Case questions, first read the case then answer the questions

Hyundai Motor Company in China IB-91 p. 39

Class M utomobile Market

Hyundai Motor Company in China IB-91 p. 39

Class M utomobile Market

Hyundai Motor Company in China IB-91 p. 39

Class M utomobile Market

Case: IB-91

Date: 09/24/08

HYUNDAI MOTOR COMPANY IN CHINA

At the turn of the twenty-first century, Korea‟s Hyundai Motor Company (HMC) announced ambitious plans to become a global leader in the automotive industry, and established plants in various parts of the world, including Europe, India, and North America. In 2002, HMC turned its attention to China, one of the world‟s largest and fastest-growing economies. China‟s burgeoning demand for automobiles was forecast to become the world‟s third-largest―even as the worldwide auto market was stagnating. In this light, HMC had selected China to be site of its largest, lowest-cost assembly and manufacturing base. So it was that HMC created a separate China Business Division to lead its move into the Chinese market (Exhibit 1). In May of 2002, HMC initiated a joint automotive project with Beijing Automotive Industry Holding Corp. (BAIC) and by October the Chinese government had approved the joint venture, leading to the establishment of “Beijing Hyundai.” By February of 2003, Beijing Hyundai rolled out its first midsize sedan, the EF Sonata.

Yet many were skeptical of Beijing Hyundai‟s chances. A number of the world‟s major auto makers were already established in the Chinese market, while Hyundai lacked an understanding of the distinct characteristics of Chinese consumers, distribution channels, labor markets, and parts suppliers. Moreover, while Hyundai enjoyed a strong reputation for quality in its home market, the Hyundai brand was generally seen as lower status in China. Sung-Kee Choi, senior executive vice president at the China Business Division of HMC, who was in charge of the planning and development of Beijing Hyundai in the entry period, explained:

When HMC entered the China automobile market, responses from other major automobile competitors and the media were lukewarm, as HMC‟s reputation was not high and HMC‟s joint venture partner, BAIC, was also a very low rated company when compared with competitors. They teased us as a marriage of two low ranked classes, and lowered their guard against us.

Undaunted, Beijing Hyundai rapidly established itself in the Chinese market, growing faster in its first few years than any other automaker in China (Exhibit 2), following the “quality management” strategy of HMC corporate CEO Mong-Koo Chung. Sung-Kee Choi explained:

Professors Jae-Gu Kim and Mooweon Rhee prepared this case in collaboration with Professor William P. Barnett as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Kisan Jo and Daegyu Yang served as research assistants.

Copyright © 2008 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business.

In 2003, the first year of our entrance to the China automobile market, the company sold 50,000 units of the EF Sonata model. The company achieved this result in a year, while such foreign automakers as Honda Motors took three years to achieve the same result. In 2004, the Elantra subcompact was included into the assembly line and both models combined sold 144,000 units, and then 234,000 units in 2005. With such a remarkable achievement, other major automobile competitors became fearful of Beijing Hyundai, and we became a special target for our competitors.

Bang Shin Kim, vice president in charge of strategic planning at Beijing Hyundai, described the ensuing competition as resembling the “warring states period” prior to the unification of China under the Qin dynasty. According to Kim, in 2008:

The China automobile market has become fiercely competitive, with no company as the dominant market leader. Every automaker in the market has introduced their latest models in an attempt to attain successful market dominance. The excess supply of automobiles in the market has become a worrisome issue as the market entrants have flooded the market with cars.

As competition intensified, in 2007 Beijing Hyundai experienced a decline in sales compared to the prior year (Exhibit 3), and by 2008 a full-blown price war in China involved many of the world‟s major automakers.

In response, in 2008 Beijing Hyundai launched its second plant in China, along with new plants in India and Russia to complete a global production network across Korea, the U.S, China, India, and Europe. Yung Yu Koo, deputy general manager at China Business Group of HMC, described the thinking at Beijing Hyundai:

We are always thinking ahead as to how Beijing Hyundai can achieve sustainable competitive advantages over other major competitors. We continuously revisit forecasts of the future growth of the China automobile market to see what effect this will have in Beijing Hyundai‟s market share both in the short and long term. The first phase of achieving HMC‟s global competitiveness was obtaining production and research capabilities, and the second phase is switching to a market-focused strategy by enhancing marketing skills. While this can be a difficult task, it is not an impossible task to achieve. If the company adopts scientific approaches with future insight, we then strongly believe that by 2010 Hyundai can be a market leader in China, achieving the target of 1.03 million units in sales with a 13 percent market share.

With this ambitious goal, Beijing Hyundai looked forward from 2008 at the challenge ahead. It had increased production capacity to 850,000 units, but was on target to produce less than half that during 2008. Yet its plans included continuing to introduce a variety of models across size classes, even as Hyundai‟s reputation in China remained underdeveloped. Leadership at Beijing Hyundai and HMC Corporate were committed to succeed in China, a key market in their global expansion strategy, even as that market had become more challenging than ever.

1

HYUNDAI MOTOR COMPANY: GLOBAL EXPANSION

Since the establishment of HMC in 1967 by Ju-Young Chung, and under the leadership of the subsequent chairman, Se-Young Chung, HMC focused on developing overseas markets. With the Korea economy on the verge of collapse during the 1997 Asian financial crisis, many Korean conglomerates suffered a liquidity crisis and went into bankruptcy. In the midst of this dark period, Mong-Koo Chung succeeded his uncle Se-Young Chung in the chairmanship and sought to overcome the financial challenge through the acquisition of Kia Motors, another Korean automaker, in 1998. In 1999, Mong-Koo Chung became chairman of the Hyundai–Kia Group and reorganized HMC to reduce costs and share knowledge across Hyundai and Kia. He then turned the company‟s attention to an ambitious plan for global expansion.

Starting in 2000, Chung aggressively sought to build automobile plants outside Korea. At that time, combined sales for HMC and Kia Motors were 2.76 million units, of which 2.46 million units were from sales in Korea. Overseas sales accounted for 300,000 units, and most of these were KD (Knockdown) sales.2 Given that the domestic (Korea) market was small, Chung and his leadership team decided that expanding into the overseas market was imperative for Hyundai and Kia Motors. But moving beyond Korea confronted HMC with the need to do business in markets where its reputation was not yet well developed.

Quality Management Improvements

One of the biggest challenges faced by Chung and his management team was Hyundai‟s reputation in markets outside Korea. HMC‟s reputation was very strong in Korea, and its product quality had been improving worldwide, albeit slowly, in the 1980s and 1990s. But the company discovered that its reputation outside Korea was not changing along with its improvements in quality. On a visit to the U.S. in 1999, Chung was shocked by the fact that Hyundai cars were treated as shoddy products. Product quality had improved, yet public perceptions of quality were slow to change. Apparently Hyundai‟s initial entry into that market with lower-end vehicles was having an enduring affect on the company‟s reputation there.

In response, Mong-Koo Chung redoubled HMC‟s worldwide efforts at quality improvement. He established the Quality Control Division, and chaired monthly quality control meetings with senior quality management and executives to take control of product quality from the initial stage of the automobile development. The “Quality Pass,” or so-called “Line Stoppage,” was also developed at that time. This standard was devised to prevent the initiation and production of automobiles on the assembly lines when potential problems in products were not resolved at the quality control meeting, even if it meant a delay in the launch of a new model. Further, to improve subcontractors‟ quality, the company initiated the “five-star rating program,” an

1

See “Hyundai Motor Company” GSB No. SM122 (written by Mooweon Rhee, William P. Barnett, and James G. March) for detailed information on the historical and organizational background of HMC, as well as its operation in the U.S. market. 2

Knockdown sales are of cars that are fully manufactured but not fully assembled in the home country, and then are exported in kit form to be assembled in another country.

incentive program for subcontractors that demonstrates quality improvement gains, while penalizing non-cooperative subcontractors. Finally, Mong-Koo Chung led the implementation of the 10-10 policy (10-years, 100,000-mile warranty), in an effort to improve Hyundai‟s brand image.

