Chapter 4

Hyundai

What Got You Here Won’t Get You There

“We won’t leave China,” said Hyuk Joon Lee, vice president of Hyundai Motor (China).¹ At his office in eastern Beijing, a large map of the country hangs on the wall, marked by pushpins, indicating Hyundai’s footprint in the world’s largest auto market. Hyundai was a latecomer to China, entering in 2002, when Volkswagen, General Motors, Toyota, and other international automakers were already entrenched. But it managed to increase its China sales to 1 million vehicles annually in only a decade—a goal that took Volkswagen over 20 years to realize. In doing so, it became the country’s third-largest auto manufacturer and took a more than 10% market share. Meanwhile, Lee honed his Chinese well enough that he earned a master’s in business and a doctorate from Chinese universities. Hyundai seemed destined to thrive in China, as it had in the United States, overcoming doubters and establishing itself quickly as a maker of quality cars. Then came 2017.

That was the year China sales plummeted by more than 30%, presaging a slump that dragged through 2018 and 2019. Hyundai’s market share shrank back to the low single digits, and the company closed one of its five factories—its factory in Beijing—and laid off over 2,000 employees, or around 13% of its workforce. Another factory in the southwest city of Chongqing, which opened in 2017, was cut to 50% capacity. “We are operating at a loss,” Lee said. “But for the Chinese market, if you leave, there’s no chance to come back.”

A Weak Brand Meets a Weak Partner

Overseas expansion for Hyundai, Korea’s dominant carmaker, started in the 1980s. It ventured successfully into the United Kingdom, the United States, and India. Then it tiptoed into China in the mid-1990s. Due to the Chinese government’s quotas, it could export only around 200 cars to the country each year. Recalling that period, what struck Lee was the car prices. “A 200,000 RMB car (around $23,529) would be sold at 800,000 RMB (around $94,117) in China,” he said. Even after China joined the World Trade Organization (WTO) in late 2001, opened its auto industry, and reduced the tariff significantly, barriers remained. Foreign automakers had to apply for an entry and stipulate the numbers of cars they aimed to sell. Without approval from the government, the door remained closed. The Koreans soon realized that the auto industry was one the government intended to protect and was unlikely to open completely to imports. Their answer was to produce cars in China. Volkswagen had done that and had come to be perceived by Chinese consumers as one of their own brands.

Back then, entering China required a joint venture with one of the eight state-owned Chinese automakers that had been awarded licenses to produce passenger cars. The chairman of the Committee of the Chinese People’s Political Consultative Conference at the time, Ruihuan Li, a native of Tianjin, introduced Hyundai to Tianjin First Automobile Works (Tianjin FAW). Tianjin FAW had partnered with Toyota to produce the Xiali, a popular compact sedan, which sold nearly 100,000 units in 1998, accounting for 20% of China’s car sales that year.² But Tianjin FAW turned Hyundai down on account of the latter’s lack of brand recognition in China.

Then Hongqi, FAW’s luxury brand, approached Hyundai. The general manager had an engineering background and was interested in Hyundai’s technology. After a year of discussions, that company, too, passed on working with Hyundai. Its executives also regarded Hyundai as an unknown among Chinese car buyers.

Finally, Beijing Automotive Industry Holding (BAIC), a once glamorous yet troubled manufacturer, came forward. BAIC had collaborated with American Motor Corporation (AMC) to form the first Sino-Western auto joint venture, Beijing Jeep, back in 1984. But it had lately struggled and was rumored to be seeking a partner to avoid being acquired. Hyundai seemed its salvation. In October 2001, Hyundai and BAIC started talks, and the following May they formed a 50–50 joint venture. A few months later, in October, the Chinese state council approved the deal, a process that, according to Lee, would’ve normally taken three years. The Beijing municipality fast-tracked it to help a local company, and Beijing Hyundai came to life.

