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Published: February 26, 2013
 / Spring 2013 / Issue 70

 
 

Hyundai’s Capabilities Play

Hyundai Motor confined itself to Asian markets until 1986, when it released its first U.S. model, the Excel subcompact. At first, thanks in part to cheap Korean currency and technology borrowed from the Mitsubishi Motors Corporation, the car sold well; Hyundai still holds the industry record for most U.S. sales (186,000) during its first year of business. The low price of its cars and the company’s marketing savvy overcame local unfamiliarity, as well as the fact that potential U.S. customers struggled to pronounce the company’s name. (The company eventually told customers that Hyundai, which means “modernity” or “technology” in Korean, rhymes with the English word “Sunday,” even though the Korean pronunciation is considerably different.)

But the company’s mentality was still focused on pounding out units and increasing sales volume. Hyundai’s purchase of Kia Motors Corporation in 1997 and the Asian currency crisis in 1998 gave new urgency to the need to shrink expenses, and the company cut back on quality efforts. Sales dropped dramatically, and in May 1998, only 4,200 Hyundai cars were sold in the United States. “Many of us were pretty sure we were about to go out of business,” recalls Ferrara, who was then vice president for parts.

The solution turned out to be a new focus on quality—starting not with manufacturing, but with a marketing initiative. As the company recounts it, in 1998, facing the huge drop in sales, Hyundai’s U.S. executive leaders commissioned a bout of desperate consumer research. They discovered a highly positive reaction to the prospect of a three-part warranty deal—10-year and 100,000-mile powertrain protection, five-year/60,000-mile bumper-to-bumper coverage, and five-year/unlimited mileage roadside assistance. They proposed calling it “America’s Best Warranty.”

The warranty was less of a risk than it probably seemed to outsiders—for example, the powertrain part of it would not transfer to a new owner if the car was sold—but it still represented a massive bet on the company’s ability to improve. If car quality didn’t go up dramatically, the company could be crushed in an avalanche of claims and bad publicity.

Chairman Chung Ju-Yung was dying, and his brother Se-Yung was running the auto company. Se-Yung approved the new warranty strategy on a car ride from the Los Angeles airport to his hotel, basing the decision on his gut instinct. Ferrara, who had recently come to Hyundai from Toyota, remembers this snap decision as clear evidence of the difference in his new company’s culture. “The Koreans are cowboys and very different from the Japanese,” he says. “At Toyota, it would have taken 18 months to get the idea through the consensus process.”

In itself, the decision didn’t guarantee that the company would actually be able to make cars of sufficient quality to avoid a warranty bloodbath. It might not have worked out, except for the arrival of a new chief executive. Chung Mong-Koo, the oldest of Chung Ju-Yung’s eight sons, took over the motor company in 1999, elbowing Se-Yung aside to become chairman and CEO.

“The chairman,” as Chung Mong-Koo is still referred to inside Hyundai, had started his career in the corporation’s industrials division, moved to iron and steelmaking, and then worked for 11 years at Hyundai Motor Service, which focused on repairs and follow-up service. Chung thus had seen the consequences of poor quality firsthand. He decreed that the company would now put product excellence first. To enforce this, he set up a new quality division that could intervene at any stage of design, engineering, or production. Chung, who did not speak English, would visit U.S. plants with an interpreter. He would personally take executives out of their offices and walk them to a hoisted-up car and point out problems, such as a door that didn’t always close properly.

 
 
 
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Resources

  1. William Barnett, James March, and Mooweon Rhee, “Hyundai Motor Company,” Stanford Graduate School of Business, 2003: A case study of the company’s struggles to establish itself in the United States.
  2. Brian Collie, Scott Corwin, and Arjun Kakkar, “Optimism Returns to the American Automotive Industry,” s+b [online only], June 4, 2012: The U.S. auto market is recovering, and other automakers will be competing fiercely with Hyundai.
  3. Detroit Free Press, “Hyundai Leapfrogs Toyota in Quality,” June 8, 2006: An early article describing how Hyundai was successful in improving its quality.
  4. William J. Holstein, “Convincing Consumers to Spend Again,” s+b [online only], Apr. 7, 2009: A look at how Hyundai achieved a marketing breakthrough in a moment of economic fear.
  5. John Pearley Huffman, “The 2012 Hyundai Accent GLS: So Perfectly Ordinary That It’s Extraordinary,” New York Times, Apr. 13, 2012: A sampling of how automotive critics describe Hyundai’s success.
  6. Alex Taylor III, “Hyundai Smokes the Competition,” Fortune, Jan. 5, 2010: A rare conversation with Chairman Chung Mong-Koo.
  7. For more thought leadership on this topic, see the s+b website at: strategy-business.com/auto_airlines_and_transport.