The Hyundai Way: The Evolution of a Production Model

 
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The Hyundai Way: The Evolution of a Production Model
global asia Feature Essay The Hyundai Way: The Evolution of a Production Model

   The Hyundai Way:
   The Evolution of a
   Production Model
                                                       By Hyung Je Jo

During the recent financial
crisis, automakers around the
world reeled as one economy
after another sank into recession,
with American car makers especially
badly hit. One automaker, however,
weathered the storm better than others:
South Korea’s Hyundai Motor Company.
Hyung Je Jo, a visiting professor of sociology
at the University of California, San Diego, takes
a look at the unique production model that has
evolved at Hyundai and compares it to the much
vaunted Japanese model.

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In 1989, Alice Amsden, a noted political econ- automakers such as Honda and Toyota — long
omist at the Massachusetts Institute of Technology known for quality.
(MIT), argued that South Korea was emerging            Hyundai’s transformation from being cited as
as Asia’s next giant. Since then, the question of an example of why South Korea could never be-
whether South Korea will become another ad- come another Japan into being in the same league
vanced economy like Japan has been a hotly de- as Japan’s top auto manufacturers has attract-
bated issue in academic circles throughout the ed considerable interest from business scholars.
world. The Korean auto industry is at the center What made Hyundai’s resurrection possible?
of that debate, because it represents an important
part of the national economy in terms of its im- Hyundai’s Production Model
pact on employment as well as its industrial link- I will use the concept of a “production model”
age effects. The purpose of this essay is to explain to find clues to explain the puzzling success of
the success of Hyundai Motor Company, because Hyundai Motor. A production model is defined
the company epitomizes the remarkable perform- as a company governance structure that enables
ance of the Korean economy as well as the Korean a durable implementation of a specific profit
auto industry over the last several decades.         strategy. It is composed of production organiza-
  In 1990, the International Motor Vehicle tion, product policy, and employee relationships.3
Program (IMVP) group at MIT, which hailed Applying the concept of a production model to the
Japan’s “lean production system” as the ideal case of Hyundai, I will explain the characteristics
manufacturing model, maintained that the pros- of its particular production model as follows.
pect of South Korea becoming another Japan             First, Hyundai has reduced its dependence
was virtually impossible. They cited the failure upon direct labor, while increasing its depend-
at the time of Hyundai to penetrate the US mar- ence upon production facilities by raising levels
ket.1 And yet, since the global recession that fol- of automation and information technology in the
lowed the financial crisis of 2008, Hyundai’s per- production process. Hyundai’s production model
formance has been far superior to that of oth- is largely led by engineers who take charge of the
    er major automakers. While General Motors whole process, while the role of factory workers
             (GM) descended into financial col- is limited to supporting the operation of the pro-
                    lapse and Toyota faced the duction facilities. Among the production work-
                             crisis of massive re- ers, indirect workers play the main role in main-
                                      calls related tenance and quality control in the operation of
                                                     the production facilities to ensure no stoppages,
to safety                                            while direct workers play a minor role in preven-
issues, Hyundai                                            tive maintenance and monitoring — which
was the sole automaker                                              complements the indirect workers’
that expanded both its sales vol-                                         job. Most of the direct pro-
ume and its US market share in 2009.2                                           duction workers could
Moreover, Hyundai vehicles have received fa-                                          be easily re-
vorable quality and reliability evaluations from
various institutes over the last several years.
Consumer Reports, for example, announced
in April this year that Hyundai ranked fourth
among automakers in a synthesis of multiple
evaluations in the US market. This meant that
    Hyundai had already surpassed the perform-
        ance of US automakers and was receiving
           evaluations similar to top Japanese
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The Hyundai Way: The Evolution of a Production Model
global asia Feature Essay The Hyundai Way: The Evolution of a Production Model

