Globalization of the Korean Auto Industry - Research Paper Example

?Globalization of the Korean Auto Industry Introduction The policy makers of South Korea (henceforth Korea), post World War II, envisioned the development of the economy with the growth of manufacturing sector, in particular the automobile sector. Korea’s vibrating automobile industry is vastly the result of state support to the industry. State imposed twenty five years of continuous ban on import of completely assembled cars, thus, providing protection to local manufacturers. It also encouraged local players of the industry to enter into partnerships with foreign makers to gain technical knowhow and transfers of technology. State also opted for industry restructuring/ regulating, and concentrated on export led strategy. Rise in domestic demand due to the betterment of economic condition of the country, further enhanced the auto industry of Korea. It took Korea barely three decades to move along the learning curve and secure the place of fifth largest automobile manufacturer in the world. It is notable that exports and foreign auto manufacturers have played a key role in supporting and pulling through the industry in the worst times. This paper throws light on the road taken and success achieved by the Korean automobile industry along with its impact on the economy of Korea. It also aims to explain the reasons for its global competitiveness and what distinguishes it from American automobile industry. The next section of the paper would compare the Korean and American automobile industries which would then be elaborated by an example. It would be followed by the challenges faced currently by the Korean automobile industry. Lastly, the paper would conclude with some recommendations to tackle the challenges. Korean Auto Industry Development The history of Korean Automobile Industry can be traced back to 1960s when the Government of Korea took a policy decision to develop auto industry in the country. In the first five year plan of the country, initiated in 1962, emphasis was laid on the creation of indigenous automotive industry. In its initial phase, i.e. in 1960s, the automobile majors were largely involved in assembling of semi knocked down and fully knocked down kits which were nothing but imported components of automobiles. To ease out the conditions for the development of the industry, the state banned import of fully assembled cars although it encouraged foreign partnerships for transfer of technology to the domestic players. With the support of the state, the industry progressed to give rise to four major players which were Hyundai, Kia, Daewoo and Samsung Motors. Hyundai was formed in 1967 with the aim of manufacturing a wholly indigenous car. It started on the learning curve by creating an assembly line to assemble fully knocked down kits. It tied up with Ford, Mitsubishi and Honda for technology transfers in order to initiate local manufacturing of automobiles. It was not until 1976, that Korea achieved the feat of manufacturing automobiles domestically. After eighteen technology transfers, from its foreign partners, Hyundai launched ‘Pony’, in 1976. Pony was the first Korean developed automobile (Korean Development Bank 175). It also holds the distinction of being the first Korean car to be exported. In 1985, Hyundai achieved the landmark quality certifications to meet the quality requirements of EEC, Canada and America which enabled it to export to these geographies also apart from Middle East and Africa. Kia, another automobile firm owned by a chaebol (large Korean business house) was established in 1971. Kia started its product line with three wheeled trucks and in a span of three years graduated to manufacture four wheel vehicles. Kia produced its first passenger car ‘Brisa’, in 1974 in technological partnership with Japan’s Honda. Similarly Shinjin Motors (now Daewoo) tied up with Japan’s Toyota to acquire capital and technical knowhow in automobile production. In 1972, Toyota’s share was taken over by General Motors which steered the firm to become the largest automobile producer in Korea by 1976. Thus, the rise of major auto firms ensured the development of automotive industry in Korea. While Hyundai tapped mostly USA, Canada and EEC market, the other manufacturers were, busy taping the smaller markets of Middle East. By 1979, Korea was exporting almost one hundred million dollars worth of automobiles to around sixty seven countries around the world (Korean Development Bank 116). 