CASE STUDY: Global Capacity Expansion Strategies
of Two Korean Carmakers
This study was motivated by an empirical observation that two Korean carmakers, Daewoo and Hyundai,
despite some of their structural similarities, have pursued very different globalization strategies. From indepth case studies and extensive interviews with top managers, the lessons we learned are as follows.
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• Being direct competitors in the Korean automobile industry has affected the firms' globalization
strategies to a great extent. Each company took into account its competitive position vis-à-vis the
other's when forging its global strategy. For instance, Daewoo focused on expeditiously achieving
economies of scale by targeting the East European markets for its overseas capacity expansion, in
a way to overcome its manufacturing cost disadvantage in the domestic market vis-à-vis
Hyundai's. Likewise, Hyundai's globalization strategy, exporting supported by technological
advancement, was driven by an implicit assumption of its competitive advantage vis-à-vis
Daewoo's.
• This initial pattern of decisions was formed mostly by such determining factors as top
management's commitment to specific strategic decisions and resources, both managerial and
financial, from each company's parent business group, chaebol.
• Subsequently, it was altered or reinforced as each company accumulated different learning
experiences in the global market.
• Unless the learning process is detected early and well managed, however, it can do as much harm
as good to the company.
Two Korean carmakers and their globalization
strategies
First, we define globalization as a process through which a company endeavors to gain competitive
advantage by dynamically (that is, over time) employing different “global strategic levers” (for example,
strategic dimensions such as configuration, coordination, market participation, competitive moves, and so
forth) on a global scale.
Both Daewoo and Hyundai belong to large business groups in Korea–chaebols. These business groups
exert enormous economic influence in the Korean economy. For instance, the combined sales revenue of
the four largest chaebols in 1996 was about 55% of the Korean GNP. As of early 1999, Daewoo and
Hyundai were among the big four.
Daewoo Motor Co. Ltd
Daewoo started its car business in 1978 after acquiring then Saehan Motor Co., owned by The Korean
Development Bank (KDB). KDB acquired Shinjin Motor Co. that was renamed to Saehan shortly after the
takeover. Shinjin was a joint venture with GM, and Daewoo retained the joint venture relationship with
GM until 1992, when the two companies, GM and Daewoo, found it impossible to reach any consensus in
managing the company.
After the breakup with GM, Daewoo promoted a new slogan “Global Management,” and pursued
globalization vehemently. Figure 3.6 briefly describes Daewoo's globalization history: we divide it into
three stages: domestic, export, and globalization.5 During the “domestic stage,” Daewoo struggled to
become a viable automobile company in Korea. As we discuss later, the Korean automobile industry has
long been dominated by Hyundai. As of 1993, Hyundai enjoyed almost 50% market share in Korea,
whereas Daewoo held only 20%. Daewoo started exporting in 1986. However, it was not particularly
successful, either. In the exporting front, Hyundai has been the commanding force as well. As of 1993,
Hyundai accounted for almost 58% of cars exported by Korean companies.
Figure 3.6 Daewoo's globalization
Faced with this enormous hurdle in the domestic market, Daewoo sought other ways to evade this impasse
and found globalization an ideal answer. In 1994, it started globalizing in earnest: it acquired FSL and FSO
in Poland successively and Rodae Automobile S. A. in Romania. As of 1997, Daewoo globalized into nine
countries where it was managing 11 manufacturing and 30 marketing subsidiaries.
Daewoo's globalization–Functional and geographic
expansion
Daewoo's globalization can be characterized by its dual approach: it has concentrated on manufacturing in
Eastern Europe and the Asia-Pacific, while it has heavily invested in marketing in Western Europe.
From Figure 3.7 and Figure 3.8, we clearly identify the patterns of Daewoo's globalization. Figure 3.7
shows the functional expansion by geographic region, while in Figure 3.8 we highlight Eastern and
Western Europe since Daewoo had explicitly focused on these regions. Based on these figures, we infer
that Daewoo's globalization pace was quite fast: it took less than four years for Daewoo to increase its
capacity of foreign operations and marketing, which more than quadrupled. Another interesting observation
is related with Daewoo's heavy emphasis on the Eastern European markets for its manufacturing
destinations.
