From the outside, Hyundai Motor Co.'s headquarters near Seoul doesn't look like the home of the world's fastest-growing carmaker. The two 21-storey glass towers, linked by an atrium, wouldn't attract much attention in a suburb of Toronto or Vancouver.
Come here at 5:30 in the morning, however, and you start to see the Hyundai difference. Yes, that's an Olympic-sized swimming pool in the basement and, yes, that's the leadership of the company doing laps or working out in the adjacent gym before they start another marathon day.
And come up to the second floor-if only in your imagination, because outsiders and indeed most employees aren't allowed here-and you'll see another marker of Hyundai's distinct culture: a computerized worldwide command-and-control centre that could pass for a set in a James Bond movie.
And then, if you get to the city of Ulsan, 300 kilometres to the southeast on the Sea of Japan, see how the sheer enormity of Hyundai's highly centralized manufacturing overwhelms you. Here the company operates the world's largest auto plant, spread over 1,233 acres, producing up to 5,600 cars a day. The place has its own port, capable of docking three 50,000-ton ships at once.
This is not the Hyundai of the 1980s, when the brash young company tried to establish a beachhead in North America by flooding the market with cheap and poorly made compacts. The Pony and the Excel became the butt of jokes for years: Even David Letterman piled on, suggesting that the best way to scare astronauts would be to put the company's distinctive "H" logo on a spacecraft's control panel.
Executives in Seoul were humiliated by their company's shabby reputation. But they learned from their mistakes. In the 1990s, they committed themselves to quality, an intense work ethic, and a centrally directed long-term plan that is now shifting into high gear just as many of Hyundai's rivals in Detroit and Japan are faltering.
By almost all measures, 2009 was a banner year for Hyundai, and a brutal one for its major competitors. Worldwide, the Korean contender surpassed Ford to become the fourth-largest automaker. In the recession-battered U.S. market, Hyundai was the only major manufacturer to increase sales-climbing by 9% to 675,000 vehicles while total industry sales shrank by 21%. In Canada, Hyundai sold more than 100,000 vehicles, making it the fastest-growing import brand. In China, the company's sales roared forward by 94% last year.
Hyundai is now just about the only manufacturer that can focus all its energy on the future. Toyota is still struggling to recover from the defective-accelerator scandal that torpedoed its sales and morale, and Detroit's Big Three are still wrestling with the legacy of two decades of decline. Meanwhile, Hyundai is pushing ahead with quality and styling improvements to its existing models, as well as introducing upscale new ones, including the Equus, which arrives this fall and will compete with Mercedes and BMW.
And while Hyundai may have lagged in the race for the green car, it's aiming to leap ahead there, too. The company's first gasoline-battery hybrid arrives in showrooms later this year. It also has ambitious plans to introduce the holy grail of green cars by 2015-a hydrogen fuel cell-powered vehicle that sells for less than $50,000 (U.S.).
How has Hyundai prospered in recent years as almost all of its rivals have stumbled? It has to do with the country where it was born, the leaders who have run the place and the savvy decisions they've made.
Hyundai is still a relatively young carmaker, and essentially remains a family-run company. That's one big reason it has been able to maintain focus and discipline. The company is also one of the key actors in the astonishing economic surge in South Korea since the 1960s. The success story is based on a national business culture that is hard-working, highly educated, ambitious and export-oriented. South Korea's growth-and no small amount of internal controversy-also stems from central economic planning by authoritarian, pro-U.S. regimes that have worked closely with a tightly knit network of several dozen family-owned conglomerates called chaebol.
The push began under President Chung-Hee Park, a general who seized power in 1961 and ruled until his death in 1979. When Park took over, South Korea was an impoverished agricultural country whose average per-capita income was about the same as Ghana's. Park curtailed imports, and channelled loans from foreign lenders and domestic banks into export-oriented manufacturing concerns owned by the chaebol. His successors continued these practices until the Asian currency and financial crisis of 1997 forced them to rein in the chaebol somewhat. But the country's biggest industrial enterprises, including giants such as Samsung and LG, are still family controlled and supportive of one another.
It's hard to argue with the results. South Korea's GDP swelled exponentially, from about $3 billion (U.S.) in the early 1960s to more than $1 trillion (U.S.) in 2007, or more than $20,000 (U.S.) per capita for the population of 49 million. In 2009, South Korea was the world's ninth-largest exporter, ahead of the United Kingdom, Russia and Canada.