The Rise of an Underdog

The venture wasn’t one that won headlines or worried competitors. After all, it was a marriage of a weak Chinese automaker and a “no-name” Korean partner. Still, Hyundai came prepared. Prior to its entry, the company created a unit called the China Business Management Team to lead the expansion. Lee was part of that team, and its members saw great potential in the Chinese market, which was growing about 20% a year. That growth was likely to continue as Chinese consumers, with increased income, replaced government bodies as the main buyers of cars. A market as big as China’s could offer opportunities even to a latecomer. Hyundai extensively researched its rivals, probing for weaknesses. It found Toyota had been selling locally manufactured cars to Chinese consumers for 30% or more above the prices of comparable models in Japan and the United States. Other foreign brands often brought outdated models to China. Volkswagen’s Chinese Jetta was based on a version from the 1980s.

Hyundai would bet on price and design. “We decided to bring our latest models with reasonable prices to Chinese consumers,” Lee said. In December 2002, the EF Sonata, a midsize sedan, rolled off the assembly line at the Beijing plant. The model had been Hyundai’s best seller in Korea and was priced at about 200,000 RMB ($24,390 in China). Compared with models from Toyota or Honda, which often sold for over 250,000 RMB, the car looked appealing. “I was often asked why I picked the unknown Hyundai over Volkswagen or any other brand that had been in China long enough to win us over,” recalled Ning Zhu, a software engineer who bought an EF Sonata in 2003 with help from his parents. “Its design and appearance were superior. A definitely head-turning car boosted a 20-something young man’s ego. And the price was cheaper than other foreign brands.”³

Hyundai ended up selling 53,000 cars that first year, exceeding its expectations. “We thought we would sell 20,000 units or 25,000 units maximum,” said Lee.

The early success stemmed partly from replicating Hyundai’s established supply chain in the new territory. The EF Sonata hit the market only two months after the government approved the joint venture. Behind this record-breaking “Hyundai speed”—a term coined by Chinese media to describe Hyundai’s ability to slash the time to get things done—was a tightly managed supply network. When Hyundai entered China, it pulled its main Korean suppliers in too—all of them were affiliates of Hyundai Group. Hyundai Mobis was one. Mobis is the world’s sixth-largest auto-parts manufacturer. Hyundai Motor’s CEO and chairman owns 7% of the company’s shares, while Kia Motors, of which Hyundai owns 33%, controls 17%. And Mobis, in turn, is the biggest shareholder of Hyundai Motor, owning 20%. This interlocking shareholding structure, known as keiretsu, is typical of Korean conglomerates, and it bound Hyundai and Mobis tightly together.

Mobis located its Chinese branch in Shunyi district of Beijing, where the Beijing Hyundai factory was. Mobis and other Korean suppliers provided 80% of the components for the joint venture’s cars, which ensured the quality and speed in the initial stage. “It was risky to come to China with us, but we had them come anyway,” Lee said. “I doubt if Volkswagen or any other automakers had such influence over their suppliers.” In fact, Volkswagen did have difficulty persuading skeptical suppliers to follow it to China during the early days and had been forced to build up a supplier network in the country. So Hyundai’s supply chain was a strength—at first. Later, it would become a source of friction between the joint venture partners.

Hyundai introduced a second compact car, the Elantra, by the end of 2003, and the next year it almost tripled overall sales, to 144,000 cars. In 2005, that number increased again, to 233,000. That same year, another opportunity presented itself.

“Guanxi” Counts

Hyundai had first made an international name for itself at the 1988 Seoul Olympics as the national sponsor. It wanted to replicate that success in China by winning the sponsorship at the 2008 Beijing Olympics. It ended up losing out to Volkswagen, but the planning around the games offered up another opportunity: Beijing was upgrading its taxicab fleet. Hyundai realized that this too might let it market itself at the world’s largest sports event.

Beijing’s taxi fleet was around 67,000 vehicles and included Tianjin FAW’s Xiali, Volkswagen’s Jetta and Santana, and Peugeot-Citroen’s Fukang. The incumbents wanted to remain, and new contenders, including Hyundai and several Chinese automakers, aimed to displace them. The Beijing government would, in effect, pick the provider by how it wrote its taxi standards; only cars that met the standards could serve as cabs in Beijing. Hyundai won big. Its outlook draft, designed by professors from Tsinghua University, was approved almost as soon as the standard committee saw it, according to Lee. The detailed standards, which included the dimensions of the car, engine capacity, safety equipment, and emissions, seemed tailored to the Sonata. Hyundai ended up providing 70% of the taxicabs for Beijing and soon became well known in China.