Figure 3.7 Daewoo's globalization by function
Figure 3.8 Daewoo's globalization by region
Hyundai Motor Company
In December 1967, Hyundai Motor was established with technological help from Ford. At the outset,
Hyundai set up business goals that emphasized technological independence and development of its own car
models. In 1972, the alliance between Ford and Hyundai broke up. Since then, Hyundai completed its
manufacturing plant complex and embarked on developing its first “independent car model,” which
succeeded by introducing the compact car “Phony” in 1976. Hyundai became the dominant player in the
Korean car market, enjoying 43.6% of that market. In 1976, Hyundai for the first time exported its “Phony”
to Ecuador. Following its first foreign export, Hyundai advanced its target to focus on the North American
market by setting up its sales subsidiary in Canada in 1983. Two years later, Hyundai developed its second
car model “Excel,” which made its debut in the new market with an impressive success. Because of this,
Hyundai got more confident and opened its first R&D center in the United States in 1986. Two years later,
Hyundai built its first foreign manufacturing subsidiary in Canada for the North American market.
Around the early 1990s, the North American market suffered from rapid contraction, and Hyundai had to
look for other markets, especially in Europe. Due to this difficulty, Hyundai had to suspend its operations
in Canada. As of 1997, Hyundai was operating three R&D centers abroad, three manufacturing
subsidiaries, about 10 technical arrangements, and three foreign sales subsidiaries, plus many dealers in
other countries (see Figure 3.9).
Figure 3.9 Hyundai's globalization
Hyundai's globalization–Functional and geographic
expansion
As in Figure 3.10, Hyundai chose the North American market as its globalization destination. However,
Hyundai's entry into North America was not always painless: its manufacturing subsidiary in Canada had
never become a viable business, and, it eventually closed in 1993. Hyundai concentrated more on R&D
than manufacturing in North America, but it did not try to expand rapidly: its primary objective was to get
technological knowledge and market information. Until very recently, Europe, West and East alike, has
never been an attractive market to Hyundai. Only quite recently, like Daewoo, Hyundai started expanding
into less advanced regions such as the Asia-Pacific and Africa (see Figure 3.11). The main motivation here
was to gain access to emerging markets.
Figure 3.10 Hyundai's globalization by function
(a) Manufacturing
(b) R&D
Figure 3.11 Hyundai's globalization by region
(a) North America
(b) Asia-Pacific
Comparative study
Daewoo versus Hyundai as chaebols–As chaebol companies, Daewoo and Hyundai have much in common
in terms of structural characteristics: both are highly diversified conglomerates, heavily dependent on debt-
financing, and have focused on exporting as their primary growth engines. Despite these structural
similarities, Daewoo and Hyundai are different in subtle ways. As summarized in Table 3.1, we see key
differences between them.
Using total assets as a criterion to determine resource availability at the business group level, we infer that
Hyundai has more potential to deploy resources for supporting its competitive position in the industry.
Moreover, automobile manufacturing fits better with Hyundai's core competence than Daewoo's. The
Hyundai Group as a whole has expanded its business portfolio, which is firmly centered on heavy
industries such as automobile and heavy machinery, whereas the Daewoo Group has specialized in light
industries such as textile and trading. Hyundai was also enjoying its first-mover advantage: by the time
Daewoo entered the car market in 1978, Hyundai had solidly established itself as the leader in the industry.
Managers' thoughts on globalization–In order to find out why each firm has pursued a particular
globalization strategy, it is useful to see inside the minds of the key decision-makers at the firm. There are
multiple sources such as company annual reports and news clips. Here we show two quotes, one Daewoo
and the other Hyundai. They attest what the top managers at each company believed had motivated their
company's globalization. The time of the quotes is 1994, around which the two companies embarked on
globalizing strategically.
Daewoo Motor President Taegu Kim (Annual Report and Chosun Daily on January 4, 1994):
… This year, Daewoo Motor Company will globalize in earnest. We will concentrate all of our effort on
reaching a production capacity of 2 million cars per year. But, we cannot achieve this level of scale by
staying in the Korean market alone. Since it is dominated by Hyundai which has already established huge
capacity, the Korean domestic car market becomes more saturated in terms of manufacturing capacity and
thus less attractive for further investment in the capacity. Therefore, it is critical to shift our attention to
foreign markets for capacity increase. … We will acquire foreign manufacturing sites and continue plant
construction projects …
Hyundai Motor President Seongwon Jeon (Annual Report and Chosun Daily on January 4, 1994):
… This year is very important for Hyundai Motor Company, which makes it its primary objective to
become one of the world's top 10 carmakers in the year 2000. To achieve technological independence, we
try to improve our quality level to the last 1% and focus more on quality than quantity for our export
business. We will produce 1.15 million cars this year. … Considering our recent experience in Canada
[closing the manufacturing plant], we decide to concentrate more on technological improvement than
capacity expansion, which should be planned more cautiously. … We plan to sell 740,000 cars in the
domestic market and export 410,000 cars, worth $8.5 billion, increased by 21.5% from last year. …We will
invest more than $40 million in technology development to achieve technological independence–we will
complete developing medium-size engines and airbags independently–and continue R&D for cars using
alternative energy sources such as electronic cars. …
From what the top managers said, we deduce the following. Regarding globalization, the top manager at
each company had clear objectives, which were very different from the other's. The Daewoo Motor
president was determined to achieve quickly economies of scale by expanding the manufacturing capacity
abroad, whereas the Hyundai Motor president focused on R&D, exporting strategy, and domestic capacity
increases rather than an overseas capacity increase.
