After a long, quiet period of what seemed suspended animation, the Hyundai Kia Automotive Group appears ‘back on the boil’. Implementing the conglomerate’s new era strategy was obviously dependent on the official outcome of its chairman’s fortunes.
For much of 2007 the South Korean public, Seoul stock-market and the auto-industry at large, have all waited to see exactly what future role Chung Mong-Koo would play. His role was undeniable, simply whether having to orchestrate from afar, or lead from the front. The September outcome was an expected one, witnessing his ‘freedom to rule’ underpinning a fresh sense of ambition exemplified by:
1. the target of a 20% rise in sales for 2008
2. the planned purchase of a 30% Shinhueng Securities stake.
The new sales targets, aiming to grow from 3.97m units to 4.8m, demonstrate the pace of change Hyundai Motor management believe is required to get back on track, the additional units coming from new Chinese and India plants coming on stream in what are recognised as primary markets. These come after previous highly successful plant investments in the US, Turkey and Slovakia.
Hyundai recognising some time ago that a “Japanese Quality-Korean Price” growth strategy was fundamental to the massive US market where domestic automakers where failing to provide lower-priced quality cars and for emerging markets where it could undercut Japanese marques and quickly gain a following. To this end the auto-industry essentially watched with wonder as the company rode this near perfect business model, becoming the 6th largest global VM.
But it wasn’t an easy ride. The 1997 Tiger economy crash and the domestic slowdown that followed demonstrated the need to export quality cars. And as the well managed domestic economy thrived once again South Korea became a proportionately more expensive country to produce in and export from; Hyundai faced with rising domestic overhead, across the board production costs given China’s exacerbation of Asian materials, energy etc demand and a strengthening Won. This lead to a tightening of local plant operations which dismayed Korean workers causing ultimately little affect strike action. Actually assisting the company by deflating production capacity and inventory. However, these combined challenges simply drove Hyundai to seek globally efficient production, localised production in major markets linked to regional research & engineering centres to ensure the catering of consumer tastes and to network with the local component supply base to avoid currency fluctuation problems and grow buyer-supplier relationships.
Today Hyundai’s achievements are self-evident, especially so in the US where it has achieved high consumer survey rankings year after year for more and more vehicle types. The initial 1980s baptism of fire in the US and continued tenacity there has created the learning and foundations for international spread. So as the tried and tested ‘glocalisation’ model marches onward it seems that the company’s senior staff are perhaps looking beyond the perfecting of car-making to other powerful business solutions to enhance corporate strength; especially so given Chinese and Indian ambitions to follow rapidly in their footsteps.
Given Korea’s industrial foundation in electronics (ie Samsung, LG etc) and a historical chaebol culture (though much divided after 1997) the country's long distinct competitive advantage over its Asian peers has been the field of electronics and semi-conductors. Relative to auto-electronics, whilst Hyundai does not profess itself to be further advanced than the Big 6 VMs in areas such as the development of Whole Vehicle Electronic Architecture (eg Canbus) / Genaral Telematics / Intelligent Transport Systems / Advanced Power Systems (eg 42V); given the essential core competence of Korea as an electronics hub and leader, these – long-awaited - breakthrough technologies could potentially be first made real by Hyundai. Yes it may have fallen behind from the likes of GM with OnStar and Ford with Sync technologies, but could the company leverage the electronics intellect of the nation to radically advance the electronic ‘consumer delivery’ content of its vehicles?
As mentioned, the once powerful chaebol network is today ‘fractured’. But if Hyundai Motor’s ambitions reflect our conjecture, the need to reconstruct a highly efficient vertically and horizontally integrated industrial base would be paramount.
Hyundai Motor already encompasses a low-value-creation, but obviously vitally important, steel division. But whilst publicly it proudly mentions electronics innovation, as far as we can assess, there is a disjoint in PR and the real-world ability to compete with benchmark competitors in the fields of hybrid propulsion, vehicle electrical architectures and user-interface info-media.
This leads us onto the possible powerful rationale for the 30% purchase of the Shinhueng Securities Brokerage.
The non-too-informative party line from Hyundai stands as: ““Our financial business remains small relative to our group size,”…“We have been considering entering the securities market as a long-term development agenda as we believe we could enhance synergies with the automobile business.” Yes there are definite financial synergies with the Financial Services and Card divisions, the addition of a brokerage to lure across present customers into playing the booming stock market (and latterly add a banking arm) makes sense indeed.
But is there another, closer to home, reason? Possibly.
We cannot discount the fact that various blue-chip players (from Banks to Construction Materials companies) could be securing brokerage assets to negate the (costly and sometimes problematic) ‘middle-man’ when seeking large scale purchases of other complimetary Korean companies…effectively endeavouring to slowly re-build chaebol conglomerates.
With very high competition for the acquisition of western sector counterparts and little political leverage to acquire often effectively protected emerging market peers, Korea’s industry leaders may be looking to re-group; each (if like Hyundai) have reached natural plateau of industrial core-competance.
Thus Hyundai may seek the dual advantages of:
1. a new revenue stream taking stock buy/sell commissions (from institutional & public clients) during a bull Korean market (with brokerage sector consolidation also promising to lift margins)
2. enabling direct access to global financial exchanges to buy-up complimentary sector company stock, their corporate bonds and possibly company notes.
This is only conjectural, but is the fundamental consideration too far fetched?
We don’t think so. The 5% Hyundai & 3.2% Kia stock drops at the announcement will be greatly reverted if this dual strategy ideal is ultimately unveiled.