Hyundai’s hard road
The name on the court docket reads Chung Mong-koo, but it may be the company he leads that’s on trial.
Chung, the 68-year-old chairman of Hyundai Motor Co., faces sentencing Monday for embezzlement and misappropriation of corporate funds. He could receive a six-year jail term.
For Hyundai, his legal troubles could hardly come at a worse time.
Despite earning top quality ratings in American customer surveys, outranking even Japanese rivals Toyota Motor Corp. and Honda Motor Co., Hyundai saw sales flatten last year. Profit skidded 35%, hurt by chronic labor strife, currency exchange fluctuations and reluctance on the part of many American and European buyers to shell out large sums for Hyundai cars and trucks.
Now Chung, who engineered the automaker’s transition from industry also-ran to a $29-billion-a-year empire selling in every region of the world, faces an uncertain future.
“Hyundai Motor relies on one man. Only he has power to control management,” said Stephen Ahn, an auto analyst at Woori Investment & Securities in Seoul.
Since Chung was arrested in April, the South Korean company has delayed factory projects in the United States and Eastern Europe and put a host of decisions on hold at a time when Hyundai’s fortunes have soured.
Managers at the automaker say a succession plan is in place in case the worst comes to pass. But many South Koreans expect the chairman, the oldest surviving son of Hyundai Group’s legendary founder, industrialist Chung Ju-yung, to receive a suspended sentence. One factor in Chung’s favor: Hyundai Motor’s importance to the national economy. South Korea may not want to put at further risk a company that accounts for 5% of the country’s exports and employment.
“We’re really looking forward to putting this behind us,” said Oles Gadacz, a spokesman at Hyundai headquarters here. Chung has been free on bond since the summer, but health problems and the trial have taken a toll on the chairman and his company. “There are a lot of brush fires we have to fight, a lot of things that have been neglected.”
Among them are efforts to launch manufacturing plants in the Czech Republic and in West Point, Ga., 90 miles southwest of Atlanta. The latter facility would build cars for Kia Motors Corp., which Hyundai controls, adding to factories in South Korea, China, India, Turkey and Montgomery, Ala.
The months-long delay of the new plants has slowed a key element in Hyundai’s effort to extend its global reach and someday even catch Toyota, expected before too long to overtake General Motors Corp. as the No. 1 automaker in the world. Hyundai has a long way to go. The company produced about 3.8 million Hyundai and Kia vehicles last year, 5 million less than Toyota’s total.
Hyundai managers say they need to add dealers, particularly in Europe, and sharpen the company’s marketing and brand image.
The automaker’s challenges come during an uncertain time for the industry. U.S. auto sales are projected to dip this year. Hyundai’s rivals are moving aggressively to cut costs and shift resources to faster-growing markets such as China. GM and Ford Motor Co., which reported a $5.8-billion loss in the fourth quarter, are restructuring and exploring tie-ups with other companies. Toyota and Honda, among others, are racing to develop more advanced hybrid gasoline-electric models.
Hyundai Motor Group, which includes Kia, has built its business and become No. 6 worldwide by exporting smaller cars at relatively low prices. But it wants to move up in value as well as volume -- and do so before Chinese manufacturers, with their cheaper labor, make a bid for the lower-end market.
The automaker’s leaders “are looking behind their backs,” said Jim Sanfilippo, senior analyst at AMCI, an automotive research firm in Bloomfield Hills, Mich. The view in front is no less daunting. “Now they’re going head to head with the toughest brands,” he said. “It’s a ground war.”
How Hyundai fares will be determined not just in the courtroom in Seoul but by what happens in Ulsan, an industrial city south of Seoul where about half of its vehicles are built.
Choi Ok-gon, 45, joined the paint department at Ulsan in 1986, the year Hyundai shipped its first cars to the United States. The small Excel sedan, priced at a low $4,995, was an instant hit -- but exacted a high cost.
“We were so busy putting them together that we didn’t even think about quality,” he said.
By the early 1990s, the cars had virtually disappeared from U.S. roads. With the Excel prone to breaking down, more and more shoppers looked elsewhere. The name Hyundai became a joke -- the Yugo of its day.
But Choi and other employees agree that things changed after Chung took over in 1999. In the previous two decades, he had worked in relative obscurity in Hyundai’s aftermarket business, selling parts and addressing consumer complaints, which gave him an eye for what customers wanted.
Chung made quality the corporate mantra. Twice a month, he led intense meetings during which Hyundai vehicles and those of rivals were displayed and analyzed. He ordered each factory to include all departments in quality discussions, encourage suggestions from employees and reward them with bonuses. Last year employees made 472,264 suggestions, the company said, saving Hyundai about $91 million.
A walk through Ulsan’s plant No. 3, where the Elantra sedan is assembled, reveals a workplace festooned with inspirational messages: “Quality Is Our Face,” “Make a Global Car.” Museum-style displays on the factory floor showcase dozens of car parts with improvements made by workers: a third hole on a hinge to make the door close more securely; using reusable fabric covers, instead of a waxy film, to protect vehicles destined for overseas markets.