The following years saw Hyundai surge. Except for a blip in 2007, sales climbed. In 2013, they broke 1 million units. Hyundai kept launching new models, some of which were designed for the Chinese market. The Mistra, for example, had the long hood, additional rear legroom, a digital instrument panel, and the higher quality of interior trim that Chinese buyers preferred. Hyundai became the third-largest automaker in China, behind Volkswagen and General Motors. During this period, competitors would disassemble Hyundai’s cars to study how they were made. “Hyundai seized on the opportunity and acted aggressively,” said Dongshu Cui, secretary general at the National Passenger Cars Association. “It was a smash hit in China—superior design, diverse models, and competitive pricing.”⁴

Homegrown Rivals

But Hyundai’s strong position was soon to be undercut in ways that wouldn’t have seemed possible just a few years earlier. When Hyundai first exported its cars to China in the mid-1990s, Shufu Li, an owner of a motorcycle company in the eastern Zhejiang province, was dreaming of making vehicles of his own. After extensive research, including having his technicians disassemble a Mercedes-Benz piece by piece, he concluded making cars wasn’t that hard. It was just “four wheels and two sofas,” he quipped.⁵ In 1997, Li and his engineers made (by hand) their first car, the Geely No. 1, a mashup of the appearance of a Mercedes-Benz and the interior of a Hongqi. Two years later, the first of the company’s mass-produced Haoqing cars rolled off the assembly line, selling at 55,800 RMB (around $6,804), a price that shocked the auto industry. Li’s company soon introduced a series of small cars, and, by 2004, sales had broken 100,000. Yet a trip to the Frankfurt Auto Show in 2005, where the Geely was viewed as cheap and poorly built, set Li on a new path: acquisition.

In 2006, Geely Automobile acquired a 23% stake of London cab maker Manganese Bronze. The two formed a joint venture in Shanghai to produce cars under the name Englon. Two years later, Geely bought an Australian transmission supplier named Drivetrain Systems International. Another two years on, in a move that surprised the auto industry worldwide, Geely bought Volvo from Ford, as the US automaker struggled to repair its balance sheet during the financial crisis. Few in the industry believed Geely could turn around Volvo, which was struggling under Ford. Li took a hands-off stance, letting the Swedes at Volvo run their own shop. “Volvo is Volvo. Geely is Geely,” he said. He stepped in only when necessary—for example, when Volvo sought to design a car with features Chinese consumers would prefer. Volvo has since built three plants in China and one in the United States and expanded its research centers in Sweden. By 2015, Volvo was selling over 500,000 vehicles a year, the best record in its 89-year history.⁶ Geely, for its part, gained access to Volvo’s technology, especially in safety, and that helped turn the Chinese parent company into a more credible brand among auto buyers. “Before the acquisition, we didn’t completely master the design, research and engineering of a car, nor did we completely understand the manufacturing process,” said Li. “Now we have it all figured out.”⁷

In 2016, Geely launched a new high-end brand, Lynk & Co, and the first car, Lynk & Co 01, received 6,000 preorders within 137 seconds, according to Geely’s records. Meanwhile, Geely’s sales kept mounting, hitting 1.5 million in 2018, and eating into Hyundai’s share.

Geely wasn’t the only Chinese carmaker that emerged to challenge Hyundai. Another privately owned carmaker, Great Wall Motor, joined the auto club too. Founded in 1984, Great Wall initially did only modifications and repairs. In 1990, Jianjun Wei took over the debt-ridden company and turned it into a pickup-truck manufacturer. Great Wall focused on the domestic market and correctly predicted that Chinese consumers, like those in the United States, would shift their taste from sedans to SUVs. In 2002, it rolled out the first Safe SUV, priced at 80,000 RMB, and sold 30,000 units. Safe ended up becoming the third-best-selling SUV that year. Hyundai didn’t release its first Tucson SUV until three years later and at a much higher price—around 200,000 RMB per unit.