Hyundai grew out of a car repair shop founded in 1947 by Ju-Yung Chung. Over the next three decades, he expanded into other industries, including engineering, construction and-in 1967-auto manufacturing. In 2000, a year before he died, Chung split up his holdings among his sons, giving each control of what are now separately owned companies, including Hyundai Heavy Industries Group and Hyundai Asan, a real estate development and tourism company. Mong-Koo (M.K.) Chung became chairman of Hyundai Motor.
M.K. Chung, now 72, assumed the helm when the automaker was still smarting over the Pony and the Excel. Those two models were hot sellers at the start. Hyundai started exporting the Pony to Canada in 1983. Priced at about $6,500, the Pony sold more than 57,000 units in 1985, making it the No. 1 import model in the country. But the car's exterior and interior finishes were poor, it rusted easily in the Canadian winter and the plastic heater core often froze.
The experience was similar in the U.S. when the front-wheel-drive Excel was introduced in 1985. The car was priced at less than $5,000 (U.S.), was voted one of the year's 10 best new products in a Fortune magazine survey, and sold more than 168,000 units in its first year. But sales started skidding in 1988. Part of the explanation for the slide is that American consumers didn't know anything about Hyundai at the start, says Finbarr O'Neill, who joined Hyundai Motor America as general counsel in 1985, and was CEO from 1998 to 2003. "People just assumed the vehicles were Japanese quality," he recalls. They weren't.
Cutting corners on quality to compete on price was not just a short-term tactical error but a mistake in long-term strategy. "Hyundai's philosophy was to generate sales volume-as much as we could," says Hyundai Canada CEO Steve Kelleher, who joined the company in 1986, heading the parts department. "But our technology was so far behind. We were buying some of it from other manufacturers-licensing it."
Hyundai still hasn't completely shaken that lower-quality image, judging by the findings of J.D. Power and Associates, the marketing analysis firm that is especially influential in the auto industry-and which is currently headed by none other than Finbarr O'Neill.
Power conducts annual surveys of both vehicle quality and buyers' satisfaction. David Sargent, the firm's vice-president of vehicle research, says that Hyundai's quality scores have actually been as good as, or better than, its U.S. and Japanese rivals since 2004, "but if you walked down the street and asked 100 people, who has better quality, Hyundai or Honda, or even Ford, few people would say Hyundai." And, as Toyota's embarrassing experience with its defective accelerators over the past year proves, even if you've had a reputation for quality for decades, says Sargent, it can vaporize "in about 20 minutes" if there's a major snafu.
After the Pony and Excel debacles, O'Neill and Kelleher say that everyone in Hyundai knew that the company needed an overhaul. Although M.K. Chung didn't officially succeed his father in the top job until 2000, Hyundai executives credit him for laying out a long-term quality strategy and sticking to it.
The company had already started making some improvements in the 1990s. An early milestone was the development of Hyundai's first proprietary engine, the Alpha, in 1991. In 1997, the Asian financial crisis triggered the collapse of a third of the 30 largest chaebol, and exposed inefficiencies in the Korean system. Among them: The country had seven automakers. Hyundai bought a 51% stake in its principal rival, Kia Motors (which it has since reduced below 35%). Internally, with the 1999 model year, Hyundai was confident enough of the quality of its cars to introduce a 10-year powertrain warranty in the United States, an industry best-practice at the time.
But Hyundai still needed to do more work to catch up to its overseas rivals in quality. As was the case with Toyota and other Japanese manufacturing successes in the 1960s and 1970s, Hyundai didn't spend appreciably more than its rivals on research and development. (Even now that Hyundai is flush, it spends about 5% of its revenues on R&D, which is roughly the auto-industry average.) Rather, the company studied the best technology and processes of its competitors, and applied what it learned.
In 2000, Hyundai adopted the Six Sigma management discipline. The process uses intense statistical analysis to identify flaws in a manufacturing process. Quality specialists rate processes from one sigma (31% of products are flawless) to six sigma (almost 100%). Kelleher said a key part of the discipline was "not just reading your own PR, or your own internal quality reviews, but really looking at third-party assessments of what the customer is saying. One of the great things about management in Korea was the ability to seek out criticism and deal with it."
That's a striking difference from Detroit, whose downfall was a large element of hubris. And the new attitude was also strikingly different from the Hyundai of old.
Hyundai now didn't try to race to get ahead as it had done in the 1980s. Models such as the Accent subcompact and the Sonata sedan went through facelifts and mechanical upgrades in the 1990s. When Detroit went SUV-mad in the late 1990s-and hit the jackpot at first-Hyundai did respond with the Santa Fe, but didn't bet the farm as Detroit did.