In the wake of all these changes, published quality rankings improved greatly for Hyundai, as shown in Exhibits 4 and 5. The 2004 report by the IQS (Initial Quality Study) ranked the Sonata number one, over Toyota, in the U.S. midsize automobile market. In 2008, Hyundai‟s small car, the Verna, was ranked number one in the IQS survey, over Toyota‟s Corolla. And Hyundai‟s small-medium model, the Elantra, became the „Top Small Car‟ of the year 2008, beating out the Honda Civic, according to Consumer Reports. These remarkable achievements continued when Hyundai‟s midsize SUV, the Santa Fe, was also listed as a „Top Pick” of the year 2008 by Consumer Reports. Meanwhile, across the world in India, Hyundai‟s major compact model, the Santro, was ranked number one in the Vehicle Dependability Survey (VDS) by J.D. Power and Associates. Yet worldwide perceptions of the Hyundai brand still seemed to lag behind reality, as evidenced in this headline: “Man bites dog. The earth is flat. Hyundai builds better quality cars than Toyota. ….. The impossible has happened.”[footnoteRef:1] [1: Excerpted from Automotive News, April, 2004. ]

Overview of HMC’s Global Expansion

United States

Mong-Koo Chung saw the need to establish automobile assembly plants in the United States. This was mainly to position Hyundai as a „locally produced automobile maker‟ in the U.S. market, and also to help the company mitigate any possible future trade conflicts. When HMC planned to launch an assembly plant in the U.S., the company expected that the U.S. market would grow by 4 percent annually until 2010, with especially expansive growth in the SUV market. Based on their market projection, therefore, the company was interested in producing highly profitable small and midsize SUVs, along with midsize sedans. In 2003, HMC selected Alabama to manufacture the company‟s core models, the Sonata and the Santa Fe, by May of 2005. Chung used a mass introduction strategy to flood the U.S. market with the automobiles assembled there, which he also expected would increase public awareness of HMC‟s production in the United States. Despite the difficulties in producing automobiles in an unfamiliar territory with culturally different human resources, the Alabama plant did not take long to stabilize its assembly line. The Alabama plant manufactured and sold 236,000 units (amounting to $3,589 million) and 251,000 units (amounting to $3,830 million) in 2006 and 2007 respectively, with a 6.3 percent growth in number of units sold and a 6.7 percent growth in sales amount. In 2008, HMC released new models, the Sonata F/L and the Genesis, and planned to focus on small car sales, as fuel efficiency became a hot topic in response to the rising oil prices that year. HMC also expanded its dealerships from 790 in 2007 to 820 in 2008, increased the number of independent dealerships, and developed a range of dealer capability enhancement programs.

Europe

Towards the end of 2000, HMC also began basic preparations to build production sites in the European market. While HMC already had an automobile assembly plant in Turkey with a yearly production capacity of 60,000 units, the plant was too small to meet the demands of the entire European market. While HMC considered the possibility of expanding its assembly plant in Turkey and acquiring Daewoo‟s assembly plant in Poland, their feasibility analysis led to the conclusion that establishing a new assembly plant was more favorable. HMC‟s market survey in 2003 also concluded that to effectively target the European market, the company needed to build an automobile assembly plant designed to produce small-sized cars, which were Kia Motors‟ strengths. In 2004, Kia Motors built its assembly plant in Slovakia. Since then, Hyundai and Kia Motors have cooperated to penetrate the European market through this production facility. Meanwhile, sales by the HMC Turkey assembly plant increased from 87,000 units in 2007 to 108,000 units in 2008, an increase of 23.6 percent. HMC in 2008 also established its Czechoslovakia assembly plant with a yearly capacity of 200,000 units.

India

India was one of the first targets for HMC‟s global expansion, attractive because of its low costs and huge growth potential. In 1996-97, HMC constructed an automobile assembly plant in only 17 months, and within another six months Hyundai Motor India (HMI) ranked number two in the Indian market in quantity of automobiles manufactured. In 1998, HMC introduced a new model, the Santro, which became the number one selling car in India in two years (see Exhibit 6).

Inspired by such success, Chung often encouraged executives of other global divisions to benchmark the localization and productivity of HMI. During an inspection tour of the company's manufacturing complex in the southeastern port city of Chennai in 2005, he announced a plan to build a second assembly plant with a yearly capacity to produce 300,000 units, which would double the existing capacity. He envisioned that HMI would be able to serve neighboring markets, including the European and Middle East regions, as well as India. By 2006, for example, HMI exported 100,000 units, 30 percent of total production, while the production capacity continued to increase from 250,000 units in 2005 to 300,000 units in 2006 to 600,000 units in 2007.

HMI‟s success within India has been attributed to its development of Indian versions of the automobiles (e.g., the Santro is the Indian version of the Atos). These designs took into consideration India‟s high temperature, humid environment, and poor road conditions. Also, HMI management realized complementary product lines through the careful selection of car models and release periods. For example, HMI‟s pricing strategy was structured to promote sales of the Santro, while its other model, the Accent, was priced to increase profit margins. According to K.A. Song, general manager at Global Command & Control Center of HMC, who was then responsible for the establishment of assembly plants in India:

Our sales strategy was another success factor in the Indian automobile market. In order to be on top of the Maruti, which had 80 percent market share, Hyundai entered the market at a 5-10 percent lower price than Maruti. The company initially introduced a basic model to enhance brand recognition, and then added other optional features onto the basic model to increase profit margins. That is, we were successful in a „sequential entry strategy‟ by having introduced two different models for two different purposes: one for market penetration and the other for profit margin creation.

HMI‟s geographic location in Chennai, India, contributed to the minimization of logistics costs and the standardization of parts supply. Hyundai executives reported that the conscientious and hard-working habits of the southern Indians (Chennai is in South India) also were attractive.

Once the assembly plant was established, the company initiated a slogan “NO CASTE, NO RELIGION,” in an attempt to reduce discrimination by social class and religious affiliation in the workplace. While the Indian labor market was experiencing a high labor turnover rate, HMI was able to keep its turnover rate lower than the industry average through the use of such human resource policies.

HMI grew successfully in India, but leadership remained concerned about the possibility of increasing competition. In response, HMI diversified its product lines, including more upscale models. The company also increased the number of dealers from 235 in 2007 to 300 in 2008, formed a stronger sales network, and expanded corporate advertising to strengthen the company‟s brand.

As of 2008, HMC manufactured cars in different parts of the world, including the U.S., Europe, India, and China, to accommodate diverse market needs (see Exhibit 7). Consequently, the company ranked sixth in the volume of production among global automakers (Exhibit 8). But HMC‟s record of success would be dwarfed by its future growth rate if it could succeed in its ambitious plans for China after 2008.

4

THE AUTOMOBILE INDUSTRY IN CHINA

Development of the Chinese Automobile Industry

The Chinese automobile industry got started during the 1950s with technical assistance from the former Soviet Union, but remained little developed until 1984. China‟s first automobile manufacturer, Di Yi Motors (predecessor of the FAW Group), was established in 1953 with assistance from ZiL, a major Soviet Union truck and heavy equipment manufacturer. The production system of Di Yi Motors was vertically integrated, which later had a significant impact on the structure of subsequent Chinese automakers. The „Great Leap Forward,‟ led by Mao Zedong from 1958 to 1960, strengthened the authority of local governments. This political shift, combined with a shortage of automobile supplies, led local governments to build small automobile plants to manufacture imitations of foreign models. The SAIC (Shanghai Automotive Industry Corporation) and Beijing Motors (now BAIC) were two well-known examples to emerge during this period.

Towards the end of 1950s, the Chinese automobile industry faced difficult times due to the deteriorating relationship between China and the Soviet Union. For the next 20 years, Chinese automakers had to find a way to develop their own automobiles without help from other countries. In order to promote economic and industrial development, the Chinese government

4

Parts of this section benefit from the information provided by HMC and Hyun-Chul Kim, “Recent Trends and the

Future of Chinese Automobile Industry,” International Seminar on the Productivity Innovation and Global Productivity in the Age of Limitless Competition, Korea Productivity Association, June 2008, and Jangro Lee, “The Marketing Case Study on the Chinese Market – Hyundai-Kia Auto Group,” 2007, Muyok Publishing Company.

saw the need to intensify the capacity of national transportation, designating the automobile industry as essential to the country‟s economy and giving it greater financial support from the government. During the period of the Cultural Revolution, for example, Dongfeng Motors (DFM), which now ranks second among Chinese automakers, was founded at the behest of Mao Zedong in 1968. Automobile plants were later scattered all over China due to the policy of “one province, one assembly plant.” But this policy led to over-construction of automobile plants, and impeded the effective division of labor within the industry as well as the standardization of auto parts. Over time, these forces created a unique automobile industrial structure: on top of the pyramid there were large automobile manufacturers, such as FAW Group and DMC, controlled by the central government; next were medium-sized companies governed by the municipal governments (e.g., Shanghai, Beijing, Nanjing); and at the bottom were small automobile manufacturers overseen by municipal governments.