In 2013, Great Wall launched a separate SUV brand, Haval, and hired former BMW designer Pierre Leclercq as head of design. The brand since has become a leader in the category and has topped the best-selling list for several years. Haval has further raised the profile of SUVs, and it helped lift Great Wall to the million-seller club in 2016. “Local players now are almost as good as Beijing Hyundai and at least 20,000 RMB cheaper,” said Robert Bao, a board member at BAIC.⁸

As China’s homegrown brands squeezed Hyundai, its foreign peers made life even harder. Unlike in the early days, when an outdated model could thrive and yield high margins, China had grown into one of the most competitive markets for the auto industry. Global automakers had to introduce new models to maintain their positions, and prices had to fall. Geely’s Li once explained the evolution as follows: “Santana was sold for over 200,000 RMB, and Xiali was priced over 100,000 RMB when steel, plastics and labor were cheap in China. Now the cost of making a car has become expensive, but cars are so cheap. Why? Competition, brought by companies like us.”⁹

When Toyota, Honda, General Motors, and other foreign automakers lowered their prices, there was not much room left for Hyundai. Hyundai’s premium cars, such as the Equus, aimed to compete with Toyota’s Lexus but couldn’t command the same premium because they lacked the high-end brand image. “Chinese consumers care about two things,” said Hyundai’s Lee, “design and brand.” Hyundai hadn’t been able to distinguish itself with either. Its pioneering designs had been matched by its Chinese rivals, and its brand had remained the weakest among foreign automakers. Middle-class Chinese buyers preferred Volkswagens, Buicks, and Toyotas, while those in the luxury segment wanted Audis, BMWs, and Mercedes-Benzes.

Marital Conflict

While dealing with the increasingly competitive market, conflicts with BAIC started to spark. Hyundai and BAIC had had a blissful honeymoon. BAIC orchestrated the joint venture’s lightning setup—from negotiations to production in a year; its chairman, Heyi Xu, was also a Beijing municipal official. And BAIC had helped Beijing Hyundai win that sizable taxicab business. Beijing Hyundai’s early success, in turn, saved BAIC from the embarrassment of the AMC failure. Only one year after being established, the joint venture’s revenue reached 9 billion RMB and contributed 12% of the industrial output of Beijing.¹⁰

Yet that honeymoon didn’t last. A key conflict that emerged was over suppliers. Beijing Hyundai initially adopted Hyundai’s suppliers to expedite production and ensure quality. Mobis, Wia, and a few other Korean firms controlled the supply network. BAIC grew dissatisfied with the arrangement. Beijing Hyundai’s deputy general manager, Honglu Li, at the time said: “It’s risky to have main parts coming from a single supplier.”¹¹ Another drawback, from BAIC’s perspective, was cost. As a latecomer, Beijing Hyundai offered competitive prices to gain market share. But sourcing from Korean suppliers, which often charged more than their Chinese counterparts, squeezed margins. Li admitted that Beijing Hyundai’s profit was lower than the industry average.¹² But given the interlocked shareholdings between Hyundai Motor and Hyundai Mobis, industry analysts suspected that Hyundai Motor maintained this arrangement to support Mobis and eventually benefit from Mobis’s gain. William Xu, deputy director of strategic planning at Baoneng Motor, a Chinese automaker, formerly worked in Beijing Hyundai’s purchasing department. He confirmed the suspicion: “When Hyundai came to China, 90% of the top 50 suppliers were Korean. Because of this, Hyundai was able to profit through the parts companies.”¹³

Whether Hyundai Motor has benefited from Mobis’s sales to the joint venture is debatable, but a conflict between BAIC and Mobis boiled over when BAIC rejected Hyundai’s proposal to cut the prices of their vehicles amid a sales slump in 2007. BAIC cited the high sourcing costs. “Previous price-cutting was at the expense of our joint venture’s interest,” said Honglu Li. “This is equivalent to drinking poison to quench thirst.”¹⁴ BAIC insisted on maintaining prices unless sourcing costs fell. The spat lasted for a few months, and Hyundai eventually conceded. Korean suppliers ended up lowering their prices, but BAIC didn’t get what it fought for either: a supplier network that included more Chinese firms.

