Closing Case of Hyundai

1) What are the roles of comparative and competitive advantages in Hyundai's success? Illustrate your answer by providing specific examples of natural and acquired advantages that Hyundai employs to succeed in the global car industry.

ANS: Demand in South Korea is too low to sustain indigenous automakers like HMC and Kia, thus exporting is a necessity to attain the economies of scale needed to remain competitive in a tough industry. South Korea enjoys various national competitive advantages in the provision of cars such as abundance of production factors in cost-effective labor, knowledge workers, high technology, and capital.

The South Korean government devised a partnership system of close government/business ties, including directed credit, import restrictions, and sponsorship of specific industries. In part due to these efforts, Korea is home to a substantial industrial cluster for the production of cars and car parts.

2) In terms of factor proportions theory, what abundant factors does Hyundai leverage in its worldwide operations? Provide examples and explain how Hyundai exemplifies the theory. In What ways does Hyundai's success contradict the theory? Justify your answer.

ANS: It is a fact that Hyundai enjoys various advantages such as knowledge labor, inexpensive wage, low cost of input-goods (steel, tires…) which are profitably exported, but due to the government restrictions on imported goods, the factor proportions theory is misused.

3) Discuss Hyundai and its position in the global car industry in terms of porter's diamond model. What are the role of firm strategy, structure, and rivalry; factor conditions; demand conditions and related and supporting industries to Hyundai's international success?

ANS: With many competitors battling for market share, carmakers such as Toyota, Nissan, Honda, Hyundai, General Motors, Ford, DaimlerChrysler, Renault, and Volkswagen operate on relatively thin margins. The automotive industry has been suffering from excess production capacity. Although there is a capacity to produce 80 million cars globally, total global demand runs at only about 60 million a year. Thus, car manufacturers typically employ only 75-80 percent of their production capacity.

Their “10-year warranty” strategy was a major turning point for Hyundai, and they set about designing and building cars based on much higher quality standards. While still maintaining low prices, HMC was able to provide substantial extra value to consumers. By investing in Kia, HMC gained access to the firm’s competitive advantages in R&D and production. During its lifetime, Kia had managed to acquire a substantial base of highly knowledgeable workers, engineers, and design staff.

Together, the two firms created synergies and economies of scale in R&D, engineering, purchasing, quality control, and marketing. HMC also invested in R&D centers in North America, Japan, and Europe. To gain a competitive edge, HMC must not only seek out cheap labor, it must also source from locations that can supply low-cost input goods (such as engines, tires, and car electronics). HMC invests heavily in various value-chain activities and uses FDI to develop key operations around the world.

Management chooses foreign locations based on the advantages they can bring to the firm’s global business. R&D is targeted to developing safer, more convenient automobiles of superior quality. HMC is developing environmentally-friendly technologies that emphasize fuel efficiency. HMC conducts market research to help with choosing designs, as well as interior and exterior styling of its cars. Domestic demand in South Korea is some two million vehicles; total productive capacity had reached five million.

Exporting was a necessity. Late 1970s HMC began an aggressive effort to develop engineering capabilities and new designs. Instead of FDI (as in Canada), HMC began exporting to the U. S. market with the Excel as an economical brand with a $4,995 price tag. The car was soon a big success with exports rising to 250,000 units per year. HMC produces about a dozen models of cars and minivans, as well as trucks, buses, and other commercial vehicles. Popular exported models are the Accent, Elantra, and Sonata.

4) The Korean Government has been instrumental to Hyundai's success. In terms of national industrial policy, what has the government done to support Hyundai? What can the government do to encourage future success at Hyundai? What can the government in your country do to support development or maintenance of a strong auto industry?

ANS: The government participates in the firm’s success by developing a partnership with the firm, giving credit, import restrictions of goods and products related to the firm, and sponsorship of specific industries. In time of bankruptcy, the government can always be there to support the firm by inflowing money in it.

5) Consistent with Dunning's Eclectic Paradigm, describe the ownership-specific advantages, locations-specific advantages, and internalization advantages held by Hyundai. Which of these advantages do you believe has been most instrumental to the firm's success? Justify your answer

ANS: By investing in Kia, HMC gained access to the firm’s competitive advantages in R&D and production. HMC built a factory in Turkey in 1997, in India in 2000, (with a second plant in 2007), and in China in 2002. The main advantages of these locations are the availability of inexpensive, high-quality labor and proximity to the Middle East and Western Europe. Internationally, in its FDI, it is settled in countries that can supply low-cost input goods (such as engines, tires, car electronics). According to my own perception, all those advantages are equally important for the firm’s success because each one of them brings its own benefits to the firm’s profitability.