The China automobile industry has boomed since the introduction of the open economy policy in 1979. The period from 1984 to 1990 has been called “the exploratory period,” during which there was a large increase in demand for automobiles. Companies that were under municipal jurisdiction became independent, and many merged or were acquired by other domestic competitors. In 1984, Beijing Automobile Works (BAW, a subsidiary of BAIC) and the U.S. company AMC formed the first joint venture in China, known as Beijing Jeep. In 1985, SAIC formed a joint venture partnership with Volkswagen. As the open economic policy continued and the Chinese economy grew rapidly, its automobile market suffered a severe shortage in the mid-1980s. In response, since the 7th Five-Year Plan, the Chinese government established a policy aimed at localizing automobile manufacturing. In 1987, at the China Executive Cabinet meeting, a consensus was reached to introduce policies to foster the growth of the Big Three (FAW Group, DFM, and SAIC), and in 1988 the policy was extended to include three additional companies (BAIC, Guangzhou Automobile Industry Group (GAIG), and Tianjin Xiali ).

In the 1990s, the world automobile market suffered excess supply and stagnant demand, which resulted in a major overhaul of the industry worldwide. While the world market was in turmoil, in China the automobile market was growing rapidly due to the strong performance of China‟s economy. Between 1990 and 2000, the China automobile industry introduced the concept of the family automobile to the market. In response, almost all global automobile makers sought to enter the China automobile industry through a variety of joint ventures. In 1990, DFM formed a joint venture with the French company Citroen, named the Dongfeng Peugeot-Citroen Automobile (DPCA); in 1991, FAW Group formed a joint venture with a German company Volkswagen, named FAW-VW; and in 1992, the Jinbei Automotive Company joined with U.S. company General Motors, forming Jinbei GM. Also in March of 1997, SAIC and GM formed a joint venture known as Shanghai GM. In April of 1999, Shanghai GM built an automobile plant with a yearly capacity of 100,000 units to manufacture GM‟s Buick series of automobiles. In 1997, GM America, in partnership with SAIC, also established the Pan Asia Technical Automotive Center to develop next generation automobiles. In 1997, Toyota established a joint venture company with Tianjin Xiali; and in 1998, Honda Motors established a joint venture company with GAIC.

Beginning with the 10th Five-Year Plan in 2001, the Chinese government reaffirmed its commitment to the utilization of foreign direct investments. For example, the Plan mandated that automobiles endorsed by the Chinese government should be adopted by the general public. In the same year, China joined the World Trade Organization (WTO), creating new opportunities for global automakers aiming to enter the Chinese automobile market because China‟s WTO entry was conditioned on liberalized market access for foreign companies in China. From 2001 to 2006 the market grew explosively. In 2004, the Chinese government announced a new automobile industrialization policy, through which the government hoped to enhance the market competitiveness of Chinese automobiles and restructure the automobile industry. By 2008, the Chinese automobile market had become an arena of competition for the global automakers, as described in Exhibit 9.

The normal process for an overseas automobile manufacturer to enter the Chinese automobile market was through its initiation of automobile exports. Once the market was better understood, the importer would then shift to KD exports for assembly in China. Finally, foreign direct investment might be the next step, though this was required to take place through a joint venture with a Chinese counterpart.

The Chinese Automobile Market

The average growth rate of the Chinese automobile market from 1992 to 2000 was 25.2 percent, and from 2000 to 2006 was 38.3 percent. One reason for the rapid growth since 2002 was a large increase in the purchase of personal automobiles. In 2006, the China market sold 4,260,000 units, seven times more than in 2000 (Exhibit 10). Experts‟ estimates on the prospects for the China market also continued to increase. As of 2007, for example, the estimated supply for 2010 was 7,814,000 units, according to the State Information Center of China (SIC)―a 9.4 percent upward adjustment from the 2006 estimate.

The Chinese economy had been growing rapidly up to 2008, increasing the class of potential automobile purchasers. However, China also expected a larger income gap, particularly between city and rural people (see Exhibit 11). The Chinese automobile market was mainly driven by individual consumers, and it was expected that personal consumption would account for 90 percent of total purchases by 2010.

Growth rates in automobile markets typically differ depending on the size class of vehicle. Exhibits 12 and 13 describe the growth rates of the various vehicle size classes using a classification system common in China, in which vehicle and engine size increases as one moves from A through E. Sales expansion in the China automobile market has occurred in various classes of automobiles simultaneously. The C2 models have enjoyed the fastest growth, showing an increase from 33 percent in 2006 to 37 percent in 2007. The portion of SUVs sold also has demonstrated a continuous increase. The portion of the C1 and smaller models (class A and B) showed a slight decrease.

The SIC estimate of 2010 demand by automobile classes showed that the growth of car sales would be primarily in classes C2 and D cars. The Chinese automobile makers, which have focused on class A and B models, were expected to release upper class models, so the portion of classes C2 and D sales was forecasted to increase. According to the SIC estimates, the total annual demand would grow by an annual average rate of 13.1 percent from 2007 to 2012. SIC forecasted that compared to 2007, the 2012 demand for classes C1, C2, and D cars would have more than doubled to reach 1,520,000 units, 3,580,000 units, and 2,140,000 units, respectively. The SUV models were estimated to increase at a moderate rate.

Competition

The period 2000-2008 saw the Chinese market become highly competitive. The Chinese government played an important role in the formation of this competition, as it advocated an “independent technological development model.” This phrase refers to use of joint ventures with global automakers, where the Chinese partner “offers the market and obtains the technology.” Global automakers have typically resisted transferring their technology to local makers by manufacturing only older models in China. In response, the government introduced the traditional “以夷制夷 (yi yi zhi yi: using barbarians to control other barbarians)” strategy, where easing the entry of multiple global automakers stimulated competition among them. This competition, in turn, triggered the introduction of newer models with the latest technologies, and local sourcing of auto parts. Furthermore, these newer models were selling for ever lower prices, as the global automakers waged fierce price wars. As a result, car prices dropped by approximately 35 percent on average since 2004.

By 2008, intensifying competition drove many foreign automakers to introduce newer models, despite the risk of low-quality imitations. For example, Volkswagen, an early entrant to the China automobile market, initially produced the Santana, a representative taxi model in Shanghai, through a joint venture Shanghai VW. But VW did not upgrade the Santana for a long time, which along with the poor quality of parts from local suppliers, dissatisfied Chinese consumers. As Shanghai GM, Beijing Hyundai, and others entered the market, VW began to lose out to their newer models. Shanghai GM entered the China automobile market with the same models as those sold in the U.S. market, and was able to establish an image as the purveyor of advanced cars. Other later entrants were also aggressive in introducing their newest models. Toyota began to produce its main model, the Camry, and even planned to manufacture the hybrid Prius in China, while Honda manufactured its eighth generation Accord in China. As competition raged, former market leaders Shanghai VW and FAW-VW saw their market shares fall, as Shanghai GM took over the number one spot.

The availability of newer technologies to be imitated, in turn, increased competition from private local automakers, such as Chery Automobile and Geely Automobile. Geely Automobile, located in Wenzhou, started to manufacture in 1997 and built its own independent models. Geely maintained a top-ten spot since 2003, and its sales skyrocketed from 98,000 in 2004 to 218,000 units in 2007. Geely Automobile also expanded to overseas market with 18 dealerships and 108 stores in other countries. Chery Automobile was formed through the consolidation of five companies in the Anhui province. Although its model, the Chery QQ, created disputes of being the “carbon copy” of GM Daewoo‟s Matiz, the company expanded its sales aggressively (85,000 units in 2003, 189,000 units in 2005, and 381,000 units in 2007). The number of car models in the market increased from 46 in 2001 to 305 in 2008 (Exhibits 20 and 21).

