However, Hyundai is in the process of implementing what appears to be a very plausible growth strategy, which began at the end of the last decade with the integration of the recently purchased Kia Motors into its existing organisation.
Integration of Kia
With the acquisition of Kia, Hyundai immediately added well over half a million units of production capacity and in the process eliminated the former number three domestic vehicle producer from its list of rivals. However, Kia was far from a perfect fit. Normally, when one vehicle manufacturer purchases anther it looks for a gap in its existing line-up or organisation and attempts to fill it. Examples of this type of strategy are Ford's purchase of Land Rover, which provided the US giant with an established SUV brand, and GM's acquisition of parts of the bankrupt Daewoo Motor, which provided the world's number one vehicle manufacturer with immediate access to the Asian market. However, Hyundai and Kia were very much direct competitors and for more than twenty years the two companies competed in the same segments in the same markets. All of a sudden that had to change.
As soon as the ink on the acquisition documents was dry, Hyundai set about integrating Kia into its existing organisation, a task that is never easy (just ask DaimlerChrysler). The company was quick to announce that both brands would continue to be sold in all markets, which meant that the newly formed Hyundai would have to reposition its products so that the two ranges would complement one another, rather than compete directly.
Hyundai immediately embarked on an ambitious plan to overhaul the identities of its two brands, which will be reflected in the development and marketing of their vehicles. As part of this strategy, Hyundai will be the more conservative of the two brands, while Kia will become more experimental. Kia will move away from inexpensive low-end models and start rolling out luxury cars. Indeed, of the next six Kia models scheduled for launch, not one is aimed at the lower end of the market.
Hyundai is also considering a new luxury brand in the same mould as Lexus (Toyota) and Infiniti (Nissan). According to reports, the next generation Equus (Centennial outside South Korea), which is due in 2006, might be the first model to be sold under this new brand.
However, a dramatic change in brand image will not be easily achieved, particularly in light of recent quality problems that have plagued models such as the Carnival (Sedona outside South Korea). However, both Skoda and Audi have managed to successfully improve their brand image, and Kia is confident it can do the same.
Another important step in Hyundai's growth plans is the consolidation of its platform architectures in order to create economies of scale. In 1999, Hyundai and Kia models utilised a total of 23 platforms. Hyundai plans to reduce this number to just seven by the end of 2007, at which point it plans to be manufacturing around 5m vehicles globally each year. In terms of volume, the main platforms will be the EF Sonata, Avante XD (Elantra outside South Korea), Click (Getz) and Sorento architectures, which will underpin around 70% of all Hyundai and Kia new passenger vehicles by 2007.
In addition to redesigned versions of existing products, these four platforms will host several new products, aimed at improving Hyundai's segment coverage, especially in North America and Europe. New models will include a new sport wagon off the EF Sonata platform (due in 2006), a small SUV and convertible off the Avante XD platform (2004 and 2005, respectively) and a pickup based on the Sorento platform (2006).
Like many of its competitors, Hyundai plans to build its models as close as possible to the regions in which they are sold, which ultimately means expanding its existing manufacturing network. Spearheading the company's global expansion will be a new US$1bn plant in Montgomery, Alabama, which will begin mass production in 2005. The new factory, which is currently being constructed on a 1,600-acre site, will build around 300,000 Hyundai mid-size sedans and SUVs per year at maximum capacity.
The United States will also house a new proving ground, which is currently being built some 100 miles north of Los Angeles in the Mojave Desert. The 4,300-acre, US$50m facility will be the test site for next-generation US-built Hyundai and Kia vehicles.
Another integral part of Hyundai's plans to establish a global manufacturing network will be the construction of a new US$1.3bn plant in Europe. Although the company has not yet decided on the location of the new plant, latest reports suggest that it will choose between Poland and Slovakia by the end of March. Construction of the new factory is expected to begin in early 2005 and job one is planned for 2007. It will build several vehicles, including an all-new C-segment model based on the Avante XD (Elantra) platform, a concept version of which will be unveiled in 2005.
Asia will also play a major part in Hyundai's march towards the top five. Not surprisingly, the company will focus much of its efforts on China, where it plans to boost output at its existing joint ventures as part of its plan to build over 800,000 vehicles on the mainland by the end of the decade.