placed by other workers, because they do simple    Japanese model.
jobs that don’t require a high degree of skill.    Hyundai pursued
   Second, Hyundai has increased the impor-        an independent
tance of product development, while establish-     strategy to develop
ing unique procedures to improve the quality lev-  and produce its own
el during the late stages of product development.  products after a failed
At the stage of “pilot production,” research centereffort to cooperate with
engineers work to meet the requirements of pro-    the Ford Motor Company to
duction lines in advance, while a small number     produce Ford’s Cortina model
of experienced workers produce test models in a    in the early 1970s. Through a
large-scale pilot plant located near the research  process of trial and error, Hyundai
center. During pilot production, Hyundai solves    gradually accumulated experience pro-
about 90 percent of the problems that could be     ducing its own products, incorporating
encountered during mass production. The use        auto technology it imported from abroad.
of a large pilot plant is, therefore, one important   Hyundai benchmarked its production mod-
characteristic of Hyundai’s production model.      el against the Japanese automakers Mitsubishi
   Third, a significant portion of Hyundai’s pro-  Motors, with which it had a joint venture for dec-
duction process is outsourced to parts makers,     ades, and Toyota. Since the early 1980s, when it
and many outsourced parts are sub-assembled        developed a vehicle to export to the US, Hyundai
into modules before going to the final assembly    sought to adopt the Japanese production model,
line. Modular production is defined as a produc-   using highly skilled workers who participated ac-
tion method in which parts are sub-assembled       tively in the production process on the shop floor.
into interchangeable units to be supplied to the   Over time, though, the different circumstances of
final assembly line.4 At Hyundai, outsourcing has  manufacturing in South Korea caused Hyundai
been facilitated by modular production. This is    to evolve in a direction that now competes with
another characteristic of Hyundai’s production     Japanese automakers.
model. By combining outsourcing with modular          How did Hyundai’s production model emerge
production, Hyundai has gained huge benefits       and evolve? First, the industrial policy of the
not only in terms of cost savings but also in im-  South Korean government contributed. In the
provements in quality and productivity. Hyundai    early 1970s, the Korean government announced
has therefore been able to concentrate on prod-    a “long-term promotion plan” to help domestic
uct development and marketing by reducing the      automakers develop original products, starting
burden of parts production.                        with local parts production. The policy helped
   These three characteristics of Hyundai’s pro-   give birth to Hyundai’s original model, the Pony.
duction model clearly contrast with the Japanese   The Korean government also provided domestic
production model, which consists of the follow-    automakers with generous amounts of financing
ing: 1) heavy dependence on highly skilled direct  and protected them from imports. When the do-
workers who actively participate in the production mestic auto sector was suffering from over-invest-
processes; 2) development of products in close in- ment, the government even stepped in to limit the
teraction with the requirements from factory pro-  number of automakers. With the help of these
duction lines rather than in pilot plants; 3) low  industrial policies, Hyundai was able to exploit
use of outsourced modular production because of    the economies of scale in the domestic market,
long-term stable relationships with parts makers.  which it soon came to dominate, before casting
                                                   its eyes abroad.
the Evolution of Hyundai’s Model                      Second, the technological “nationalism” of
Ironically, Hyundai’s production model was an un- Hyundai engineers contributed to the emergence
intended consequence of its efforts to imitate the of Hyundai’s own production model. Even though
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Hyundai heavily invested                             own state-of-the-art technology to produce origi-
                                                     nal products on a mass scale.
                                                        Third, unstable labor relations for companies
in the automation of                                 in South Korea paradoxically contributed to the
                                                     evolution of Hyundai’s production model. During
production processes                                 the country’s early stage of industrialization, the
                                                     Korean government didn’t allow workers to or-
rather than developing                               ganize in order to keep wages low in the ma-
                                                     jor industrial sectors, including the auto indus-
the skills of workers,                               try. However, with the advent of democracy in
                                                     1987, labor unions began to take root, including

because it did not expect                            at Hyundai, whose union played a leading role
                                                     in the Korean labor movement during the 1990s.

education and training                               The mass layoffs experienced during the 1997-
                                                     98 financial crisis only hardened the determina-
                                                     tion of unions — including at Hyundai — to seek
to have positive effects                             higher wages and greater job security.
                                                        The adversarial labor relations at Hyundai
given the deep distrust                              pushed the company to develop a model that
                                                     was clearly different from the Japanese model’s
between management                                   reliance on high-cost workers. Japanese auto-
                                                     makers have heavily invested in the education
and labor. Consequently,                             and training of their workers, because of the ex-
                                                     pected benefits. In contrast, Hyundai heavily in-