Hyundai Motor Company in China IB-91 p. 2

Hyundai Motor Company in China IB-91 p. 2

Chinese Consumers

Since Chinese consumers lacked experience with automobiles, they tended to equate brand recognition with product quality. They often sought advice from others who were knowledgeable about cars, primarily due to the lack of public information on the evaluation of automobiles. Hence, it was very important to attract consumers by improving brand recognition and brand position. Further, Chinese consumers had a tendency to value the brand image based on the country associated with an automaker. According to Bang Shin Kim at Beijing Hyundai:

As a result of globalization, Chinese consumers obtained some knowledge on brands, yet they are very sensitive to country brand. Preference exists towards German, U.S. and Japan-made automobiles. Consumers in the U.S. market have access to information from quality evaluation institutions such as Consumer Reports and J.D. Power Associates, but Chinese consumers do not. Because of this, such makers as Beijing Hyundai suffer from a weak brand image compared to the actual quality and performance of their cars.

Chinese consumers were cautious when purchasing cars, and payment on credit was very rare. This was due to the underdeveloped financial infrastructure and a high level of uncertainty in the Chinese economy. (Exhibit 16 presents the results of a survey study conducted by Beijing Hyundai regarding Chinese consumers‟ primary motives for automobile purchase.)

The Chinese market was geographically large and motorization was more developed in some regions than others. Motorization first developed in the coastal area of the Southeast, and then spread inland. Major cities such as Shanghai, Beijing, and Tianjin already showed significant progress in motorization. By 2008, such regions as Guangdong, Fujian, Jiangsu, and Zhejiang were in the process of developing motorization as a result of economic development. Some regions, including Shandong, Hubei, and Heilongjiang, were in the beginning stage of motorization, while there were many other regions where motorization had barely begun. Such regional differences in the Chinese market led to differences in consumers‟ brand recognition and purchasing patterns.

Distribution Channels

Up until the mid-1990s, China‟s automobile distribution system was embedded in complex pyramid channels, making it difficult for automakers to control pricing and sales or to maintain a stable brand image and promotion activities. Further, it was almost impossible to respond to the changing needs of customers in a timely manner. These channels were also costly and resulted in the separation of after-sales service from sales.

As of 2002, most of the global automobile makers in China had increased control over their channels by establishing “4S Shops.” The 4S Shop referred to a large dealer shop that operated the functions of Sales, Service, Spare Parts, and Survey simultaneously. The vast majority of Chinese consumers purchased their cars from a 4S Shop, where they also received after-sales service and spare parts supplies after their car purchase. This system contributed to building brand image and attracting customers. The 4S Shop resulted in more effective control of sales networks through tight contracts between manufacturers and dealers, and also a more integrative approach to customers. Some automakers, like VW, operated both 4S Shops and local dealerships, since the more independent dealerships gave access to certain regional distribution channels. Dealerships put brand image at risk, however, since they were difficult to control.

5

HMC IN CHINA

Initial Entry

The process of gaining approval to enter the Chinese market could be difficult, but Hyundai‟s partner, BAIC, helped to manage this process. Municipal authorities in Beijing favored working with BAIC. In turn, these authorities helped to gain central government approval for the operation of Beijing Hyundai. Meanwhile, HMC‟s sister automaker Kia Motors formed its 50:50 joint venture with DFM, known as Dongfeng Yueda Kia. Consequently, both Beijing Hyundai and Dongfeng Yueda Kia established their first assembly plants in 2002. In addition, Rongcheng Huatai Automobile, in technological and brand alliances with HMC, produced Hyundai‟s SUV models, the Santa Fe and the Terracan. (Jianghuai Automobile used to manufacture Hyundai‟s van model, the Starex, through a technological alliance with HMC, but the alliance was terminated: see Exhibit 18.)

Yet HMC and BAIC discovered that there were some cultural gaps between the partners. SungKee Choi explained:

While China and Korea belong to the same East Asian belt, differences in country size, historical experience, and cultural practices have produced different dispositions. For example, the Chinese people are associated with caution while Korean people have a „chop-chop‟ nature. Such differences caused a difference in decision-making process. HMC, a private enterprise, emphasized efficiency in the decision-making process, but BAIC, a governmental enterprise, focused more on the consensus among diverse interest[ed] parties. I also found a difference in the communication styles between the two groups. We share the same goals, but there is a discrepancy in communicating the solutions to the goals due to different experiences. For example, HMC saw sponsorship as a way of enhancing the corporate image, but the Chinese counterpart doubted it.

These differences led early on to some problems in the timing of Beijing Hyundai‟s market entry. Expecting rapid government approval, Beijing Hyundai planned around an aggressive initial

5

Parts of this section benefit from the information provided by the following: HMC and Hyun-Chul Kim, “Recent

Trends and the Future of Chinese Automobile Industry,” International Seminar on the Productivity Innovation and Global Productivity in the Age of Limitless Competition, Korea Productivity Association, June 2008; Jangro Lee et al., “The Marketing Case Study on the Chinese Market – Hyundai-Kia Auto Group,” 2007, Muyok Publishing Company; Myung Hyun Nam, “Interrelationship between Internationalization and the Improvement of Competitive Advantage of the Firms from NICs : A Case of Hyundai Motor Company,” unpublished PhD Dissertation, the University of New South Wales, Australia, 2005; and Chul Cho, “Recent Trends and the Challenge of Korean Auto Companies in Chinese Automobile Market,” China Industrial Economics Brief, Korea Institute for Industrial Economics and Trade Beijing Office, 2008.

production schedule. Then the company had trouble meeting facility and equipment contracts when the process went slowly due to BAIC‟s consensus approach to obtaining government approval.

Working with the expanded R&D organization of HMC Corporate, Beijing Hyundai made an effort to select appropriate car models for the initial entry to China in order to establish a quality reputation. Consequently, Beijing Hyundai first introduced its midsized model, the EF Sonata, to create a luxury image, and continued to modify this model to meet the needs of the Chinese market. For instance, the company changed the outer appearance of the car to ensure that it would enhance the perceived status of its owner, and also promoted plush interiors for the rear seats as it is common in China for owners of midsized cars to have a chauffeur. The company also adjusted the structure and height of the cars to local road conditions.

Building the Production System

Building the production system in China was helped by the geographic proximity of Korea and China. While the industrial infrastructure, such as auto parts supplies, was not fully developed for Hyundai in China, the company was able to use HMC‟s existing network of global parts suppliers in Korea. The simultaneous entry of HMC and its long-term Korean suppliers, such as Hyundai Mobis, into China made possible rapid quality improvements and cost reductions in the initial stage. This capacity allowed Beijing Hyundai to develop its local supplier network methodically. These geographical advantages enabled Beijing Hyundai to enter the market rapidly once government permission had finally been obtained. (Exhibit 17 presents a brief summary of Beijing Hyundai‟s history.)

The company also modularized about 10 core parts, including the headliner, the front end, and the door inner panel. This approach to design resulted in the reduction of production times and improvements in product quality. Bang Shin Kim at Beijing Hyundai made the following comment about how the management of local suppliers developed:

One of Beijing Hyundai‟s competitive advantages over VW or other competitors is in the management of local subcontractors. This enabled us to „kill two birds with one stone,‟ cost reduction and quality improvement. The major problem for VW was the poor maintenance of its relationships with local parts suppliers, which led to an increase in costs and the loss of trust. Beijing Hyundai subcontracts such parts as engine, manual transmission, car seats, chassis, and air conditioning units from suppliers in the Beijing area to save transportation costs, while other parts such as audio, accelerator, tire, wheel, and battery are supplied from other provinces. We ally with 118 suppliers in total and 57 suppliers are located in the Beijing area. As of 2008, only 10 percent of auto parts, such as automatic transmission and ECU, come from suppliers in Korea, and all remainder are outsourced from local suppliers. This really helps us reduce costs.

At the initial stage of its entry to China, Beijing Hyundai provided a lot of support and assistance to local suppliers, such as technical and managerial training. The company also tried to maintain harmonious relationships with local suppliers through the sharing of information, encouraging them to promptly respond to Beijing Hyundai‟s needs and supplying them with updated estimates of market demand so they could adjust their production timelines if necessary. Beijing Hyundai also held annual meetings with local suppliers and more regular monthly meetings for core parts suppliers.

Quality production was difficult at first, but improved as Beijing Hyundai‟s facilities implemented quality control processes. Initially, the company suffered from production delays due to the unanticipated influx of yellow dust and pollen to the factory. Over time, production quality increased by the application of Hyundai‟s “3-D policy”: (1) no defective products are used; (2) no defective products are manufactured; and (3) no defective products are sold. In addition, the company also established a comprehensive quality assurance system to coordinate exchanges among R&D center (design quality), assembly plant (production quality), and subcontractors (parts quality). These efforts paid off. While the number one HMC plant in Korea, Asan plant, produced 63 units per hour, Beijing Hyudai‟s plants produced 68 units per hour at consistently high quality. Moreover, the implementation of “poly production” made it possible to assemble five different models from just one assembly line.