Also from the Daewoo Motor president's quote we see that the primary reason for the global capacity
expansion in that scale was related to the competitive situation in the domestic market. He specifically
pointed out the market dominance by Hyundai and suggested global capacity expansion as a means to
overcome Daewoo's competitive disadvantage.
Comparing the quotes with the actual patterns of capacity expansion by the two companies (see Figures
3.12 and 3.13), we find consistency. It is reasonable to say that the top managers' perceptions, as well as
beliefs, shaped the firms' globalization strategies. Alternatively, the top managers were simply reflecting
what had been happening in their companies' globalization.
Global manufacturing capacity expansion as part of global strategy–Expanding manufacturing capacity
overseas is part of globalization strategy. We show how each company has globalized its manufacturing
capacity. From Figure 3.12, it is clear that Daewoo's overall capacity expansion has occurred in a much
shorter period and in a much more dramatic manner than Hyundai's. Daewoo's compounded rate of
capacity increase from 1988 to 1997 is about 32%, whereas Hyundai's only 10%. The rapid expansion is
more apparent in recent years: it was largely fueled by adding more manufacturing capacity overseas.
Figure 3.13 indicates that Daewoo's globalization pace has been much faster than Hyundai's, when the
globalization velocity is measured by the speed at which the company's manufacturing capacity multiplies.
Between 1989 and 1996, Daewoo's foreign production capacity increased from practically zero to more
than 1.2 million cars per year, while Hyundai's remained almost unchanged at about 100,000 cars per year.
On the other hand, the increase in Hyundai's domestic production capacity seems comparable with
Daewoo's during the same period.
Figure 3.12 Manufacturing capacity expansion–Daewoo
and Hyundai
Note:
–Deawoo's compounded annual rate of capacity increase: about 32% from 1988 (180,000 number of cars
per year) to 1997 (2,200,000).
–Hyundai's compounded annual rate of capacity increase: about 10% from 1988 (640,000 number of cars
per year) to 1997 (1,500,000).
Figure 3.13 Domestic versus foreign manufacturing
capacity expansion
This comparative study makes it clear that the two carmakers, Daewoo and Hyundai, have pursued very
different globalization strategies. As pointed out earlier, the primary research objective of this paper is to
find out “why and how?”
A theoretical model–The global LPM
Incorporating our case studies into the LPM (see Figure 1.16), we put forth an extension, the “global
LPM,” which offers a coherent and convincing explanation for the cases (see Figure 3.14).
Determining factors such as organizational capability influence the firm's competitive position in the
domestic market. Along with the determining factors, the firm's competitive position shapes its
globalization motivation, goal, or objective. This globalization motivation dictates what global strategy the
firm should pursue. Initially, the firm has a perception that the chosen strategy would work fine in the
global market: it is logical because after all, the chosen strategy fits well with its organizational capability
and also its competitive position in the domestic market.
Believing in the effectiveness of the chosen globalization strategy, the firm decides which market to
concentrate on and which particular value chain activity (business function) to globalize and how. Also,
the firm probably has to decide how fast it could afford to expand into the global market. Commitment to
the selected strategy would eventually bring about higher performance that reinforces the “perception”. 6
The critical moment arrives when the firm evaluates its performance in global operations following the
selected strategy, and asks “Has it been successful or not?”
Should the strategy prove successful, the firm should feel satisfied with its choice of the strategy and
reinforce it. This process will continue iterating and it will accelerate until serious challenges indicate
otherwise. What if the selected strategy fails to realize the promised performance improvement in the
global market? When the strategy proves unsuccessful, the evaluation sends a negative feedback to the
company, which will try to rectify the problem by adjusting its globalization strategy. With this new
strategy, the firm restarts its global expansion dynamics.
