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Hyundai Motor Company in China

Managing Business in China, Spring 2013

HJ Crystal

on 7 June 2013

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Transcript of Hyundai Motor Company in China

HYUNDAI MOTOR COMPANY IN CHINA Hyundai Motor Company in China

Doing Business in China, Spring 2013
Presented by: Hyun Ju Park (Yonsei, Dept. of Law) Hyundai Motor Company HMC's Quality Management Improvements HMC in China Initial Entry Table of Contents

1. Introduction
-Hyundai Motor Company (HMC)
-CMK's Initiative for Global Expansion
2. HMC's initiative for Quality Management Improvements
3. The Automobile Industry in China
-Chinese Consumers
4. HMC in China
-Intial Entry
-Building the Production System
-Building Distribution System
-Beijing Hyundai's Response to Competition
5. Conclusion Building the Production System Building the Distribution Channels Beijing Hyundai's Response to Competition -is a South Korean multinational automaker headquartered in South Korea
-Chung Ju-Young founded the Hyundai Engineering and Construction Company in 1947.
-Hyundai Motor Company was later established in 1967 and with Kia, comprises the Hyundai Motor Group
-it is the fourth largest automobile manufacturer based on annual sales in 2010
-in 2010, HMC sold over 3.6 million vehicles worldwide
-HMC operates the world's largest integrated automobile manufacturing facility in Ulsan, which is capable of producing 1.6 million units annually.
-The company employs about 75,000 persons worldwide. -Hyundai vehicles are sold in 193 countries through some 6,000 dealerships and showrooms. May 2002
HMC initiated a joint automotive project with Beijing Automotive Industry Holding Corp. (BAIC) October 2002
The Chinese gov't approved the joint venture, leading to the establishment of "Beijing Hyundai." February 2003
Beijing Hyundai rolled out its first midsize sedan, "EF Sonata." "In 2003, the first year of our entrance to the Chinese automobile market, the company sold 50,000 units of the EF Sonata model. The company achieved this result in a year ... took three years for other foreign automakers (Honda)."
-Sung Kee Choi
(Senior Executive Vice President at the China Business Division) "In 2004, the Elantra subcompact was included into the assembly line and both models combined sold 144,000 units and then 234,000 units in 2005."
-Sung Kee Choi
(Senior Executive Vice President at the China Business Division) In 2007, Beijing Hyundai experienced a decline in sales compared to the prior year. In 2008, a full-blown price war in China involved many of the world's major automakers. 2008
In response, Beijing Hyundai launched its second plant in China, along with new plants in India and Russia to complete a global production network across Korea, the US, China, India and Europe. In April 2008, the company released the Chinese version of the Elantra (the Yuedong), which was equipped with physical design. 2008
Saw a slight rebound

HMC was concerned with the stagnant sales in class D cars. It was critical to establish a luxury image but Toyota's Camry and Honda's Accord were significantly outperforming Hyundai's Sonata. -Focus on developing overseas market
-1997 Asian financial crisis
-Chung Mong-koo (CMK) succeeded his uncle, Se-Young Chung in the chairmanship
-Sought to overcome challenge though acquisition of Kia Motors in 1998.
-In 1999, CMK became chairman of Hyundai-Kia Group and reorganized HMC to reduce costs and share knowledge across Hyundai and Kia.
-Turned company's attention to global expansion. HMC: Global Expansion -Starting in 2000, Chung aggressively sought to build automobile plants outside of Korea.
-At that time, the combined sales of HMC and Kia Motors were 2.76 million units, of which 2.46 million units were from sales in Korea.
-This expansion plan confronted HMC with the need to do business in markets where reputations were not developed. Overview
-United States
-India -One of the biggest challenged faced by Chung and his management team was Hyundai's reputation in markets outside of Korea.
-HMC discovered that its reputation outside Korea was not changing along with its improvements in quality.
-Apparently, it was Hyundai's initial entry into a market with lower-end vehicles that had an enduring effect on the company's reputation. -Established the Quality Control Division
-Chaired monthly quality control meetings with senior quality management and executives to take control of product quality from the initial state of the automobile development.
-"Quality Pass" or "Line Stoppage" was also developed.
-This standard was devised to prevent the initiation and production of automobiles on the assembly lines when potential problems in products were not resolved at the quality control meeting, even if it meant delaying the launch of a new model.
-"Five Star Rating Program"
-to improve subcontractor's quality
-incentive program for subcontractors that demonstrates quality improvement gains
-penalizing non-cooperative subcontractors
-"10-10 policy"
-10 years, 100,000-mile warranty
-to improve Hyundai's brand image In response, CMK redoubled HMC's worldwide efforts at quality improvement. The Automobile Industry in China Got started with technical assistance from the former Soviet Union in the 1950's, but remained little developed until 1984. China's first automobile manufacturer, Di Yi Motors (predecessor of the FAW group) was established in 1953 with assistance from ZiL, a major Soviet Union truck and heavy equipment manufacturer.