Building Distribution Channels

One of the most important challenges for Beijing Hyundai was to develop distribution channels, and to decide where channels should be expanded geographically. Beijing Hyundai decided to adopt the 4S Shop model, but had to decide where the company should locate the shops. The company classified the China market into seven regions, north, south, east, northeast, central, southwest, and northwest. These seven regions were then regrouped into two major categories, an “all cities expansion group” (north, south, and east) and a “core cities expansion group” (northeast, central, southwest, and northwest). The company then established a sequential channel expansion strategy, following a hub and spoke pattern, for each of the two groups of regions.

With the hub and spoke approach for the “all cities” expansion group, Beijing Hyundai‟s distribution channels made inroads into major hub cities in the north, south, and east, identified based on the consideration of income level, population, and competition. The company then expanded its distribution channels to spoke cities. The hub cities were formed around Beijing and Qingdao in the north, around Nanjing, Hangzhou, and Shanghai in the east, and around Guangzhou and Fuzhou in the south. Those hub cities served as the centerpieces of regional promotion, dealer education, and logistics controls, and also played a crucial role in supporting spoke cities. The next phase of the hub and spoke approach was to enter 24 separate lower-level income areas cautiously, waiting for possible growth opportunities there.

As a result of its low brand image, Beijing Hyundai initially had a difficult time obtaining 4S Shop dealers. Although Beijing Hyundai benchmarked itself against Honda‟s distribution channel, there was a difference in the selection of dealers. Whereas Honda‟s major criterion for making the selection was dealers‟ financial resources, Beijing Hyundai focused more on dealers‟ past experience. While the company set a dealer‟s minimum investment at 25,000,000 RMB, the dealers‟ passion and determination were also considered.

Once dealers were selected, systematic education and training were given to those with a special emphasis on advertisement and sales promotion. Beijing Hyundai sometimes outsourced training facilitators with extensive experience in global dealership to educate the dealers. The company also implemented a dealership sales training program to increase the influence of the sales force on customers‟ choice of car models and optional features. In addition, the company held dealer conventions twice a year and awarded outstanding sales people. These incentive and training programs increased dealers‟ loyalty and strengthened the sales network. Since 2004, many of the Beijing Hyundai dealers have ranked in contests among the top 50 of the approximately 25,000 dealers in China.

Beijing Hyundai Reacts to Competition

As the China automobile market became more competitive, both parties to the Hyundai/BAIC joint venture feuded over how to react. Beijing Hyundai, determined to survive, was willing to cut prices to gain share. But BAIC was concerned about the decrease in profit margins as a result of increasing sales through price reductions. The two parties also had different views on the control over local auto parts suppliers. Furthermore, BAIC complained about HMC‟s resistance to BAIC‟s attempt to develop its own models.

Competition also spurred Beijing Hyundai to tailor its models to the Chinese market. In April 2008, the company released the Chinese version of the Elantra, the Yuedong, which was equipped with an improved physical design. Of special note, the Yuedong was equipped with newly improved, self-developed Alpha and Beta engines, increasing fuel efficiency by 8 percent compared to the previous model and in compliance with the Euro 4 emission standards. The Yuedong also was redesigned to appear more dynamic, including a raised bumper line and highlighted engine hood, in line with a younger target customer.

Beijing Hyundai signaled its commitment to China by increasing production capacity there to 850,000 units, made possible by the opening of its second plant in 2008. Product lines were also expanded, from only one model in 2002 to six models in 2008 (the EF Sonata, the NF Sonata, the Verna, the Tucson, the Elantra, and the Yuedong). The company reinforced its commitment to a target of 1,100,000 annual units by 2010 (Exhibit 19).

Yet since 2006, the increased competition affected Hyundai sales in China. Sales of the Elantra were stagnant, and in 2007 Beijing Hyundai‟s overall sales decreased (Exhibit 23), although it saw a slight rebound in 2008. Of particular concern were stagnant sales in class D cars (Exhibits 23, 25, 26, 27, 28 and 29). Performance in class D was critical in establishing a luxury image, but Toyota‟s Camry, and Honda‟s Accord were significantly outperforming Hyundai‟s Sonata.

HMC Corporate and Beijing Hyundai were exploring various strategies to overcome these obstacles. Sung-Kee Choi, at the China Business Division of HMC, said:

As a result of the recent intense competition, Beijing Hyundai needs to release new models continuously and establish an efficient distribution channel. In addition to a global corporate image linked with product quality, the company needs to establish a localized corporate image through various charities and public services to the Chinese society. It is also important to reflect social norms in product development for a higher brand image. For example, Toyota increased the size of the Camry in response to the Chinese norm that links car size to social status. Paying attention to the fact that the China society values intricately decorated items, VW added chrome line to the Passat cars. Hyundai will also try to introduce more customized models. But, Hyundai also needs to carefully watch the growing price competition. Despite its high brand image, Toyota has priced the Camry lower than competing models of other automakers. Most importantly, Beijing Hyundai needs to establish its own unique product identity through a consistent product development. We know some role models, such as “Jetta = durability,” “BMW = pleasure of driving,” and “Toyota = best quality globally and locally.” Such unique product identity will lead to a high level of brand recognition as a global brand.

In addition, the company was challenged to attract the high-quality human resources needed to localize its distribution channels. Myung-Hyun Nam, director of Brand Strategy Team at HMC, explained:

HMC‟s global management has flourished with successful accomplishment of overseas production and overseas R&D. Highly talented hires from the United States and Europe and the expansion of our R&D center have continued to enhance the quality of Hyundai cars. We now have some confidence in customizing our products to the local markets by using the latest technology…. However, Beijing Hyundai is still relatively weak in marketing, sales, service, and maintenance of customers. We lack local specialists who have expertise in market research and customer service. Worse, given the insufficient supply of high- quality human resources, Hyundai Beijing is competing with other global makers in China to attract and retain local experts.

HMC also needed to resolve the problem of how to cooperatively deal with the transfer of technology to BAIC. Under the motto “We are Beijing Hyundai,” HMC was rebuilding its partner relationship, but was still seeking the appropriate balance between the protection of technology and the maintenance of trust.

Hyundai Motor Company in China IB-91 p. 10

Hyundai Motor Company in China IB-91 p. 10

Hyundai Motor Company in China IB-91 p. 10

1

Organization Chart of HMC

2

Beijing Hyundai’s Sales Performance in China Automobile Market

Year	2002	2003	2004	2005	2006	2007	2008 *
Sales	1,003	52,128	144,090	233,668	290,011	231,137	164,792

Notes: * Sales in the first half of the year

Source: Beijing Hyundai

Exhibit 3 Top Ten Automakers’ Ranks in China Market and Their Sales Performance

Rank	2004	2005	2006	2007	2008 *
	Maker	Sales	Maker	Sales	Maker	Sales	Maker	Sales	Maker	Sales
1	S-VW	354	S-GM	298	S-GM	413	S-GM	500	S-VW	272
2	F-VW	300	S-VW	245	S-VW	352	F-VW	456	F-VW	269
3	S-GM	223.8	F-VW	238	F-VW	345	S-VW	436	S-GM	239
4	K-Honda	185	B- Hyundai	234	Cherry	305	Cherry	381	F-Toyota	200
5	B- Hyundai	144	K-Honda	203	B- Hyundai	290	K-Honda	295	B- Hyundai	165
6	Charade	130	Charade	190	K-Honda	260	F-Toyota	281	D-Nissan	159
7	C-Suzuki	110	Cherry	189	F-Toyota	223	D-Nissan	272	K-Honda	142
8	Cherry	93	D-Nissan	158	Geely	204	B- Hyundai	231	Chery	125
9	D-PSA	89	Geely	149	D-Nissan	203	C-Ford	218	C-Ford	117
10	Geely	87	D-PSA	140	D-PSA	201	Geely	218	D-PSA	103

Notes: The unit is a thousand.

* The data of 2008 is collected in the first half of the year.

