Hyundai Kia: Car Deal Or Car Crash?

The takeover won't cure Korea's auto industry

These are jittery times at Kia Motors, the bankrupt Korean auto maker. The government announced on Oct. 19 that Hyundai Motor Co. won the bidding for Kia. But at Kia, no one--from factory workers to managers--can figure out how selling their company to the money-losing Hyundai can improve their prospects or help reshape Korea Inc. "Everyone is trying to break up the chaebol. But with this deal, a chaebol is getting larger," says Heur Myon Yong, a 63-year-old cleaner at Kia Motors' Asan plant outside Seoul. "This is not restructuring. It should have been Ford or another foreign auto maker that took over."

The Kia acquisition is shaping up to be a painful piece of dealmaking that doesn't really settle anything. Government officials and Korean car executives say the takeover clears the way for a meaningful restructuring of the industry. Yet serious differences exist within the government and the industry itself over what should happen next, how much influence foreign carmakers should have, and how many workers should lose their jobs. Maybe the carmakers and bureaucrats will straighten things out. But right now, the rescue of Kia is looking like an expensive mess.

Hyundai beat out cash-rich Ford Motor Co. in the bidding for Kia, South Korea's No.2 auto maker, by offering $886 million and proposing that creditors forgive 80% of Kia's $7.6 billion in debt. If creditors approve, then Korea may soon have only three auto makers--Hyundai/Kia, Daewoo Motor, and Samsung Motors, which started cranking out cars in March. But officials, analysts, and rivals figure Samsung cannot survive on its own. Although its plant can produce 240,000 vehicles a year, since March it has sold only 50,000 cars.

A Samsung spokesman says the company is exploring its options, including a foreign partner. If it does pull out of cars, Hyundai and Daewoo will obviously be delighted. "There has been too much competition among Korean auto makers. It's killing everybody," says Hyundai Motor Chairman Mong Gyu Chung. With the addition of Kia, Hyundai will dominate Korea's auto market with a 61% share, and it will join the ranks of the world's top 10 auto makers with an annual production capacity slightly larger than that of Honda Motor Co.

The trouble is, Hyundai is not in good shape itself. South Korea's No.1 auto maker reported its first unconsolidated loss ever of $975,000 on sales of $3.4 billion during the first half of this year. Hyundai Motor has amassed $6.3 billion in debt, some five times its equity. Worse, analysts estimate that its factories are now running at 46% of their capacity. Kia's plants are semi-idle too, so a Hyundai-Kia combination will just result in a collection of money-losing factories.

CHASSIS SHARING. The solution is obvious but painful: shut down plants and lay off workers until a viable car company emerges. Since Hyundai and Kia carry the same product lines, Hyundai executives think they can easily build Kia and Hyundai models on the same chassis and get better deals from parts suppliers. Such restructuring would take several years to pay off in the best of times. But Hyundai's domestic market is half the size it was last year, while other Asian customers aren't buying. And government officials, understandably eager to avoid social upheaval, have asked Hyundai not to lay off Kia workers. At this rate, the company may never lower costs.

The question of foreign involvement is another potential flash point between the government and the auto makers. Even though Ford failed to win Kia, many policymakers think that only a large amount of outside capital can make the auto industry work. They are hinting that Hyundai and Daewoo should sell as much as 50% of their companies to foreign auto makers. "[Hyundai and Daewoo] have to find the appropriate partnership with GM, Ford, or another company," says Lae Gue Leem, director general of the Commerce, Industry & Energy Ministry.

Yet the last thing Hyundai and Daewoo want is to cede control or have a truly equal partnership with a foreign carmaker. Ford and GM executives also sound very wary of investing heavily in these debt-laden companies. Hyundai executives would gladly co-develop or make cars at low cost for a foreign carmaker to sell under its own name. "We need to cooperate with a company with brand equity," says Hyo Byung Lee, a general manager at Hyundai. But it will be hard to persuade world-class auto makers to hand over their technology and designs without giving them some control.

IMAGE PROBLEM. Hyundai and Daewoo also desperately want to boost sales in Europe and the U.S., but they suffer from an image problem. Hyundai had a strong debut in the U.S. in 1986--until "the market discovered that these were not Korean prices for Japanese quality. They were Korean prices for Korean quality," says James M. Hossack, vice-president of market researcher AutoPacific Inc. in Santa Ana, Calif. During the first half of this year, Hyundai's U.S. sales slid 8.4%, to 72,420. The company hopes to reverse the slump by introducing new Sonata and Elantra models. Kia has had more success recently in the U.S. Its $15,000 sport utility, the Sportage, has acquired a following, and the rapid opening of dealerships has powered a sales jump of 68.5% during the first nine months of this year, to 65,987 vehicles. These numbers, though, remain comparatively tiny.

There's one more source of pressure. Starting next year, the Seoul government will lift the ban on cars imported from Japan. South Korea and the U.S. have also agreed to ease restrictions on car imports. "From now on, every Korean carmaker should think there is no difference between the domestic and international markets," says Leem.

For Hyundai and Daewoo, that means there may be no place to hide from global competition--especially if the Japanese march in and grab share. A serious restructuring could create Korean carmakers capable of withstanding this onslaught. But in Korea, the restructuring is half-complete at best.