Hyundai developed                                    vested in the automation of production process-
                                                     es rather than developing the skills of workers,

a ‘labor-exclusive’                                  because the company did not expect education
                                                     and training to have positive effects given the
                                                     deep distrust between management and labor.
production model, which                              Consequently, Hyundai developed a “labor-ex-
                                                     clusive” production model, which minimizes de-
minimizes dependence                                 pendence on factory workers.
                                                        In summary, even though Hyundai tried to imi-
on factory workers.                                  tate the Japanese, it eventually developed its own
                                                     model under the influence of South Korea’s in-
                                                     stitutional environment. The industrial policy of
Hyundai incorporated different foreign technolo-     the Korean government provided Hyundai with a
gies in the early stages of its development (1967-   domestic springboard to take on the world mar-
1990), the company’s engineers aspired to devel-     ket. This, combined with technological nation-
op and produce original products. This played a      alism among company engineers and adversar-
major role in the development of Hyundai’s pro-      ial labor relations, resulted in Hyundai adopting
duction model. Moreover, Hyundai’s senior man-       a production model that minimizes its depend-
agement gave engineers relative autonomy to de-      ence on the workforce. In other words, unlike the
velop new ideas, compensated them generously         Japanese, the company developed an innovative
and promoted them within the company. As a re-       model that depends on the flexibility of automat-
sult, by the later stage of Hyundai’s development    ed production facilities, not the functional flex-
(1991-present), the company began to rely on its     ibility of workers.
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global asia Feature Essay The Hyundai Way: The Evolution of a Production Model

Table 1 Production, Sales and Overseas Production of Hyundai Motor Company
Source: Korean Automobile Manufacturing Association, 2010.

                                                        2001        2003         2005          2007         2009
 Domestic Production (A)                                1,513,000   1,646,000    1,684,000    1,707,000     1,607,000
 Domestic Sales                                         707,000     630,000      571,000      625,000       703,000
 Export Sales                                           801,000     1,012,000    1,131,000    1,076,000     911,000
 Overseas Production (B)                                260,000     410,000      699,000      911,000       1,493,000
 % of Cars Exported                                     52.9        61.5         67.2         63.0          56.7
 % of Cars Produced Overseas (B/(A+B))                  14.7        19.9         29.3         34.8          48.2

Expansion of Overseas Production                                     in 2007.5 Considering that the Montgomery plant
Hyundai Motor has increased its share of the ex-                     started production only in 2005, this perform-
port market as well as the domestic market. As                       ance is impressive. Japanese transplants took ap-
shown in Table 1, Hyundai produced 1,684,000                         proximately 7-8 years before their quality or pro-
units and exported 1,131,000 units, despite the                      ductivity levels approached that of similar plants
economic recession in 2009. The proportion of                        in Japan.
exports as a share of total production was 56.7                         Hyundai was previously indifferent toward
percent in the same year. Hyundai’s share of                         overseas production due to its failure to properly
the US market — the world’s most competitive                         manage its Bromont plant in Canada in the early
auto market — has also continued to increase.                        1990s. However, Hyundai finally decided in 2002
Hyundai Motor estimates that it accounted for                        to build the Montgomery plant following success
7.1 percent in the US market in 2009 (this figure                    in the late 1990s with plants in Turkey and China.
includes Kia Motor Company).                                         The decision to manufacture in the US was con-
   The increase of Hyundai’s market share in the                     sidered inevitable for Hyundai to prevent trade
US reflects the success of its ambitious market-                     conflicts and to shield itself from exchange-rate
ing strategy. Hyundai has used unique market-                        fluctuations in the dollar.
ing strategies such as a 10-year, 100,000-mile                          Even though Hyundai was very anxious about
warranty and the “Hyundai assurance program,”                        building its US plant, the outcome has been a clear
which allows a customer to return his car if he                      success and demonstrates that Hyundai’s pro-
loses his job. However, these strategies would not                   duction model is now easily transferable to other
have been possible without high-quality products.                    countries — more so than the Japanese produc-
Hyundai’s production model has decisively con-                       tion model. To transfer the Japanese production
tributed to the increase of its market share by con-                 model to the US, for example, Japanese automak-
tinually improving quality.                                          ers needed to recruit and train American workers
   Hyundai’s competitiveness has also been dem-                      for a long time to raise their skill level and mobi-
onstrated in its overseas production since the late                  lize the active participation of workers. Because
1990s. The products that Hyundai produces at its                     the Hyundai production model depends less on
US plant in Montgomery, Alabama, have reliabili-                     production workers than the Japanese model, it
ty ratings that compare favorably with Japan’s top                   is easier to transfer. To recruit and train American
automakers. For example, Consumer Reports rat-                       workers was relatively easy for Hyundai, because
ed the Hyundai Sonata on a par with the Toyota                       its production model doesn’t require high skill
Camry and the Honda Accord in the medium-                            levels and active participation. Hyundai’s trans-
size sedan segment in 2009. Also, Hyundai’s                          plant surpassed the performance of the original
Montgomery plant ranked second in productiv-                         plants in South Korea within two years, because
ity among North American auto assembly plants                        it benefitted from the flexibility of automated pro-
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global asia Vol. 5, No. 2, Summer 2010