“No other company has had this dramatic improvement in such a short amount of time,” said Neal Oddes, director of product research and analysis at J.D. Power & Associates in Westlake Village, which in June ranked Hyundai No. 3 in quality among 37 nameplates, up from No. 34 in 2000.
But Power’s survey didn’t help Chung much. He was in jail last spring after being arrested, and was later tried on charges of setting up multimillion-dollar slush funds to bribe politicians and aid his bid to transfer control of the company to his son, Chung Eui-sun, who runs Kia Motors. The elder Chung has admitted to having a hand in setting up the funds through Hyundai businesses.
Hyundai Motor’s troubles show that South Korea is still grappling with authoritarian traditions in which family-run conglomerates known as chaebol wield considerable economic and political clout.
Samsung Group, the electronics giant, has struggled with similar accusations. But whereas Samsung shunned labor unions from the start, Hyundai embraced them early on -- even coddled them, critics say -- and now that is costing the automaker. Hyundai Motor’s labor union struck the company 13 times last year, mostly for political causes, including during recent free-trade agreement talks. The company said the labor disruptions caused it to lose nearly $2 billion in sales.
Although some analysts believe that figure is exaggerated, the losses -- and bitter feelings -- keep mounting. In January, union members refused to work overtime, demanding higher year-end bonuses, despite a growing backlog of orders. At the annual New Year’s pep rally at the Ulsan complex, workers set off fire extinguishers inside a factory and provoked a melee that, management said, left the manufacturing president there with bruises on his face.
Hyundai has sued the union for assault, even though it settled the latest job action by agreeing to increase workers’ bonuses under certain conditions. Hyundai’s subcontractors, Ulsan residents, politicians and consumer groups have faulted the company, saying it caved in, while blasting the union for staging repeated walkouts that hurt the multitudes of suppliers and small businesses that depend on Hyundai for their livelihoods.
“This wasn’t the right time to pick a fight with the union,” a Hyundai executive said. Union representatives would not comment.
“Hyundai’s biggest weakness is its visibly inferior productivity compared to the top-tier players, including the Japanese,” said Park Young-ho, an auto industry analyst at Daewoo Securities Co. in Seoul. The cause is labor-management conflicts, he said.
Nobody sees an easy solution to the problem. Hyundai Motor’s trade union was founded in 1987 during South Korea’s democracy movement, which bestowed a strong political and militant legacy. Hyundai’s prosperity in recent years and efforts to build plants overseas have spurred labor leaders to push for higher wages and benefits.
Hyundai declined to provide precise labor rates, but its factory workers in South Korea earn about $22 an hour on average, compared with about $32 for American car assembly workers and about $30 for similar employees in Japan, said Steven Szakaly, an economist at the Center for Automotive Research in Ann Arbor, Mich. But Hyundai’s wages are rising more rapidly, he said, while its productivity shows no sign of comparable improvement.
In past years, Hyundai could afford to give generous wage increases to workers, but now analysts wonder whether the automaker’s productivity and labor problems will put it on the same path as Detroit’s Big Three, which continue to struggle to cut costs.
Hyundai hopes to produce cars more cheaply by building high-tech factories. Its newest South Korean plant, in Asan, is outfitted with 330 robots that tower over the assembly line, their arms inserting panels and welding them with lasers. Workers are scarce on the factory floor. The plant produced 300,000 Azera and Sonata sedans last year, one every 57 seconds.
Hyundai’s factory in Alabama is even more state-of-the-art. Adding overseas operations also will help cushion the company against fluctuations in currency. The South Korean won has risen about 20% against the dollar in the last couple of years, making Hyundai’s exports more expensive and less competitive in major overseas markets.
The costlier won has narrowed Hyundai’s price advantage over Toyota to just a couple of percentage points in some cases. Yet Hyundai can’t claim the name recognition or brand loyalty to go toe to toe with Toyota or Honda on price, even though the South Korean firm’s cars are rated as comparable in quality in J.D. Power and other customer surveys.
“We need another five years for customers to open up their wallets to pay the premium for quality and product value,” said Brandon Yea, a senior vice president in Hyundai’s marketing strategy division. Yea previously worked at the company’s U.S. headquarters in Fountain Valley.
Yea and other managers are trying to push that timetable by creating a more global and knowledge-based organization. Hyundai Motor has opened research and design centers in Irvine, Japan and Germany.
The company’s flagship R&D; campus in Namyang, just outside Seoul, boasts a staff of 8,000, including 2,500 with graduate degrees. The center runs 140 shuttle buses a day to ferry employees to and from Seoul and surrounding communities. Its test tracks, sound tunnels and other facilities are considered among the best in the industry.
“The quality performance in the past seven years has surprised our competitors,” Yea said. But quality isn’t the only factor, he and other Hyundai managers noted.
One lesson from the decline of the Big Three is clear, he said: “Cost controls are quite critical.”