Hyundai was also cautious about joining the rush to lower costs by building new plants in low-cost/high-incentive jurisdictions such as the anti-union southern U.S. states. That was partly because Hyundai had seen early on that this tactic is not a cure-all-in 1989, it opened a $349-million Sonata plant in Bromont, Quebec, including $50.1 million in federal and provincial assistance. But the company shut down production in 1993, and repaid Ottawa and Quebec City in 1995. Hyundai did establish a design centre in California in 1990, and added a test track in the Mojave Desert in 2004, as well as a technical centre in Michigan in 2005. The company waited until 2002, however, before breaking ground on another assembly plant-a $1.1-billion (U.S.) factory near Montgomery, Alabama, that makes Sonatas and Santa Fes. But it's still a relatively centralized automaker.
Meanwhile, the quality drive started to bear fruit. In 2003, Hyundai tied Honda for second place in an annual reliability ranking by Consumer Reports magazine (Toyota was first). In 2004, Hyundai scored a breakthrough in J.D. Power's widely watched initial quality survey. In this study, the firm asks new-car buyers to identify quality problems 90 days after they've bought their vehicles. Hyundai tied Honda for second place with an average of just 102 problems per 100 cars for all its models, a 29% improvement from the previous year, and just one more problem than Toyota.
Two big hurdles were looming, however. First, it can take years for quality-survey scores to boost sales. And M.K. Chung was about to be slammed by a massive embezzlement scandal.
Chung rarely talks to English-language reporters, and he declined to be interviewed for this story. But he's genuinely revered by Hyundai executives around the world (the firm sells cars in more than 190 countries). All of Chung's resources were put to the test in April, 2006, when he was arrested in Seoul on charges that he had siphoned about $100 million (U.S.) of company money into slush funds to bribe government officials and bankers. He spent two months in jail before being released on bail, was convicted in February, 2007, and sentenced to three years. That September, however, a higher court suspended the sentence, citing Hyundai's importance to the economy, and Chung vowed to keep a promise he made in 2006 to donate $1 billion to charities. In August, 2008, Chung was one of 341,000 executives who received pardons from South Korean President Myung-Bak Lee.
Yet the company never stumbled. It has introduced better and more stylish cars over the past five years, building on several long-standing advantages. Among the biggest are cost and price. Hyundai's cars aren't as wildly cheap as they were in the 1980s, but they sell for 5% to 10% less than competing models. Hyundai also offered hefty sales incentives to recession-battered U.S. buyers in 2009-an average $2,500 (U.S.) per vehicle.
Yet Hyundai's most recent reported earnings were a net profit of $1.7 billion (U.S.) on sales of $18.7 billion for the first nine months of 2009. Toyota posted big losses over the same period, and Ford was the only one of Detroit's Big Three to earn a profit.
How does Hyundai build cars so cheaply? Management in Korea wouldn't share cost data. Even Hyundai Canada CEO Steve Kelleher and former Hyundai Motor America CEO Finbarr O'Neill say they don't know those numbers. Still, it is possible to identify several factors, and dispel some myths.
First, many North Americans assume that Korean autoworkers are less militant than unionized workers here, and that they earn meagre wages. Neither is true.
The basic hourly wage in U.S. plants represented by the United Auto Workers is about $28 (U.S.) an hour, but health care and other benefits can double that cost. Hyundai says its Korean assembly-line workers with 10 years of experience earn about $50,000 (U.S.) a year, based on a 50-hour workweek. That coincides with some analysts' estimates, which peg Korean wages and benefits at about $22 (U.S.). Still, the Korean labour cost is substantially higher than the typical $10 (U.S.) in Mexico and just $3 (U.S.) in some factories in China.
Moreover, Hyundai workers in Korea have gone on strike almost every year since the 1990s. Last December, management narrowly avoided a strike by agreeing to pay a onetime bonus of three months' salary. Given the substantial pay and benefits it's paying in Korea, Hyundai is shifting global production of its small, lower-profit margin models to India. "The lower wages make it profitable," the company says.
For bigger, higher-priced cars, however, rank-and-file remuneration is a less decisive cost factor. "I would look more at their world-class efficiencies," says O'Neill. The company says three of those efficiencies are its mature and highly competitive parts suppliers in Korea, its own proprietary technology (which it owns and therefore doesn't have to pay to license), and its centralized control of worldwide production, with "the very latest information technologies."