Following that wrangle, BAIC tried a different tact. In August 2007, it teamed up with Beijing Industrial Development Investment Management Company to form an auto parts company, with 60% and 40% shares, respectively. According to BAIC’s plans, this outfit, named Hainachuan, would provide parts to BAIC’s subsidiaries, including Beijing Hyundai, Beijing Benz (joint venture between BAIC and Mercedes-Benz), and BAIC’s own brands, including Foton Motor and Beijing Jeep. But that didn’t happen with Beijing Hyundai; to this day, it mostly retains its Korean-dominated supply chain. Only recently did it open the network to others. “It’s really difficult for Chinese local suppliers to get into Beijing Hyundai’s supply network,” said Weigang Chen, chief technology officer at Hainachuan. The percentage of parts Hainachuan provides to Beijing Benz is much higher than it provides to Beijing Hyundai, and Hyundai’s closed system makes it difficult to control the cost, Chen added. “It’s not a competitive environment but more like a monopoly.”¹⁵

Xu noted another argument for Hainachuan’s inability to break through: BAIC’s relatively weak research and development capability. “Mobis was deeply involved with Hyundai Motor even during its early stage of car development,” he said. “Mobis controls the platform, and it’s hard for Hainachuan to replace it.” If BAIC wants to get Hainachuan more involved, BAIC must play a bigger role in Beijing Hyundai’s car development, following the example of Shanghai Automotive Industry Corp (SAIC). SAIC developed a low-emission engine with its joint venture partner General Motors and jointly owns the intellectual property. As a result, SAIC’s auto-parts company, Huayu, plays a significant role in that joint venture’s supply network. “Apparently BAIC doesn’t possess the similar R&D capability,” Xu said.

BAIC’s weakness in R&D also undermines its influence on the joint venture, impeding Beijing Hyundai’s responses to changing market conditions. If SAIC senses any change in the market, it can prompt the needed response. SAIC and another of its joint venture partners, Volkswagen, have launched vehicles specifically for China, developed jointly. BAIC doesn’t have that kind of sway at Hyundai. Yet by relying only on Hyundai for new model development, their venture misses market opportunities. An example is SUVs. Though Beijing Hyundai introduced the Tucson in China in 2005, it had been slow to diversify its offerings and mostly missed the golden era of SUVs. “Xi25 and Santa Fe came out kind of late,” Xu said. “In fact, it’s not that Hyundai is too slow. It’s the Chinese market that moves too fast to catch.”

The THAAD Crisis

Amid all these pressures, Beijing Hyundai faced a crisis. In March 2017, the United States deployed a missile defense system called THAAD (Terminal High Altitude Area Defense) in Seoul. Both the United States and Korea say the radar system is meant to protect South Korea from North Korea, but China strenuously objected to its deployment, arguing it could be used to spy on its territory. Anti-Korea protests erupted across China. Korean products were boycotted. Korean TV dramas and music were removed from broadcasts. Trips to Korea were canceled. Lotte Mart, a Korean retailer that had rented its land for THAAD’s deployment, ended up closing its 112 Chinese stores.

Hyundai, too, suffered. Sales plummeted from 1.14 million units in 2016 to 780,000 in 2017 and 790,000 units in 2018. The number dropped again, to 716,000, in 2019. This was when Hyundai shut down one of its five factories in Beijing and laid off over 2,000 employees. “It was THAAD,” said Lee, vice president at Beijing Hyundai. “But we no longer even talk about THAAD anymore. It’s something we have no control over.” That’s true inasmuch as Beijing Hyundai couldn’t have planned for an “unknown unknown” like this. But, on account of its inflexible supply chain, it also likely lacked the agility to respond quickly.

Other automakers’ responses to big setbacks in China suggest that THAAD wasn’t Hyundai’s only problem. Consider the Japanese companies. In 2012, they faced much more widespread protests and boycotts over Japan’s control of disputed islands in the East China Sea. Sales of Japanese vehicles plunged, and Toyota, Nissan, and Honda cut their production in China roughly by half.¹⁶ Yet, by the end of 2013, they had all recovered, with Toyota and Honda even seeing record sales.¹⁷

What’s more, seven months after the THAAD boycotts had started, the Chinese government softened its stance. China and Korea agreed to normalize their relations, and China lifted the ban on group tours to Korea. Yet Beijing Hyundai’s performance didn’t rebound. Since the crisis, Beijing Hyundai has frequently changed its management team. On the Hyundai side, a new general manager arrived in September 2017, only to be replaced within a year. On the BAIC side, the deputy general manager also changed twice in the same period. “During the period when Beijing Hyundai had strong leadership from both sides, its performance was way better than other periods,” Bao said. “Beijing Hyundai probably sat on their success for too long. The same product positioning and lineup helped them achieve that big role in the initial stage. So they kept the same strategy for years.”