duction facilities and a labor market in Alabama       needs to actively participate in setting favorable
that did not have militant unions. This environ-       standards for alternative auto technology, and
ment enables Hyundai to lay off workers in re-         adapt its production model to the new auto in-
sponse to changes in market demand, or to make         dustry paradigm.
use of idle time for work place innovation when           In the short term, Hyundai also needs to trans-
the production line happens to stop. Through this      form unstable labor relations into cooperative
experience, Hyundai’s management has learned           ones to utilize the flexibility of both production
that its production model functions even better in     workers and production facilities. With stable
places where it does not face the same labor envi-     labor relations, Hyundai could maximize its hu-
ronment as it does in South Korea.                     man resources as well as its technological edge.
  Hyundai has been rapidly increasing over-            Hyundai’s management needs to develop broad
seas production not only in European coun-             communication channels through which workers
tries such as Slovakia and the Czech Republic,         can voice their demands collectively.
but also in developing countries such as Brazil           By achieving these tasks, Hyundai’s produc-
and Russia. As shown in Table 1, the proportion        tion model would be sustainable as a long-term
of overseas production to total production was         best practice.
48.2 percent in 2009, up from 14.7 percent in
2001. When new production facilities in Brazil         Hyung Je Jo is Professor of Sociology at the
and Russia come on stream, this will exceed half       University of Ulsan, South Korea, and is
of Hyundai’s total output.                             currently Visiting Professor of International
                                                       Relations and Pacific Studies at the University
A Rosy Future?                                         of California, San Diego. He is the author of
Is the success of Hyundai’s production model           Hyundai Way: Is A Korean Production Model
sustainable? Can Hyundai’s production model            Possible? (Seoul: Hanul Press, 2005, in Korean.)
be established as another best practice distinct
from the Japanese model in the long term?              Notes
                                                       1 Womack, James P., Daniel T. Jones, and Daniel Roos,
  The world auto industry is now experiencing          The Machine That Changed the World (New York:
a revolution driven by the emergence of alterna-       Rawson Associates, 1990), 261-263
       tive vehicles that are less polluting and by    2 “Losing Its Shine,” The Economist, Dec. 12, 2009
                                                       3 Boyer, Robert and Michel Freyssenet, The Productive Models: The
               the fast growth of developing mar-      Conditions of Profitability (Palgrave Macmillan, 2000), 20.
                         kets.6 These two factors      4 Fredriksson, Peter, “Modular Assembly in the Car Industry,” European
                                 are closely inter-    Journal of Purchasing & Supply Management 8 2002, 221-233.
                                        related, be-   5 Wyman, Oliver, The Harbour Report North America 2008.
                                                       6 Freyssenet, Michel (ed.), The Second Automobile Revolution
                                                       (Palgrave Macmillan, 2009).
cause the lat-
ter makes the former
inevitable. That is, rising au-
tomobile use in developing coun-
tries has made air pollution worse, which
makes it imperative to develop alternatives.
   Considering these challenges, Hyundai’s pro-
duction model may not be sustainable in the
long term, because Hyundai is a late-comer in
the alternative market, even though it is com-
petitive worldwide in rapidly expanding emerg-
ing markets in the medium term. To make its
production model more sustainable, Hyundai
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