Globalization dynamics–Speed and global marketfunction mix
Applying the learning propensity theory,7 we propose that initially managers at each company developed
perceptions consistent with their company's globalization strategy, which was in turn forged by determining
factors and the company's competitive position in the Korean market. Then, each firm's patterns of
globalization should have reflected its globalization strategy.
Daewoo has expanded its manufacturing function into less advanced countries, especially in Eastern
Europe, quite expeditiously. On the other hand, Hyundai opted to be much more cautious in expanding its
manufacturing function overseas. Rather, it focused on R&D in more advanced countries for learning and
innovation (see Figure 3.15).
Global learning propensity dynamics applied to Daewoo
and Hyundai
Putting together the pieces discussed above, we reconstitute the globalization dynamics for each of the
companies. Figure 3.16 shows Daewoo's starting with a globalization strategy to pursue economies of scale,
since the company needed to increase its capacity fast in order to overcome its cost disadvantage vis-à-vis
Hyundai in the domestic market. Being consistent with the strategy, Daewoo entered Eastern Europe,
where it acquired existing manufacturing capacity. During that process, the company seldom encountered
any serious difficulty, and that lack of problems reinforced Daewoo's propensity to expand its capacity in
the region. It was due to the self-reinforcing and thus accelerating nature of the learning propensity. It is not
easy, though, a priori to tell whether a lack of challenges, and therefore failures, during the globalization
process is good or bad in the long run.
Figure 3.16 Global learning propensity dynamics–
Daewoo
In contrast, Hyundai showed more complicated dynamics (see Figure 3.17). Initially, the company focused
on R&D and export. After its first export under its own brand name to the North American market became
a success, Hyundai redirected its globalization strategy so as to expand its manufacturing capacity into
Canada. This is the first cycle in Figure 3.17. But, its operations in Canada were not successful. From its
failed operations in Canada, Hyundai learned a valuable lesson and adopted a more cautious approach to
expanding its capacity overseas (second cycle in Figure 3.17). Eventually, Hyundai decided to return to its
original globalization strategy: developing technologically independent cars and exporting them to
advanced markets. This started the accelerating reinforcement cycle, the third one in Figure 3.17.
Managerial implications and lessons
Figure 3.17 Global learning propensity dynamics–
Hyundai
Learning reinforced or sometimes slowed each firm's globalization process. 8 After the successful new car
development based on its own independent R&D, Hyundai adjusted its globalization strategy and started
operating a manufacturing subsidiary in Canada. But, it failed. This experience of failure, that is learning,
since became a powerful restraint on Hyundai's capacity expansion overseas. Rather, it returned to its early
strategy to focus on perfecting technology and exporting. On the contrary, Daewoo seldom confronted a
serious obstacle during its capacity expansion spree: its experience in overseas capacity expansion was selfreinforcing and accelerating. It is also worthwhile to note that as of late 1999, Daewoo went bankrupt
mainly due to its debt-financed capacity expansion in Eastern Europe. Many competing explanations are
possible. However, if we base our inference on the case studies in this chapter, Daewoo's globalization
velocity was well beyond the speed limit set by its organizational capability, and resource availability
should be blamed for its global debacle. This is another lesson: top management must be able to discern
positive from negative learning, in order not to trap their organization in a vicious self-reinforcing cycle.
During our interviews of top managers, we came across an interesting phenomenon. Manufacturing
companies can enjoy economies of scale with dispersed configuration. It is a counterintuitive observation!
Daewoo acquired several plants in Eastern Europe, resulting in a dispersed configuration, which Porter 9
said is not compatible with achieving economies of scale. What did Daewoo do? It manufactured a large
amount of parts in Korea so as to attain economies of scale, and shipped many of them to the overseas
plants for assembling. This observation motivates future research on the diverse ways to achieve scale
economies in the global market.
“… top management must be able to discern positive from negative learning, in order not to trap
their organization in a vicious self-reinforcing cycle.”
Reference:
Kim, Bowon. Supply Chain Management in the Mastering Business in Asia series. 1. VitalSource
Bookshelf. John Wiley & Sons (P&T), 10/21/05, 07/08/2012.
<http://digitalbookshelf.argosy.edu/books/9780470826089/id/appendix_3-1>