Hyundai's Hurdles

Will union unrest slow the auto maker's global growth drive?

Hyundai Motor Co. is on a roll. In the past three years, the Korean auto maker has seen its U.S. market share rise 70%, to 2.4% of all autos sold, from 1.4% -- and that doesn't include the 1.4% share of subsidiary Kia Motors Corp. In the U.S., Hyundai has gone from a late-night talk show joke to a value-priced alternative to Japanese sedans and sport-utility vehicles. Its microcars are a hit in Italy and are selling well elsewhere in Europe, helping boost Hyundai and Kia's share on the continent by 20%, to 2.4%, since 2000. And in India, a customized version of the Santro subcompact has helped Hyundai become the second-best-selling car brand in the country.

In short, Hyundai is fast becoming a global company. Since 1997, it has opened plants in Turkey, India, and China. And by 2005, it plans to open its first plant in the U.S. The goal: to move up within seven years from the world's No. 9 auto maker to No. 5, which would mean jumping past PSA Peugeot Citroën, Renault, and Honda and nudging aside current No. 5, Volkswagen. Hyundai's rivals have reason to worry. In the first six months of this year, its exports jumped 30%, to 627,728 cars -- at a time when global auto sales contracted. "We had projected exports of 1 million vehicles this year, but we are now revising it upward," says Yang Woo Suk, Hyundai general manager for exports. Hyundai Motor Group, which includes Kia Motors, aims to sell 5 million units in 2010, up from nearly 3 million this year. The group is expected to post a net profit of $1.3 billion on sales of $23 billion this year.

As the sultry summer wears on in Korea, though, storm clouds are threatening Hyundai's expansive dreams. One key to the carmaker's success over the last five years has been its ability to keep its traditionally restive labor unions at bay with near double-digit annual pay raises and other concessions. This summer, however, it appears that the nasty annual ritual of labor unrest has returned to the southeastern city of Ulsan, Korea's Motown. Since June 25, thousands of angry workers wearing red headbands and carrying banners have rallied daily, demanding better working conditions, an 11% annual pay increase, and union approval of management decisions affecting jobs. Although they have yet to call a full-fledged strike, the workers have staged several mini-work stoppages that the company says have cost it $480 million in lost production.

The union's chief worry is that Hyundai's aggressive overseas expansion could mean an exodus of jobs from South Korea. "Certainly we have to think about risks that the management may be creating, particularly if their rosy projections fall apart," says Ban Il Hyo, a Hyundai union leader. The union lost nearly a fifth of its once 42,000-strong membership at the height of the 1998 Asian crisis, when Hyundai found itself dangerously overextended. And despite its global success, domestic sales are down 10% so far this year, mainly due to Korea's stagnant economy -- making it more likely, in the workers' view, that local jobs might be sacrificed.

Worker militancy has already held up one key initiative. In February, Hyundai and DaimlerChrysler, which owns 10% of the Korean auto maker, were scheduled to launch a joint venture to make 90,000 trucks annually in Korea. But union demands that they be allowed to name at least one director and that jobs be protected even if the venture fails have held up the deal.

For now, analysts do not expect the labor agitation to dissolve into a debilitating strike. But they project that if Hyundai's worldwide sales continue to rise, next summer workers will be back to demand a bigger slice of the pie.

And Hyundai management remains very bullish on the company's global prospects. The company last year sold 375,119 cars and light trucks in the U.S., up 8.3% from 2001. And while its U.S. growth has slowed so far this year, Hyundai remains well ahead of the market, with a gain of 4.9%, vs. an industrywide contraction of 2.5%. Its performance in the U.S. provides a peek at Hyundai's strategy going forward: Instead of flooding the market with stripped-down economy cars, Hyundai is aiming higher, with vehicles such as the Santa Fe, an SUV that sells for $18,139 to $25,589, and the Sonata sedan, going for $16,039 to $19,914 and seen as a rival to Toyota's Camry and Honda's Accord. "We're moving from a brand of last resort to a brand of choice," says Finbarr O'Neill, president and chief executive officer of Hyundai Motor America. The company wants consumers to think "it's O.K. to have a Hyundai in your driveway."

Hyundai has also made impressive gains in Europe. In the first five months of this year, when overall new auto registrations declined 3.8%, Hyundai posted a 7.1% increase. Kia, meanwhile, saw its Western Europe sales jump by 43.5%. The Korean cars' low price and improving quality are their main selling points, but Hyundai and Kia have also benefitted from an expanded dealer network and the fact that they offer Europeans the diesel engines many prefer. Says David Sargent, director of European operations for auto quality researcher J.D. Power & Associates Inc.: "Hyundai's quality is improving rapidly. They have made huge strides in the last few years. Buying a Hyundai is not a risk anymore. And their styling is quite good."

The big test for Hyundai will come in 2005, when its first U.S. plant, now under construction in Montgomery, Ala., comes on stream. It will be a nonunion shop whose first-year production will be 150,000 Sonata sedans for the U.S. market. Hyundai hopes to ramp up production to 300,000 vehicles by 2006. Competitors are taking the company's new initiative seriously. "Hyundai has done a remarkable job of accelerating the learning curve and development cycle of their products," says James E. Press, a U.S.-based director of Toyota Motor Corp. "They've closed the gap faster than anyone ever thought they would."

Hyundai's other important new market is China, where it gained a foothold late last year by setting up a joint venture with Beijing Automotive Industry Holding Co., China's sixth-largest auto company. Daewoo Securities auto analyst Cho Yong Jun says Hyundai is poised to sell 50,000 Sonatas in China this year. Next year, Hyundai plans to add its compact Elantra. By 2010, the company hopes to sell 500,000 cars in China. "The performance in China and the U.S. over the next several years will decide Hyundai Motor Group's fate as a global player," says Kim Kwang Joo, senior vice-president of Kia Motors, which has its own joint ventures with local carmakers Dongfeng Motor Co. and Yueda Automobile Co. Kia is expected to sell 50,000 Qianlima subcompacts in China this year.

To get to its destination, though, Hyundai will first have to face down its unions. An old Korean adage holds that before you can conquer a foreign adversary, you first need to get your own household in order. That means management must convince its workers that selling -- and making -- cars around the world will benefit them, too.

By Moon Ihlwan in Seoul, with Larry Armstrong in Los Angeles and Gail Edmondson in Frankfurt

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