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UK: Is Hyundai Mobis coming of age?

By SupplierBusiness.com | 9 September 2004

2006 could be a major milestone for Hyundai Mobis. Production resulting from the recently-announced rolling chassis contract with DaimlerChrysler at the Toledo, Ohio plant is set to fire up in that year, an event that could signify the real beginning of the supplier's evolution from an in-house Hyundai/Kia components source to a globally-competitive company competing on equal terms with industry peers.

Although a publicly-quoted company, with private and foreign investors each holding around 32% of the equity, Mobis currently remains almost solely an in-house supplier for Hyundai and Kia Motors. It has yet to follow the bumpy route taken by Delphi and Visteon towards greater customer diversification, focusing instead on investing overseas in the wake of the global production expansion of Hyundai and Kia in North America, Europe and China. Which makes the Chrysler Jeep contract all the more of a surprise. But will this represent a real coming of age for Mobis and a wake-up call for established peer competitors or just a one-off piece of opportunism based on aggressive pricing? Either way, Mobis has much to prove in the face of intense industry interest.

Reassuringly, DaimlerChrysler appears to have done its homework before plumping for the Korean specialist of electronics, cockpit, chassis and front-end modules in preference to five others. These five included frontrunner Dana, which has past experience of assembling rolling chassis for Chrysler's Dodge Dakota at Campo Largo, Brazil, a project that was probably a little ahead of its time, requiring integration of around 200 components form 66 individual suppliers. Reports suggest Tom LaSorda, Chrysler's COO visited Korea to reassure himself that Mobis was up to the job, reassurance that appears to have been forthcoming after watching rolling chassis assembly for the Kia Sorento SUV in full swing. The result is that, beginning in late 2004, Mobis, along with two other suppliers, Kuka Group and Durr, will begin to construct facilities "co-located" on the existing Jeep Wrangler manufacturing complex on Toledo's north side. As part of an overall $US2.1 billion investment programme for the site, the three new and interconnected facilities, costing around $US300 million in total, will be built and operated by the suppliers. These will represent what LaSorda refers to as "an alternative to the traditional greenfield site approach to new manufacturing facilities" and "an innovative approach that can close the competitive gap with 'transplant' companies that aren't burdened with legacy costs". Interestingly, LaSorda has also referred to the programme as a $300 million cost-saving exercise that is "enough to pay for one additional derivative product". In other words, the three suppliers will effectively fund the entire cost of a new model derivative, an interesting extension to the current practice of suppliers contributing to R&D and product development costs in certain component, system and module areas of a new vehicle programme.

For Mobis, the contract with Chrysler, that will see the supplier responsible for a chassis frame with around 300 parts including engine, transmission, brake, steering and suspension systems, could not be more significant; or more of a challenge. Mobis' management has no doubts as to the company's current abilities. In an interview with SupplierBusiness.com, Jeong-In Park, Mobis' chairman and CEO, expressed confidence that the company's technology base has now been reinforced: "Once there was a temporary phenomenon of insufficiency in our technological power and production base, but Hyundai Mobis has now established a robust growth foundation through active technical co-operation with Bosch of Germany and Alpine of Japan and through the acquisition of domestic module manufacturing firms etc."

But some analysts continue to express caution with regard to Mobis' evolving business model. The company has three basic divisions for reporting purposes, one of which - Module and Part Manufacturing (59% of 2003 sales), is responsible for the supply of various modules, including cockpit, chassis and front-end modules to many Hyundai and Kia models. According to analysts at CLSA Asia-Pacific Markets in a research note in April 2004, "Mobis' business model acts as a vehicle to move high-cost unionised assembly work away from HMC/Kia. This allows capex to be limited, while maintaining the existing Korean part supplier chain. We view the recent takeover of a couple of smaller part suppliers [Apollo Industrial and Jin Young Industry] unfavourably. The more this strategy is pursued the more the business model changes to one of being a pure part manufacturer, with greater fixed cost and R&D burden/risk."

Somewhat worryingly, the analysts also noted: "Mobis is a grey box when it comes to module-division margins, since transfer pricing between the Hyundai Group is not readily transparent. Indeed, on new models this year, Mobis has indicated module pricing was still being sorted out, completely counter to American automakers' pricing relations with suppliers."