Now Beijing Hyundai is trying to elevate its brand, improve its technology, and invest in alternative-energy vehicles. Will it be able to return to the million-unit club in the near future, or will it follow its country mate Samsung, the maker of mobile phones, and fade from the Chinese market? That remains to be seen.

Applying the Framework

Hyundai has been in China for almost two decades and has experienced two distinct eras: success, then struggles. Here are some of the key explanatory factors:

• When Hyundai entered China, it possessed alpha assets. Unlike other foreign automakers, such as Volkswagen, which had to devote enormous effort and time to building a supply network, Hyundai replicated its sturdy Korean supply chain. That ensured quality and speed. Hyundai also scaled up its manufacturing quickly. For a while, the joint venture was the third-largest automaker in China, after Volkswagen and GM. The venture’s initial product, a best-selling model brought directly from Korea, outperformed competitors, thanks to superior design. Coupled with competitive pricing, it was an immediate hit among Chinese consumers. Though Hyundai didn’t have a strong brand, those three alpha assets carried it through its early years and contributed to its initial success.
• Hyundai’s governance structure—a 50–50 joint venture with a local company—is inevitably more complex and unwieldy than other foreign companies’ China setups. Both parent firms contributed key managers, yet the disagreements between them never stopped. That slowed decision-making and the ability to respond to China’s rapidly changing market. When the performance of the joint venture deteriorated, both parents meddled, leaving less autonomy for the local executives. An extreme example was the executive upheaval from 2016 through 2018, when Hyundai replaced its general manager twice and BAIC replaced its vice general manager twice.
• Strategically, by partnering with BAIC, Hyundai aimed to start with cost leadership. Then, as China’s middle class swelled and Hyundai’s brand became established, it planned to move upmarket. But that strategy was never fully realized. Hyundai stalled out, doing well initially but never elevating its brand. Chinese automakers soon matched Hyundai’s design capabilities, yet did so while retaining a cost advantage. Hyundai’s Korea-centric supply network inhibited lowering costs. Other foreign automakers responded by updating their models and cutting prices, further squeezing Hyundai. Hyundai also lagged behind Chinese consumers’ demand for more and better SUVs.
• And then there was THAAD. You have to call that bad luck. A question to consider is whether Hyundai could’ve better endured that crisis, in the way the Japanese carmakers did theirs, if its China operations and its relationship with BAIC had been stronger.

These elements and other factors in the framework are noted in Table 4.1, along with our subjective assessment of the decisive factors.

Table 4.1: Summary of Success Factors for Hyundai

Factor	Era I	Era II	Explanation
Demand	▲▲	▲▲	Strong and growing demand in China for automobiles.
Access to market			Hyundai navigated the regulated market by partnering with Beijing Automotive.
Advantage	▲▲▲	▲	Initially Hyundai had strong alpha assets in the form of supply chain, production capability, scale economies, and product design. Eventually these waned.
Commitment	▲▲▲	▲▲▲	Hyundai displayed a strong commitment to China, investing $15.8 billion and building five factories. It chose to stay even amid the THAAD crisis.
Governance			Governance structure—a 50-50 joint venture with a local company—is inevitably complex and unwieldy.
Leadership			Executives provided by both partner organizations.
Strategy	▲▲		Hyundai aimed to start with cost leadership and later move up market. The second part of this strategy was not realized.
Product			Initially, the product was successful with the Chinese middle class, but Hyundai failed to invest in innovation to track changing tastes.
Agility			Joint venture structure resulted in sluggish decision-making.
Luck			THAAD was very bad luck.
Note: Upward-pointing triangles indicate a positive factor. Downward-pointing triangles indicate a negative factor. The number of triangles is our subjective assessment of the relative importance of the factor. We omit indicators for those factors that we do not believe were significant for this case.

We now turn to the story of LinkedIn, a company that remains in China, yet has struggled to meet its early expectations.