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. • 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>