The product system of Di Yi Motors was vertically integrated, which later had a significant impact on the structure of Chinese automakers. The "Great Leap Forward" led by Mao Ze-dong from 1958-1960.
-Strengthed authority of local gov'ts
-Shortage of automobile industries
-Led local gov'ts to build small automobile plants to manufacture imitations of foreign models
-Well-known examples are:
-SAIC (Shanghai Automotive Industry Corporation)
-Beijing Motors (now BAIC) Towards the end of the 1950's the Chinese automobile industry faced difficult times due to the deteriorating relationship between China and the Soviet Union. In order to promote economic and industrial development, the Chinese gov't saw the need the intensify the capacity of national transportation, designating the automobile industry as essential to the country's economy.

Companies in the automobile industry received greater financial support.

During the Cultural Revolution, Donfeng Motors (DFM), which now ranks second among Chinese automakers were founded at the behest of Mao Ze-dong in 1968. Automobile plants were scattered all over China due to the policy of "one province, one assembly plant."

-Over-construction of automobile plants
-Impeded the effective division labor
-Standardizing of auto parts were impossible Large automobile manufacturers, such as FAW Group and DMC, controlled by the Central Gov't Medium-sized companies governed by the municipal
gov't, such as Shanghai, Beijing, Nanjing. Small automobile manufacturers overseen by municipal gov'ts. 1979
Open Economy Policy 1984-1990
"The exploratory period"
-large increase in demand for automobiles
-companies under municipal jurisdiction became independent
-many merged or were acquired by other domestic competitors 1984
-First joint venture in China in the automobile industry
-Beijing Automobile Works (BAW, subsidiary of BAIC) and US company AMC, forming Beijing Jeep

-SAIC formed a joint venture partnership with Volkswagen. 1987
At the China Executive Cabinet, consensus was reached to introduce policies to foster the growth of the Big Three (FAW Group, DFM and SAIC)

The policy was extended to include three additional companies (BAIC, Guangzhou Automobile Industry Group -GAIG and Tianjian Xiali) During the financial crisis in Asia, the Chinese automobile market was growing rapidly due to the strong performance of the Chinese economy.

Almost all global automobile makers sought to enter the Chinese automobile industry through a variety of joint ventures. Process for an overseas manufacturer to enter the Chinese automobile market
1. Initiation of automobile exports
2. Once the market was better understood, the importer would then shift to knock-down exports for assembly in China.
3. Foreign direct investment, required to take place through a joint venture. The average growth rate of the Chinese automobile market from 1992 to 2000 was 25.2 percent.

Reason for rapid growth since 2002 was a large increase in the purchase of personal automobiles.

Growth rates in automobile markets typically differ depending on the size class of vehicle. -The period 2000-2008 saw the Chinese market as highly competitive.

-The Chinese gov't played a significant role as it advocated the "independent technological development model" -- use of joint ventures with global automakers, where the Chinese counterpart "offers the market and obtains the technology."

-Global automakers resisted transferring their technology to local makers by only manufacturing older models in China.

-Gov't response?
-Introduced “Yi yi zhi yi" strategy: "using barbarians to control barbarians, where easing the entry of multiple global automakers stimulated competiton among them.

-Triggered the introduction of newer models with the latest technologies and local sourcing of auto parts

-Furthermore, newer models were selling for lower prices as global automakers waged priced wars.
-Price dropped by approximately 35 percent. Competition Chinese Consumers -Lack of experience with automobiles led consumers to equate brand recognition with product quality.

-Sought advice from other who were more knowledgeable about the industry due to lack of public information on the evaluation of cars

-Important to attract consumers by improving brand recognition and position

-Chinese consumers were also very cautious when purchasing cars, and payment on credit was rare. Distribution Channels Up until the mid-90's China's automobile distribution system was embedded in complex pyramid channels, making it difficult for automakers to control pricing or maintain a stable brand image and promotion activities.

Nearly impossible to respond to changes to consumer demand.

These channels were costly and resulted in the separation of after-sales services from sales.

However as of 2002, most global automakers had increased control over their channels by establishing "4S Shops" - large dealer shop that operated (in a timely manner) the functions of:
-Spare Parts

Vast majority of consumers purchased their cars from a 4S Shop, where they also received after-sales service and spare parts supplies after their car purchase.

This system contributed to building brand image and attracting customers.

Effective control of sales through tight contracts between manufacturers and dealers

Some automakers operated both 4S Shops and local dealerships because dealerships gave access to certain regional distribution channels, BUT they were difficult to control. HMC's partner BAIC helped to manage the process because municipal authorities in Beijing favored working with them. ("Guanxi")

HMC's sister company Kia Motors formed its 50:50 joint venture with DFM, known as Dongfeng Yueda Kia.

In addition, Rongcheng Huatai Automobile formed technological and brand alliances in HMC and produced Hyundai's SUV models, the Santa Fe and the Terracan.

Jianghuai Automobile used to manufacture the Starex (van) through a technological alliance but was terminated. 2002
Both Beijing Hyundai and Dongfeng Yueda Kia established their first assembly plants. -Cultural gaps between the partners
"While China and Korea belong to the same East Asian belt, differences in country size, historical experience, and cultural practices have produced different dispositions. The Chinese people are associated with caution while Korean people have a chop-chop nature."
-Sung Kee Choi
(Senior Executive Vice President at the China Business Division) Obstacles These differences led to some problems in initial entry.