There's also the sheer scale of Ulsan. The five factories that make up the complex can produce up to 1.6 million vehicles a year. But executives and industry analysts say that even Hyundai's newer plants use up fewer labour hours per vehicle than its major competitors. On a recent visit to the Asan plant, about 100 kilometres south of Seoul, where Sonata and Azera sedans are made, there were only handfuls of workers on long stretches of the assembly line-they were overseeing robots. And the company says its Sonata plant in Alabama, which opened in 2005, requires even fewer workers per car.
The energy and commitment of the managers in Korea is also formidable. "Normally I come to work at 5:30 in the morning. In the gym, I can see all the management there," says Chang-Hwan Han, senior vice-president, American division, in Seoul. "We're in the office by 6:30. We finish late." M.K. Chung reportedly has breakfast with his family at 4:30 a.m., and arrives at the office shortly after 6.
The company is also sufficiently nimble to get the jump on its rivals when they falter. Central control can spell bureaucratic inertia, yet executives say Hyundai makes decisions faster than its competitors. "Speed is the DNA of our company," says Seong-Hwan Kim, senior vice-president, marketing division. "We go after our target."
The heart of Hyundai is the futuristic Global Command and Control Centre on the second floor of headquarters. It operates around the clock, and boasts dozens of screens relaying up-to-the-minute data and live video feeds from all of Hyundai's assembly lines and research centres around the world. The company also tracks container shipments from its parts suppliers to its own factories in real time.
Despite the centralization and all the attention to detail in Seoul, Hyundai Canada marketing vice-president John Vernile says the company gives local executives enough autonomy to implement decisions quickly. A case in point is the Hyundai Assurance program that the company rolled out to U.S. consumers in early 2009, as the recession took hold. Buyers could purchase insurance that would allow them to walk away from their dealer purchase plan if they lost their job, or suspend payments for 90 days (a similar program had been in effect in Canada since 2000). Bernard Swiecki, a senior project manager at the Centre for Automotive Research, a non-profit think tank in Ann Arbor, Michigan, was impressed by how well thought-out it was. "It was very cleverly marketed at the height of the economic crisis," he says. "It wasn't just a sales pitch or a tag line."
Hyundai has also become more comfortable manufacturing abroad. In addition to Korea and the U.S., it now has plants in China, India, Turkey and the Czech Republic, and plans to open factories in Russia and Brazil. In the first three months of this year, for the first time, it sold more vehicles made outside Korea (443,000) than inside (397,000).
Image is at least as important as substance in the car business, and for Hyundai it's the crucial frontier. Hyundai scored well again in J.D. Power's initial quality survey for 2009, finishing behind only luxury brands Lexus, Porsche and Cadillac. Also, Hyundai's 2009 Genesis, a $35,000 (U.S.) upscale sedan that competes with models such as the Chrysler 300C and the Toyota Avalon, was selected as North American Car of the Year by a jury of 50 veteran auto journalists. In Seoul, executives were particularly proud of that award. "It's another great milestone for us. It gives credit to our brand," says Seong-Hwan Kim, the marketing head.
Executives hope such plaudits will accelerate the transition in consumers' minds that the company's vehicle quality is as good as, or better than, its rivals. "With our last-generation product-within the last four years-we got it to the level where we knew we had the beef," says Hyundai Canada's Kelleher. John Vernile adds that quality pays off in customer loyalty. "Last year, 53% of our buyers were repeat buyers. That's not far from the best in the industry."
J.D. Power's Finbarr O'Neill says that Hyundai executives should be proud, because it's getting more difficult for manufacturers to differentiate on quality, and consumers' design expectations are getting higher. "The idea of quality problems has started to change from just the mechanical fixing of things, to 'difficult-to-use,'" says O'Neill.
Can Hyundai move further upscale? It plans to introduce its top-of-the-line Equus sedan in North America this fall. "The Equus isn't a volume model. For us, it's the first model to go to the $60,000 (U.S.) mark," says American division senior VP Chang-Hwan Han. "We want to show our prestige and technology to the North American market."
But auto industry analysts think it will be a challenge for Hyundai to sell the Equus at its existing dealerships. When Toyota, Honda and Nissan moved upscale in the 1980s, they introduced new brands: Lexus, Acura and Infiniti. "People are sort of accepting a $35,000 to $40,000 Genesis," says J.D. Power's David Sargent. Equus, however, is "seriously in Mercedes, BMW and Audi territory. It's a whole different ball game."