Abbreviation: B-Hyundai (Beijing Hyundai), C-Ford (Changan Ford), C-Suzuki (Changan Suzuki),

D-Nissan (Dongfeng Nissan), D-PSA (Dongfeng Peugeot Citroen), F-VW (First Volkswagen),

F-Toyota (First Toyota), K-Honda (Guangzhou Honda), S-GM (Shanghai GM), S-VW (Shanghai Volkswagen)

Source: HMC and Kim (2008)

4

Brand Valuation of “Global Top-100 Firms”

Rank	1999	2000	2001	2002	2003	2004	2005	2006	2007
1	Ford (5) (33.2)	Ford (7) (36.4)	Ford (10) (30.1)	Benz (10) (21.0)	Benz (10) (21.4)	Toyota (9) (22.7)	Toyota (9) (24.8)	Toyota (7) (27.9)	Toyota (6) (32.1)
2	Benz (12) (17.8)	Benz (12) (21.1)	Benz (11) (21.7)	Ford (11) (20.0)	Toyota (11) (20.8)	Benz (11) (21.3)	Benz (11) (20.0)	Benz (10) (21.8)	Benz (10) (23.6)
3	Toyota (20) (12.3)	Toyota (15) (18.9)	Toyota (14) (18.6)	Toyota (12) (19.4)	Ford (14) (17.1)	BMW (17) (15.9)	BMW (16) (17.1)	BMW (15) (19.6)	BMW (13) (21.6)
4	BMW (22) (11.3)	Honda (20) (15.2)	Honda (18) (14.6)	Honda (18) (15.1)	Honda (18) (15.6)	Honda (18) (14.9)	Honda (19) (15.8)	Honda (19) (17.0)	Honda (19) (18.0)
5	Honda (24) (11.1)	BMW (23) (13.0)	BMW (19) (13.9)	BMW (20) (14.4)	BMW (19) (15.1)	Ford (19) (14.5)	Ford (22) (13.2)	Ford (30) (11.0)	Ford (41) (9.0)
6	VW (31) (6.6)	VW (31) (7.6)	VW (42) (7.3)	VW (38) (7.2)	VW (42) (6.9)	VW (48) (6.4)	VW (56) (5.6)	VW (56) (6.0)	VW (54) (6.5)
7					Nissan (89) (2.5)	Porsche (74) (3.6)	Porsche (76) (3.8)	Audi (74) (4.2)	Audi (68) (4.9)
8						Audi (81) (3.3)	Audi (79) (3.7)	Hyundai (75) (4.1)	Hyundai (72) (4.5)
9						Nissan (90) (2.8)	Hyundai (84) (3.5)	Porsche (80) (3.9)	Porsche (75) (4.2)
10							Nissan (85) (3.2)	Nissan (90) (3.1)	Lexus (92) (3.4)
11								Lexus (92) (3.1)	Nissan (98) (3.1)

Notes: The value in the first parenthesis is the rank in global top-100 firms in the given year. The unit of value in the second parenthesis is a billion in US dollars.

Source: HMC

5

Brand IQS Scores in North America Automobile Market

Brand Rank excluding luxury brand

Upper Rank (13)

Middle

Rank (13)

Lower

Rank (1

2

)

Source: HMC

6

Hyundai Motor’s Sales in India Automobile Market

		1999	2000	2001	2002	2003	2004	2005	2006	2007
Model	Entry Point
Santro	98 Sep.	58,629	65,421	66,396	80,706	93,854	104,748	107,205	140,679	136,172
I10	07Nov.									14,451
Verna	99 Jan.	1,689	16,205	16,267	20,003	25,002	24,087	29,351	19,495	6,006
Getz	04Aug.						5,615	15,464	14,796	16,337
MCI	06Aug.								8,238	26,140
Elantra	04 Mar. 07 May						3,971	2,331	1,927	376
EF Sonata	01 Jul. 05 Jul.			1,269	2,091	1,264	946	806	506	668
Tucson	05 Mar.							922	533	262
Total		60,318	81,626	83,932	102,800	120,120	139,367	156,079	186,174	200,412

Source: HMC

Hyundai Motor Company in China IB-91 p. 16

Exhibit

Hyundai Motor Company in China IB-91 p. 18

Exhibit

Hyundai Motor Company in China IB-91 p. 18

Exhibit

Exhibit 7

Global Management of HMC

HKMC Global Plants & Capacity

Notes: The unit is thousand.

Source: HMC

Exhibit 8 Hyundai-Kia’s Global Production and World Automakers’ Sales

236.5

257.4

249.8

269.4

10.5

14.1

29

48.8

278.8

276.8

282.2

74.3

100.4

116.2

10.4

%

15.3

%

21.0

%

26.6

%

29.2

%

5.2

%

4.3

%

0

50

100

150

200

250

300

%

0.0

%

5.0

%

10.0

15.0

%

20.0

%

25.0

%

%

30.0

%

35.0

Domestic Production

Oversea Production

Oversea Production Ratio

2001 2002 2003 2004 2005 2006 2007

No	2001	2002	2003	2004	2005	2006	2007
1	GM	GM	GM	GM	GM	Toyota	Toyota
2	Ford	Ford	Toyota	Toyota	Toyota	GM	GM
3	Toyota	Toyota	Ford	Ford	Ford	Ford	Ford
4	Volkswagen	RenaultNissan	RenaultNissan	RenaultNissan	RenaultNissan	RenaultNissan	Volkswagen
5	RenaultNissan	Volkswagen	Volkswagen	Volkswagen	Volkswagen	Volkswagen	RenaultNissan
6	DCX	DCX	DCX	DCX	DCX	HyundaiKia	HyundaiKia
7	PSA	PSA	PSA	HyundaiKia	HyundaiKia	DCX	DCX
8	Honda	Honda	HyundaiKia	PSA	PSA	Honda	Honda
9	HyundaiKia	HyundaiKia	Honda	Honda	Honda	PSA	PSA
10	Fiat	Fiat	Fiat	Fiat	Suzuki	Fiat	Fiat

Source: HMC

Exhibit 9

Multinational Automakers’ Market Share in China Automobile Market (May 2008)

Nations‟ market share

China, 28%

Japan, 30%

Germany, 19%

USA, 12%

Korea, 8%

France, 3%

Automakers‟ market share

Volkwagen, 18%

General Motors,

9

%

Toyota, 9%

Hyundai-Kia, 8%

Honda, 9%

Chinese

Automakers,

28

%

etc., 2%

Mazuda, 2%

Ford, 3%

Suzuki, 3%

Citroen, 3%

Nissan, 5%

Source: Beijing Hyundai

Exhibit 10 The Growth of China Automobile Market (Passenger Car)

16

25

39

49

57

61

78

12

6

5

21

24

9

5

31

42

6

50

8

56

0

64

6

713

0

100

200

300

400

500

600

700

800

1992 1994 1996 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Notes: The unit is ten thousand. Values for 2007-2010 are forecasts.

Source: Compiled by author from data obtained from State Information Center of China (2006).

Exhibit 11 China’s GDP Growth and Gini Coefficient Prediction

12%

10%

11.40

%

11.10

%

10.40

%

10.10

%

10.00

%

%

9.10

8.30

%

8.40

%

%

7.60

7.90

%

8.10

%

8.30

%

%

8.60

8.90

%

9.20

%

9.50

%

9.80

%

10.20

%

%

10.50

8%

6%

4%

2%

0%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

0.5

0.4

0.4

0.41

0.41

0.43

0.43

0.32

0.32

0.33

0.33

0.35

0.36

Urban area

Rural area

0.4

0.3

0.2

0.1 0

2007F 2008F 2009F 2010F 2015F 2017F

Source: Beijing Hyundai

Note: All values from 2007 on are forecasts in both figures.