However, analysts at Daiwa Institute of Research take a somewhat more optimistic slant on this evolution in the business model. In a July 2004 research note, analyst Joe Lee noted that one key driver for future margins in the Module and Part Manufacturing division would be higher margins from the supply to HMC and KMC: "Up to 2003,the majority of module parts orders were basic assembly jobs using blueprint designs provided by HMC and KMC and thus, Mobis' profitability was low. However, through advances in technology, Mobis has been invited to participate during the early stages of the design process for some of their recent models. We expect to see a noticeable improvement in margins from 3Q04 as Mobis starts to supply a wide range of module parts to HMC (NF Sonata) and for KMC's (mini SUV) new models."

A number of issues are clear. First, Mobis' module supply business is growing rapidly, thanks largely to the increasing success of Hyundai and Kia models in export markets such as Europe and North America. Sales of such parts amounted to 380 billion won in 2000 but are expected to hit 3.5 trillion in 2004 and 4 trillion in 2005, with modules to account for more than 50% of the company's sales. Second, Mobis' input into these modules is slowly increasing from that of a pure assembler/integrator to that of a product developer and assembler/integrator. Third, Mobis has relied heavily, and still does so, on technology partners in Japan, Europe and North America. In addition to the relationships noted above, with Bosch and Alpine, Mobis also has similar partnerships, involving the licensing of specific technologies with ZF, SiemensVDO, Breed/Key and Collins & Aikman. These have provided a platform for raising Mobis' technological capabilities and acted as a driver for growth in new areas such as ESP and ABS, telematics and in-vehicle electronic networks. Fourth, Mobis needs to increasingly stand on its own feet with regard to its R&D aptitude in order to be at the leading edge of product technology rather than be a follower. Fifth, customer diversification is likely to evolve only very slowly and will require dedicated investment in new assets as current capacity is already stretched meeting the needs of Hyundai and Kia products.

Perhaps the key issue here is just how far Mobis has already advanced with regard to technological capabilities. Despite management's confidence, Mobis is still a follower rather than leader in this field, a fact that was tacitly acknowledged in early 2004 when the company announced plans to substantially boost R&D expenditure and more than triple its R&D staff to 1,700 by 2010. Annual expenditure by then will have reached an average of 140 billion won per year. In 2004 alone, R&D spending of 128 billion is forecast and the R&D workforce should grow to around 720, up from 590 at the end of 2003. Cumulatively, it expects to spend 1 trillion on R&D activities between 2004 and 2010. Even so, the planned expenditure in 2004 represents only 3.6% of anticipated sales, some few points below the investment levels of peer suppliers competing in the same product areas. This illustrates the low base Mobis is starting from.

Mobis' position in the front-end module (FEM) segment highlights its current position vis-à-vis competitors. All future Hyundai/Kia platforms will feature outsourced FEMs and a number of models - including the Cerauto, Getz, Picanto and Tuscon - already are in production with outsourced FEMs, many of which are sourced from Mobis. The new Sonata, which enters production in September 2004 will use a Mobis FEM. Hyundai's strategy is to have one main module supplier per domestic production site and to extend this philosophy to its new overseas manufacturing locations in the US and Europe. The new facility at Montgomery, Alabama, will use FEMs assembled by Mobis while sourcing for the forthcoming plant in Slovakia has yet to be decided. Mobis therefore has a good position with Hyundai/Kia but it is certain that its capabilities in the FEM segment are way short of other specialists such as HBPO and Faurecia, both of which are leading the trend towards enhanced module functionality. OEMs are increasingly demanding improved functionality for such modules from suppliers rather than the former emphasis on assembly expertise. They are also expecting a fully-integrated service embracing design, product development, sourcing, manufacturing and delivery. Combining the specialist talents of bumper, lighting and engine cooling suppliers in the way that HBPO seeks to do, gives the company a distinct competitive edge. It is clear that Mobis is some way behind in these developments, as it is in other areas such as systems development in the chassis field.

Although exact details of the contract with Chrysler have yet to be revealed, it is clear that Mobis' current strengths lie in assembly and delivery of modules rather than in other areas such as product development and sourcing. How far Mobis will be stretched outside its current capabilities envelope remains to be seen. In light of this it is impossible to evaluate at this stage whether the contract should be regarded as a watershed development or a one-off sourcing example based on a knock-out low price. Either way, Mobis' profile outside its domestic arena has been shifted up at least one gear. It will also act as a wake-up call for established suppliers in the line of fire that a new, major competitive force could be emerging.

SupplierBusiness.com