1980s also saw rapid expansion of automobile industry due to exploding domestic demand and increasing exports. While the domestic demand increased due to improving economy, exports were also well received since Korean cars appeared to be good substitutes for Japanese cars. At that point of time, Japanese were major exporter of cars to USA, Canada and European countries. However, the voluntary restriction on Japanese automobiles by the USA, acted in favour of Korean vehicles which were perceived to be quite like Japanese models due to style and technology similarities. Thus, restriction on Japanese vehicles import further fuelled the auto industry growth in Korea. Thus, by 1987, Korea was catering to 4% of the total world export market which made it number eight largest automobile exporting country (Stern and etal). The Korean manufacturers also redoubled their efforts to come in sync with the world quality standards and demand for export models. In short, from 1975 to 1995, Korea’s automobile production jumped from a miniscule 37000 in a year to 2.8 million units in 1995, recording a growth of more than 75% in a twenty year period (Korea Automobile Manufacturers Association). However, due to big players’ (such as Hyundai, Kia and Daewoo) expansion over drive, along with the introduction of a new player, Samsung Motors (Greenbaum) the industry started facing the problem of over capacity and low productivity. Rise in oil prices and consequent worldwide recession added to the woes of the industry which prompted the Government to push rationalisation measures. The measures were aimed to merge major passenger car manufacturers i.e. Hyundai and Daewoo together and major small sized trucks manufacturers i.e. Kia and Asia, together. With the rationalization measures, the Government hoped to solve the problem of overcapacity. However, the measures were abandoned mid-way as they did not go well with the industry players. Sources of Korean Auto Industry’s Global Competitiveness As discussed above, industry started experiencing the problems of overcapacity and low productivity in the beginning of 1990s. Major reason for over capacity was Korean auto manufacturers rush to increase their capacity in a bid to become number one internationally and also to defend their market share against Samsung, a new player in the game. To add to the problems, the Asian currency crisis set in late 90 which shed the domestic demand by more than 48% (Korea Automobile Manufacturers Association). Also, the financial crisis forced Korean auto industry to restructure and open to the import of fully assembled foreign cars (after twenty years of ban). The lifting of the ban was negotiated mostly by International Monetary Fund which lent Korea$ 60 million bailout package (to save Korea from bankruptcy). Inspite of allowing imports of the fully assembled cars, the foreign cars could not make much impact on the domestic public which continued buying indigenous brands with zeal of patriotism and favouritism. This support from the nation, along with Government back-up, helped three major players to survive the crisis. These players were Hyundai (with Kia under its wings), Daewoo motors and Samsung Motors. It is noteworthy that it was during the times of financial crisis that the industry achieved the distinction of selling more vehicles in the overseas market than domestic market (1987). Plummeting Asian economy and burgeoning American demand led to this change in scenario. The Asian currency crisis became a blessing in disguise for Korean auto parts manufacturers also whose production multiplied due to lower Won value and thus encouraging the entry of foreign firms. The result was that by 2002, Korea was in surplus in its Auto parts trade and also enjoyed the position of being the second largest in the region after Japan (Ravenhill 14). The increasing reliance on exports also encouraged the industry to improve the quality of their products in terms of reliability, safety and pollution levels (Greenbaum). The competitiveness of the industry was further propelled by the encouragement of Foreign Direct Investment to the sector by the Government. The process started in 1980 when Government allowed foreign auto makers to tie-up with local manufacturers for imparting technological knowhow and technology transfers. The move was logical step to grow the industry from mere auto assemblers to auto manufacturers. The foreign partners of domestic firms not only enabled them to gain essential technical knowhow but also saved them from the worst affects of recession in 1998 by pumping in investment at the peak of the crisis. In 2000 alone, Korean Auto Industry received almost 9billion worth of FDI (Ravenhill 10). Foreign auto makers have also been instrumental in taking over ailing domestic firms (such as Renault acquiring control over Samsung). Thus, at a time when industry growth became stagnant, the strategic foreign alliances initiated the industry again on the growth chart. Korean auto industry has been climbing the growth chart continuously since then and setting new standards for itself in the world. It is evident from the oft made comparison between Korean and American auto industry. Americans are one of the pioneers in the field of auto making. However, lately, it has been realised that Korean auto makers have started beating their American counterparts in global markets. The following discussion attempts to look into the reasons for Korean success in world markets vis- a-vis American auto firms. A major reason why Korea was so much successful than USA in the auto export segment is the Korean understanding of Asian requirements. Asia, with countries like China and India is bursting with the rise of middle class, which has high disposable income and a taste for consumerism. Though both Korea and USA would like to tap such a market, it was Korea which succeeded due to its ability to create small cars with diesel and petrol engines. USA