Mind you, Hyundai has raised its game at the dealer level, too. Greg Stewart, president of Pathway Hyundai in Orleans, Ontario, a suburb of Ottawa, signed on with the company in 2002. His first Hyundai showroom was a former burger joint. "My office was by the washroom," he says.
In 2002, Hyundai Canada asked Stewart to be one of the first participants in a long-term program to upgrade the look and expand the capacity of its dealerships. The program, which was completed last year, has required a considerable leap of faith by the dealers themselves-$2.6 million worth, on average. As rival manufacturers have struggled to hang on to dealers in Canada over the past two years, Hyundai has expanded, adding 16 in 2009, including about a half-dozen from GM.
For the moment, Stewart admits he isn't all that excited by the Genesis or the Equus. "I can't see people spending $75,000 on a Hyundai right now," he says. He figures that in the time it takes his dealership to sell a handful of Genesises, he can sell hundreds of Sante Fes and Sonatas. But that's part of the whole point: Because just about all of its departments and divisions around the world are pushing ahead so fast, no one initiative is crucial. Hyundai can now afford to dare.
CAN HYUNDAI LEAPFROG AHEAD IN GREEN RACE? Just about the only major area in which Hyundai has trailed the competition in recent years is in the race for greener cars. But the companies that profit most from innovations often aren't the ones that devise them or bring them to market first. Otherwise, we might still be using Edison Electric Light Co. bulbs and surfing the Net with Netscape.
Like its rivals, Hyundai is experimenting with both gasoline/battery-power hybrids and hydrogen fuel cell vehicles. And with Detroit and Toyota spending a lot of effort and money cleaning up past mistakes, Hyundai has an opportunity to leapfrog ahead.
The company's hydrogen prototypes are built and tested at Hyundai's Mabuk Eco-Technology Centre, 26 kilometres southeast of Seoul. Hyundai opened the $60-million (U.S.), 153,000-square-foot facility in 2005. In addition to installing hydrogen fuel stacks in vehicles and measuring their fuel economy, the company does safety tests, including front, side and rear collision, and fire tests. And freeze tests too: Researchers soak a car in water, store it at minus 20 C for 24 hours, then see how it starts.
Hydrogen power is a long-term investment, and no one in the industry is sure when vehicles will be economically viable. "We and all the automakers agree that fuel cell EV cars will be the ultimate solution to the environmental problem," says Byung-Ki Ahn, principal research engineer and general manager at the centre. Hyundai started experimenting with fuel cell versions of its Santa Fe SUV in 2000, followed up in 2005 by a version of the Tucson, and began work on a hydrogen-powered bus in 2006. The goal-and challenge-is to build a fuel cell-powered car or SUV that can sell for less than $50,000 (U.S.).
If all goes according to plan, Hyundai figures it can build 2,000 fuel cell vehicles in a test marketing phase between 2012 and 2014. From 2015 on, it would shift into commercial production, with a goal of making 10,000 units per year. Ahn let Report on Business magazine test-drive a Tucson prototype. It has a top speed of 160 kilometres per hour, but the ride feels a lot different from an internal combustion engine. It accelerates faster from 0 to 80 km/h, but slower from 80 to 100.
There's barely a hum as you hit the pedal, and no noise at all as the vehicle goes uphill, which makes it feel as if there's no engine under the hood. As Toyota and other automakers have done already, Hyundai will introduce a gasoline/electric hybrid before any fuel cell car. The company developed its hybrids at its main R&D centre in Namyang, 52 kilometres south of Seoul, which employs 9,000 engineers. A hybrid version of the Sonata sedan goes on sale in North America this fall, and it's powered by a lithium polymer battery. We also test-drove a prototype of that car. The engineers on the project said it was still under development, but they were beaming. "I can guarantee this car has the best fuel economy in this segment in the world," says Ki-Sang Lee, senior vice-president, hybrid vehicle development.
Lee has spent the last six years working on hybrids, after being in charge of conventional-engine design. The transition wasn't easy at first. "At the time, we didn't have any infrastructure in our company for hybrid development. We started from scratch and we got here in six years."
On the dash of the Sonata hybrid is an electronic graphic Eco-Guide-a meter with blue on the bottom and grey on top (blue is better). It tells you how much power is coming from gasoline and from electricity. The monitor also gives you an eco-score based on how much fuel you consumed during your trip. The higher the score, the better the fuel economy. We scored a paltry 2 out of 100, thanks to accelerating too fast and taking corners too hard, which require hitting the gas. "You need to practise," said Lee.