Exhibit 12

China Automobile Market Segmentation Change in 2007

% 8 6 % 8 % 6 % 17 % % 15 33 % 37 % % 6 % 6 15 % 15 % 4 % 4 % 4 % 4 % % 5 7 %

SUV MPV E D2 D1 C2 C1 B A

326,902 308,575 350,669 299,472 690,824 762,701 1,385,695 1,862,813 238,090 298,638 612,315 779,130 154,489 208,233 185,184 220,864 220,896 335,873

2006 2007 2006 2007

Source: Beijing Hyundai

Exhibit 13

Predicted Growth and Change of China Automobile Market (model class)

Class	2007	2008F	2009F	2010F	2011F	2012F	Annual Average
A	34.6 7%	40.5 7%	35.7 5%	35.8 5%	36.1 4%	37.8 4%	1.8%
B	26.7 5%	29.9 5%	30.6 4%	33.0 4%	35.3 4%	37.8 4%	7.2%
C1	86.3 17%	102.0 16%	113.4 16%	125.6 16%	138.3 16%	152.2 16%	12.0%
C2	184.2 36%	223.7 36%	266.5 38%	295.8 38%	325.8 38%	357.9 38%	14.2%
D1	32.3 6%	39.4 17%	46.5 16%	51.2 16%	56.1 16%	61.4 16%	13.7%
D2	76.1 15%	93.1 15%	113.4 16%	126.3 16%	139.1 16%	152.4 16%	14.9%
E	21.0 4%	25.8 4%	30.9 4%	34.0 4%	37.7 4%	41.2 4%	14.4%
MPV	22.4 4%	26.8 4%	31.1 4%	36.9 5%	43.5 5%	51.3 5%	18.0%
SUV	30.6 6%	37.1 6%	38.1 5%	42.8 5%	49.7 6%	57.7 6%	13.5%
Industry Demand	514.2	618.3	706.1	781.4	861.6	949.6	13.1%

Notes: The unit is ten thousand. F denotes forecast.

Source: Compiled by author from data from State Information Center of China (2007).

Exhibit 14 Top Ten Models’ Sales and Overall Share in China Automobile Market

Rank	2001	2002	2003	2004	2005	2006	2007
	Model	Sales	Model	Sales	Model	Sales	Model	Sales	Model	Sales	Model	Sales	Model	Sales
1	Jetta	9.7	Jetta	12.1	Jetta	14.3	Jetta	15.4	Charade	18.0	Jetta	17.7	Jetta	20.1
2	Santana	9.5	Santana	9.9	Santana	12.3	Santana	13.3	Elantra	17.7	Excelle	17.7	Excelle	19.7
3	Santana 2000	7.0	Santana 2000	9.5	Passat	12.2	Charade	11.3	Jetta	14.2	Elantra	17.0	Camry	17.0
4	Passat	6.4	Charade	8.4	Charade	9.6	Accord	10.5	QQ	11.6	Charade	16.2	Xiali	13.3
5	Charade	6.0	Passat	7.9	Santana 2000	9.3	Elantra	10.3	Excelle	11.5	QQ	13.2	Corolla	13.0
6	Citroen ZX	5.3	Sail	5.6	Buick Regal	9.0	Excelle	9.2	Accord	11.4	Accord	12.3	Focus	12.5
7	Accord	5.1	Citroen ZX	5.3	Accord	8.0	Santana 3000	9.0	Santana	9.4	Passat	11.4	Passat	12.0
8	Alto	3.3	Bora	5.2	Bora	7.8	Passat	7.5	Merrie	7.6	Qiyun	10.1	Elantra	12.0
9	Audi A6	3.1	Qirui	5.0	Chang‟a n Alto	6.1	Buick Regal	7.3	Corolla	6.7	Santana 3000	8.3	Accord	11.8
10	Sail	2.8	Alto	4.9	Audi A6	5.3	Bora	6.3	Passat	6.7	Corolla	8.0	Santana	10.6
Total	58.4		73.7		94.0		100.1		114.8		131.8		142.0
Total Sales	78.1		126.8		215.4		248.8		315.4		426.1		507.6
Top-10 Ratio	74.8%		58.1%		43.6%		40.2%		36.4%		30.9%		28.0%

Notes: The unit is ten thousand

Source: HMC

Exhibit 15 Main Automaker Line-Ups

	A	B	C1	C2	D	E	SUV	MPV
B- Hyundai			Accent	Elantra HD(‟08)	NF Sonata		Tucson
D-Kia				Cerata	Optima MG(‟08)		KM(‟07)	Carnival
H- Hyundai							Terracan, Santa Fe
Jianghuai Qiche								Refine (Starex)
F-VW				Bora, Golf, Jetta, Sasgitar	Magotan (‟07)	Audi A4, A6		Caddy
S-VW		Polo HB, Golf	Polo NB	Santana, Octavia (‟07)	Passat, Santana 3000			Touran
GM- Buick				Excelle	Lacrosse, Regal	Royaum		GL8
GM- Chevrolet	Spart		Lova, Sail, Aveo		Epica		Trailblazer (‟07)
F-Toyota			Vios	Corolla	Reiz	Crown	Pardo, Landcruiser RAV4 (‟07)
G-Toyota					Camry		Highlander (‟07)	Previa(‟08)
D-Honda				Civic			CR-V	Stream(‟08)
K-Honda			City, Fit HB		Accord			Odyssey
D-Nissan			Hote(‟07)	Sunny, Tiida HB/NB	Sylphy, Teana, Bluebird			Geniss
D-PSA			206, Fukang, C2	307, Elysee	C- Triomphe, 407(‟07)			Picasso, C4(‟07)
C-Suzuki	Alto	Swift HB	Swift NB
C-Ford			Fiesta	Focus	Modeo	Volvo		S-Max(‟07), Mazda2(‟08)
Chery	QQ		Cowin	A5	Eastar		Tiggo	V5

Abbreviation: B-Hyundai (Beijing Hyundai), C-Ford(Changan Ford), C-Suzuki (Changan Suzuki), D-Kia

(Dongfeng Yueda Kia) D-Nissan (Dongfeng Nissan), D-PSA(Dongfeng Peugeot Citroen), F-VW (First

Volkswagen), F-Toyota(First Toyota), G-Toyota(Guangzhou Toyota), H-Hyundai (Huatai Hyundai), K-Honda (Guangzhou Honda), S-GM (Shanghai GM), S-VW (Shanghai Volkswagen)

Source: HMC

Exhibit 16

Chinese Consumers’ Motives for Automobile Purchase

Symbolic Value	High Class, Success Freedom Safety Comfort Eff ici - ency Security Conve - nience Cleanness Time Cost Commute Shopping Picnic Travel Transportation Independent Space
Emotional Value
Functional Value
Attribute

Source: Beijing Hyundai

Exhibit 17

Beijing Hyundai’s History

Year		Events	Model Introduction
2002	May	MOU conclusion	EF Sonata(December)
	September	State Council‟s ratification of MOU
	October	Establishment of Beijing Hyundai
2003	July	Certification of ISO 9001 Attainment of sales 50,000 in the first year of China market entry
2004	December	100,000 sales of Elantra Elantra was certified as “Most ideal car for Chinese family”	Elantra (January)
2005	May	Accomplishment of 300,000 production line for the first plant	Tucson (June) NF Sonata (September)
2006	April	The start of the second plant construction	Accent (March)
	September	Certification of ISO 14001 environmental management
2007	December	Attainment of 100,000 engine production	Elantra Sports (March)
2008	February	Attainment of 1 million sales and production	Elantra Yuedong (April)
	April	The completion of the second plant construction

Source: Beijing Hyundai

Exhibit 18 HMC’s Car and Engine Production Bases in China

Plant	Establishment (Operation)	Location	Investment Ratio
Beijing Hyundai	First plant	2002 Oct.	Beijing city	HMC 50% Beijing Qiche 16.38% China Capital Steel 33.62%
	Second plant	(2008 May)
	First engine plant	2004 April
	Second engine plant	2006 May (2007 Sep.)
Dongfeng Yueda Kia	First plant	2002 July	Jiangsu sheng Yancheng city	Kia 50% Dongfeng Qiche 25% Yueda Group 25%
	Second plant	(2007 Dec.)
Rongcheng Huatai Qiche	2000 Sep.	Shandong sheng Rongcheng city	technology & brand granting
Jianghuai Qiche	1999 Sep.	Anhui sheng Hefei city	Technology granting (agreement terminated)

Source: Fourin, “Hyundai-Kia strengthens local development and purchasing capability for million sales in China,” 2008 July

Exhibit 19 HMC’s Production Capability Change in China

	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Beijing Hyundai	First Plant	0	150	150	150	300	300	300	300	300	300
	Second Plant	0	0	0	0	0	0	0	200	300	300
Yueda Kia	First Plant	50	50	50	100	130	130	130	130	130	130
	Second Plant	0	0	0	0	0	0	150	150	150	300
Sub Total	50	200	200	250	430	430	580	780	880	1,030
Rongcheng Huatai	10	10	30	70	70	70	70	70	70	70
Total	60	210	230	320	500	500	650	850	950	1,100

Notes: The unit is thousand. Figures for 2009 and 2010 are forecasts.