firms, on the other hand, produce larger sized cars which are not as fuel efficient as their Korean counterparts (Crawford and Berkeley 2) Also, Korea Auto industry is a trained player when it comes to state driven policies about levels and variety of production. Given the strict state control at the home turf, the Korean firms are easily able to adapt to such regulations in other countries also. However, USA production is consumer driven which makes its production policies unfit for operating in Middle East and major Asian markets where state control is substantial. Another reason for Korean success lies in the ownership of the auto companies in Korea. Auto companies in Korea are majorly chaebol (large business houses) controlled. Their associated production linkages provide greater market flexibility to them in comparison to American firms which are largely publicly listed companies (Lee, Lee and Kim 86). This helps in quick decision making, not to mention the tough decision making also. Korea’s success can also be attributed to its ‘authoritarian’ way of handling labour relations which means that labour are mostly under the control of the superiors. This means fewer disturbances in production due to labour related trouble. However, in USA labour relations are said to be ‘adversarial’ which impacts the efficiency of the firms (Lee, Lee and Kim 87). Another factor that helped Korea and went against USA is the structural limitations of the Asian countries. Since these countries are still in developing state, purchase finance, product servicing and marketing are still not fully functional or are under strict Government control (e.g. China) which makes it difficult for USA firms to function. Workmanship is another important reason which differentiates Korea from America. In Korea, a worker tries to master his job with perfection, which also shows his sincerity and attitude towards his job. At the same time, the culture in West is more return specific; job is done to get paid and till the time payment is not stopped, a little problem here and there is manageable. Though Korea has its own share of quality related problems, it is more due to lack of communication than workmanship (Lee, Lee and Kim 89) Flexibility in manufacturing is another reason that goes in favour of Korean auto makers. Korean plants are such that they can produce multiple product lines in a single plant. This gives them the strategic advantage of responding swiftly to the competition. American plants, on the other hand, produce one or two models only per plant. For example, Ford in North America produces only one or very few models per plant which restricts its ability to juggle the product line as per the changing needs and demands (Modi and etal) The discussion below, about Indonesian market, is an example of how the Korean firms have an advantage over American firms. Indonesia is one of the fastest growing car markets in Asia. Both Korean and American auto makers wanted to invade the Indonesian auto market, but Indonesian government supported only a national car maker. Even at the risk of going against WTO, it promoted only home made cars which was much like what the Korean government did to promote its own home auto industry. Indonesian government announced that the national car maker would get a “pioneer status if their products (1) were branded under their own, Indonesian-owned mark; (2) were produced domestically; and (3) used domestically made components. In particular they had to achieve a minimum of 20%, 40% and 60% local content by the end of, respectively the first, second and third year of operation” (Crawford and Berkeley). American firms just could not enter the market due to stringent state norms and dictations. However, Kia motors of Korea made a joint venture with a local firm and ensured that the above mentioned requirements were fulfilled so that they get pioneer status. Also, being an Asian entity, it has the knowledge into requirements of Indonesia which helped it to launch suitable models. Challenges faced currently by Korean Auto Industry R& D is a major challenge faced by the Korean Automobile industry currently. In past, the Korean growth may largely be attributed to Capital and Labour inflow. While procurement of technology from foreign partners is convenient for a short while, in long term, to sustain the same level of growth, the industry will have to invest heavily in technological advancements. Lower Labour Productivity is also a major challenge in front of Korea. As the Korean Government adopted the captive market strategy to build volumes in automobile production, the exposure of indigenous manufacturers to world best practices was limited which resulted in inefficient processes and inability to meet international quality standards. Once the industry partially opened to global competition it brought erstwhile neglected issues to the front such as low productivity and inefficiency in production process. Labour productivity, in terms of vehicles produced per employee, for the twenty year period (1954-1975) was only 8.6% for Hyundai while it was13.8%and 12.9% for Toyota and Nissan respectively for the same period (McKinsey Global Institute). Korean auto industry also faces