Expecting rapid gov't approval, Beijing Hyundai planned around an aggressive initial production schedule, but the company had trouble meeting facility and equipment contracts when the process went slowly due to BAIC's approach to obtaining gov't approval. Beijing introduced the EF Sonata to create a luxury image, and continued to modify this model to fit the demand of the Chinese consumers.

Changes included the outer appearance to ensure that it would enhance the perceived status of the owner and promoted high class interior for owners who have drivers.

The company also adjusted the structure and height of the cars to meet standards of local road conditions. -Helped by geographic proximity of Korea and China

-Industrial infrastructure, such as auto parts supplies, was not fully developed for Hyundai in China, the company was able to use existing network of global parts suppliers in Korea

-The simultaneous entry of HMC and long-term Korean
suppliers, such as Hyundai Mobis, into China made possible rapid improvements and cost reductions.

-"Killing two birds with one stone."

-This let Beijing Hyundai develop its local supplier network methodically. "One of Beijing Hyundai's competitive advantages over VW or other competitors is in the management of local subcontractors... Beijing Hyundai subcontracts such parts as engine, manual transmission, or car seats, chassis, and air conditioning units from suppliers in Beijing to save transportation costs..."

"...while other parts such as audio, accelerator, tire, wheel, and battery are supplied from other provinces."

"We ally with 118 suppliers in total and 57 suppliers are located in the Beijing area."

"As of 2008, only 10 percent of auto parts... come from suppliers in Korea and all remainder are [locally] outsourced... enabling to reduce costs."

-Kim Bang Shim at Beijing Hyundai Strategy used with local suppliers At the initial stage, Beijing Hyundai provided a lot of support and assistance to local suppliers, such as technical and managerial training.

Company tried to maintain harmonious relationships with local suppliers through the sharing of information, encouraging them to promptly respond to Beijing Hyundai's needs.

Beijing Hyundai also held annual meetings with local suppliers and more regular month meetings for core parts suppliers. Quality Product Management Difficult at first but improved after implementing quality control process.

"3D Policy"
1. No defective products are used
2. No defective products are manufactured
3. No defective products are sold

The company also established a comprehensive quality assurance system to coordinate exchanges among:
-R&D center (design quality)
-assembly plant (production quality)
-subcontractors (parts quality) -Beijing Hyundai decided to adopt the 4S Shop model, but had to decide where the company should locate the shops.

-The company classified the China market into seven regions - north, south, east, northeast, central, southwest and northwest.

-"Core cities expansion group"
-Beijing and Qingdao in the North
-Nanjing, Hangzhou and Shanghai in the East
-Guangzhou and Fuzhou in the South

-Cities served as center pieces of regional promotion, dealer education, logistics controls, also played a crucial role in supporting cities.

-Next phase was to enter the 24 separate lower-level income areas cautiously, waiting for possible growth opportunities. Managing the Distribution Channels As a result of its low brand image, it was difficult to obtain 4S shop dealers.

Beijing Hyundai focused more on dealer's past experience rather than financial resources.

Company set a dealer's minimum investment at 25,000,000 RMB and the dealer's passion and determination was also considered.

Once dealers were selected, systematic education and training was given to those with a special emphasis on advertisement and sales promotion.

Gave incentives which increased dealer's loyalty and strengthened sales network.

Since 2004, many of Beijing Hyundai's dealers have ranked in contests among the top 50 of the approximately 25,000 dealers across China. Both parties feuded on how to react
-Beijing Hyundai was determined to survive and was willing to cut prices to gain share.
-BAIC was concerned about the decrease in profit margin as a result of price reduction.
Two parties also had different views on the control over local auto parts suppliers.

Beijing Hyundai resisted to BAIC's attempts to develop its own models. The Yuedong was equipped with newly improved, self developed Alpha and Beta engines, increasing fuel efficiency by 8 percent compared to the previous model.

Redesigned to appear more dynamic, including raised bumper line and highlighted engine hood, to target younger customers. Signaled commitment to China by increasing production capacity there to 850,000 units, made possible by opening second plant in 2008.

Product lines were increased from one model in 2002 to six models in 2008. What about the future? History of the Chinese Automobile Industry To overcome these obstacles HMC and Beijing Hyundai were exploring these strategies:

-Releasing new models continuously and establish an efficient distribution channel

-Must establish a global corporate image linked with product quality

-Must establish a local corporate image through various charities and public services to the Chinese society

-Adjust to the Chinese market and introduce more customized cars

-Most importantly, Beijing Hyundai needs to establish its own unique product identity through consistent product development.

Examples are
Jetta - Durability
BMW - Pleasure of driving
Toyota - Best quality The company has also found it a challenge to attract high-quality human resources to localize its distribution channels.

Lastly, HMC must resolve problems of how to cooperatively deal with the transfer of technology to BAIC. HMC is still seeking the appropriate balance between the protection of technology and the maintenance of trust.
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