Source: Fourin, “Hyundai-Kia strengthens local development and purchasing capability for million sales in China,” 2008 July

Exhibit 20

The Number of New Model Production in China

Region or Country	2001	2002	2003	2004	2005	2006	2007	2008
China	3	11	22	13	16	27	35	53
Japan	2	3	11	5	8	11	6	10
Europe	2	4	8	3	5	6	5	9
North America	2	0	5	1	9	4	4	5
Korea	1	2	1	2	4	2	2	5
Total	10	20	47	24	42	50	52	82

Source: Fourin, “Considering the influence of fuel tax on market and industry,” 2008 June

Exhibit 21

The Total Number of Models Produced in China

Region or Country	2001	2002	2003	2004	2005	2006	2007	2008
China	19	30	51	60	74	95	128	173
Japan	8	11	22	27	35	39	45	52
Europe	10	14	22	24	28	33	34	39
North America	7	6	11	11	19	18	21	24
Korea	2	4	4	5	9	11	12	17
Total	46	65	110	127	165	196	240	305

Source: Fourin, “Considering the influence of fuel tax on market and industry,” 2008 June

Exhibit 22 HMC’s China Business Ratio

	2001	2007	2010	2015
Global demand	56,000	69,000	76,000	84,000
Hyundai-Kia‟s global market share (A)	2,420	4.7%	3,720	5.4%	6,000	7.9%	7,000	8.3%
China‟s proportion of global demand	2,100	3.7%	5,080	7.4%	7,300	9%	13,000	15.5%
Hyundai-Kia‟s China market share (B)	12	0.6%	370	7.3%	1000	13.7%	1500 2000	13.1% 17.5%
Hyundai-Kia‟s China business ratio (B/A)	0.5%	10%	16.7%	21.4~ 28.6%

Notes: The unit is thousand. Figures for 2010 and 2015 are Hyundai objectives, not forecasts.

Source: HMC

Exhibit 23 Beijing Hyundai’s Sales of Models

MC Elantra Sonata NF Tucson

0

40

30

10

177

170

120

71

45

37

26

12

3

13

14

5

9

28

45

27

0

20

40

60

80

100

120

140

160

180

200

2005

2006

2007

2008

unit:

1,000)

(

Q1~Q2

Notes: The unit is thousand

Source: Beijing Hyundai

Exhibit 24

C1 Class Models in China Market

Rank	Brand	’08 Planning	’08 M/S	’07 Sales	’07 M/S	Growth Rate
1	Lova	91,800	9%	71,505	9%	28%
2	Livina	64,000	6%	41,341	5%	55%
3	Fit	60,000	6%	63,319	8%	-5%
4	City	60,000	6%	68,129	9%	-12%
5	Mazda2	55,500	6%	1,528	0%	3532%
6	Qiyun	55,000	5%	93,415	12%	-41%
7	Vios	52,800	5%	39,395	5%	34%
8	Weizhi	51,000	5%	31,686	4%	61%
9	Accent	50,000	5%	26,665	3%	88%
10	Ziyoujian	50,000	5%	79,935	10%	-37%
Sub total	590,100	59%	516,918	68%	14%
C1 Total	1,007,150	100%	762,701	100%	32%

Source: Beijing Hyundai. The 2008 figures are forecasts.

Hyundai Motor Company in China IB-91 p. 21

Hyundai Motor Company in China IB-91 p. 22

Hyundai Motor Company in China IB-91 p. 22

Exhibit 25

L-C2 Class Models in China Automobile

Rank	Brand	’08 Planning	’08 M/S	’07 Sales	’07 M/S	Growth Rate
1	Excelle	205,000	20%	196,742	20%	4%
2	Jetta	185,000	18%	201,131	21%	-8%
3	Cerato	110,000	11%	62,786	7%	75%
4	Santana B2	100,000	10%	106,086	11%	-6%
5	Elantra XDC	95,000	9%	120,333	12%	-21%
6	Junjie	80,000	8%	82,311	9%	-3%
7	Elysee	61,000	6%	31,449	3%	94%
8	A5	37,000	4%	70,124	7%	-47%
9	Vision	30,000	3%	17,923	2%	67%
10	F3-R	20,000	2%	5,443	1%	267%
Subtotal	923,000	91%	894,328	93%	3%
L-C2 Total	1,010,250	100%	964,550	100%	5%

Source: Beijing Hyundai. The 2008 figures are forecasts.

Exhibit 26

H-C2 Class Models in China Automobile

Rank	Brand	’08 Planning	’08 M/S	’07 Sales	’07 M/S	Growth Rate
1	Corolla	178,200	17%	65,844	8%	171%
2	Tiida	116,000	11%	123,310	14%	-6%
3	Focus	112,000	10%	124,991	14%	-10%
4	HDC	100,000	9%	-	-	-
5	Sagitar	85,000	8%	74,345	9%	14%
6	Civic	85,000	8%	81,323	9%	5%
7	P307	61,000	6%	63,661	7%	-4%
8	Mazda3	59,000	5%	35,844	4%	65%
9	Corolla EX	57,500	5%	63,999	7%	-10%
10	SX4	50,000	5%	21,379	2%	134%
Subtotal	903,700	84%	654,696	76%	38%
H-C2 Total	1,078,930	100%	866,461	100%	25%

Source: Beijing Hyundai. The 2008 figures are forecasts.

Exhibit 27

D-1 odels in China A

Rank	Brand	’08 Planning	’08 M/S	’07 Sales	’07 M/S	Growth Rate
1	Santana3000	90,000	20%	97,048	29%	-7%
2	Epica	73,000	16%	41,702	12%	75%
3	Octavia	62,000	14%	31,802	9%	95%
4	Sylphy	58,000	13%	57,182	17%	1%
5	Sonata	45,000	10%	25,528	8%	76%
6	Besturn	30,000	7%	23,279	7%	29%
7	F6	25,000	6%	-	-	-
8	Zunchi	25,000	6%	32,588	10%	-23%
9	Binyue	20,000	4%	-	-	-
10	Optima	12,000	3%	6,700	2%	79%
Subtotal	440,000	98%	315,829	94%	39%
D1 Total	447,000	100%	335,222	100%	33%

Source: Beijing Hyundai. The 2008 figures are forecasts.

Hyundai Motor Company in China IB-91 p. 37

Market

Hyundai Motor Company in China IB-91 p. 37

Market

Hyundai Motor Company in China IB-91 p. 39

Class M utomobile Market

Exhibit 28

D-2 odels in China A

Rank	Brand	’08 Planning	’08 M/S	’07 Sales	’07 M/S	Growth Rate
1	Accord	178,000	18%	118,024	15%	51%
2	Camry	175,000	18%	170,294	22%	3%
3	Passat	100,000	10%	120,462	15%	-17%
4	Magotan	90,000	9%	27,235	3%	230%
5	Lacrosse	81,600	8%	71,500	9%	14%
6	Mazda 6	60,000	6%	53,994	7%	11%
7	Teana	60,000	6%	37,803	5%	59%
8	Mondeo	60,000	6%	44,375	6%	35%
9	Reiz	49,900	5%	46,299	6%	8%
10	C Triomphe	40,000	4%	31,314	4%	28%
11	NF	30,000	3%	13,882	2%	116%
Subtotal	924,500	93%	735,182	94%	26%
D2 Total	997,300	100%	785,990	100%	27%

Source: Beijing Hyundai. The 2008 figures are forecasts.

Exhibit 29

SUV odels in China A

Rank	Brand	’08 Planning	’08 M/S	’07 Sales	’07 M/S	Growth Rate
1	CR-V	65,000	27%	45,686	39%	42%
2	Tucson	60,000	25%	44,729	38%	34%
3	Santa Fe	35,000	14%	6,463	6%	442%
4	Xiaoke	32,000	13%	-	-	-
5	Sportage	30,000	12%	5,713	5%	425%
6	Oting	9,000	4%	2,721	2%	231%
7	Paladin	8,000	3%	9,605	8%	-17%
8	Captiva	5,000	2%	1,384	1%	261%
M-SUV Total	244,000	100%	116,301	100%	110%

Source: Beijing Hyundai. The 2008 figures are forecasts.