a big challenge of management of its companies. While the old chaebols are gone, there is a serious dearth of a proper management structure which reflects transparency and accountability along with the responsibility of running the company. Over capacity is another challenge for Korea. In a bid to become number one auto maker, most of the Korean companies have proliferated into all the car segments which has resulted in huge capacity wastes. As per a McKinsey report, “Korea’s average production of large/premium cars and SUVs is 16000 and 35000 respectively’ which is way below the performance of 100,000+ needed for economic stability. Hence, Korea has very low capacity utilization. Recommendations It is recommended that Korea focuses on indigenous R& D instead of transfer of technology. Technology transfers usually result in ‘me too’ products and are not received as original efforts. Also, it is really difficult to differentiate a product without differentiating product features. Hence, Korea should increase its budgetary spend on R&D at home turf. It is also recommended that Korean Auto industry should improve its labour productivity to be more powerful in international arena. This can be done by adopting the processes of lean production (multi-tasked jobs), trimming the workforce and sharing the knowhow with suppliers and involving them in the design process (as done by Japan). If the suppliers are involved right from the design phase, any last moment technological change can be efficiently handled and it will not leave the suppliers groping in the dark. It will also reduce the original equipment manufacturers workload of carrying out sub-assembly of parts as the same can be handled by suppliers if they are properly equipped. Further it will eradicate the need of indirect labour force which is usually engaged in trouble shooting the technological obstacles of the suppliers (McKinsey Global Institute). It is also important that the Korean auto industry takes step in the direction of management innovation since it is as important as technological innovation (Champy). Management innovation in terms of structural reengineering and lean management would lend the much desired credibility to the way business is done. It would also enhance the role of project managers which is crucial in the development process of an auto firm. A project manager has direct control over lead time, quality and designs. More authority to him would mean definite improvement in the process. Korea also needs to focus on quality to beat its Japanese counterparts. Since the quality issues in Korean models are more a result of tight scheduling and lack of communication, it is expected that through lean production and lean management, its product quality can also be improved. More importantly, Korea needs to tackle the issues of over capacity by better capacity utilization. The industry requires restructuring so that spare capacities may be eliminated and economies of scale can be implemented. Also, instead of acting as competitors, the Korean firms should act as partners in progress by sharing their knowhow and increasing mutual camaraderie. Conclusion Korean Auto industry is a result of more than three decades of concentrated efforts and a single vision to make it the backbone of Korean economy. It has grown from a mere assembler to a creator in its own right. The learning curve was not a smooth one, although the difficulties faced by entry of imported cars and foreign players have been a blessing in disguise for the industry. The above mentioned situation made it introspect and come out of parental control. It has started looking at rising to even greater ranks in global market not only on the basis of quantity but also on quality. It still needs to make itself self-reliant in terms of research and development which is also being realised by the industry regulators. Thus, it is expected that soon the industry would set its attention on indigenous R&D. Needless to say, that with efforts and focus on the aim; Korean auto industry is very much alive and running in the world auto race. Works Cited Champy, J. Reengineering Management: The Mandate for New Leadership. New York: Harper BusinessPublications, 1995. Crawford, Beverly and UC Berkeley. “Asia Beckons America:The Case of the Automobiel Industry.” Palgrave Press. Pagrave Press, 2001. 7-8. Greenbaum, Alex. “The Globalization of the Korean Automotive Industry.” Economic Strategy Institute (2002): 9. Korea Automobile Manufacturers Association. The Korean Automobile Market: Cooperation and Competition under Globalization. Seuol: KAMA, 2003. Korean Development Bank. “Automobiles.” Industry in Korea (1989): 175. Lee, Dong-Ok, et al. “The Korean Automobile Industry: Challenges and Strategies in the Global Market.” Journal of International Marketing (1996): 86. McKinsey Global Institute. MGI Korea Report - Automotive. Quarterly. Seoul: Mckinsey, 2002. Modi, Chirag and etal. “Comparison of Asian and North American.” 2005. Ravenhill, John. “FDI in the Korean Auto Industry.” IFRI (2005): 10. Stern, J J and etal. Industrialization and the State: The Korean Heavy and Chemical Industry Drive. MA. Cambridge: International Centre for Economic Growth, 1992. Read More