Beijing-Hyundai Automobile Co Ltd started building the EF Sonata at its plant in the Shunyi District of Beijing in November 2002. It will also produce the Avante XD model in 2004, followed by the Mighty commercial vehicle in 2005 and Verna small car in 2007. Initial capacity is planned at 100,000upa in 2003, rising to 200,000upa by 2005 and expanding to 500,000upa by 2010. The project will cost Hyundai US$430m through 2005 and US$1.1bn through 2010.
Meanwhile, output at the Dongfeng-Yueda-Kia Motors Co joint venture in Jiangsu province, which currently builds the Qianlima and Pride models, will be increased from 50,000upa to 300,000upa with the introduction of at least two new models by 2005.
In India, Hyundai is investing US$300m in its fully integrated manufacturing plant near Chennai, in order to expand capacity and fund product launches in the 2002-2005 period. The plant's capacity was increased to 150,000upa in 2003, when the Santro Xing was added to the production lineup, which until then had consisted of the Avante XD (Accent) and EF Sonata.
Hyundai also has a number of projects under way in Malaysia. A joint venture plant between Inokom Corporation Sdn Bhd and HMC in Kulim, Kedah, started production in December 2002 of the Inokom Atos, a badged version of the five-year old Hyundai Atos. The company also started assembling two variants of the Avante XD at the end of 2003, at a planned rate of 10,000 units per year.
Meanwhile, earlier in 2002 Kia established an assembly plant at Gurun in Kedah to produce the Carnival (Sedona) MPV. Kia's distributor, Kumpulan Naza, is responsible for the US$42m project. 80,000 units of the Carnival will be produced each year, but will be given a local name. 80% of the vehicles will be exported to the Asia Pacific region.
Hyundai currently owns 100% of its manufacturing facilities in South Korea and India, and its new plants in Europe and the United States will also be wholly owned. However, the rest of its manufacturing network is made up of joint ventures and assembly contracts with local manufacturers. Therefore, the success of these partnerships is vital if Hyundai is to achieve its goal of reaching the top five.
In terms of partnerships, Hyundai's joint ventures in China will almost certainly play the most significant part in directly helping it achieve its five million units per year goal. However, the company has also established several other significant strategic partnerships, the most important of which involve Mitsubishi and DaimlerChrysler.
In November 2002, Hyundai entered into a joint venture with Hyundai Mobis (component supplier) and Mitsubishi to facilitate co-operation on projects involving the development, manufacture and sale of passenger cars and automotive components such as engines and transmissions. The new agreement replaces an original deal made between Hyundai and Mitsubishi around twenty years ago.
Also in 2002, Hyundai formed a joint venture with Mitsubishi and DaimlerChrysler for the design, development, and engineering of a new family of in-line four-cylinder gasoline engines. Each company will deploy the engine in a wide variety of vehicles, taking total demand to a projected 1.5m upa. Initial production of engines by Hyundai is expected by March 2004, with Chrysler and Mitsubishi Motors engine production planned to start in 2005. The firms are also looking at other opportunities for collaboration and a venture between Hyundai and DaimlerChrysler to develop a platform for a four-wheel-drive small car is a distinct possibility.
So, will Hyundai be a top-five vehicle manufacturer by the end of the decade? Well, its plans appear credible in isolation, but as everyone knows the automotive industry is volatile and nothing can be taken for granted. What can be guaranteed is the fact that Hyundai will face much tougher competition over the next few years, both at home and abroad.
In South Korea, both GM Daewoo and Ssangyong are enjoying revivals at the moment, the former under the guidance of General Motors and the latter as an independent manufacturer (no doubt soon to be part of a larger concern). In Europe, PSA Peugeot Citroen, the first company stood in the way of Hyundai and its top-five spot, is in the process of adding an additional 500,000 units of capacity to its overworked manufacturing network. In North America, General Motors, Ford and DaimlerChrysler have embarked on aggressive product offensives, while the Japanese transplants continue to add capacity in their constant quest for market share. Then, there is market reaction to forthcoming models to worry about, not to mention uncontrollable economic circumstances that have no regard for the growth plans of an ambitious vehicle manufacturer. In short, while Hyundai clearly has the potential, it has a lot of work to do before taking its place at the top table.