Reacting to rising isolationist sentiments with production overseas
As the sixth largest global automaker[1], Hyundai relies on demand overseas for over 80% of its sales[2]. In many of its export countries such as the US, UK, and China, rising isolationist sentiment has the potential to impact trade agreements such as NAFTA[3] and the new EU deals resulting from Brexit[4]. For Hyundai, which operates multiple production operations overseas, changes to such agreements can have a drastic impact on its business.
For example, Kia motors, one of Hyundai’s brands, just opened a new factory in Mexico. Since over 80% of the plant capacity was intended for exports outside of Mexico (with US as a primary market)[5], changes in NAFTA negotiations can be of large concern[6].
In Asia, with North Korea’s nuclear activity on the rise, a protectionist response has resulted in the placement of the US’s anti-missile system in South Korea. China’s worries over the potential usage of the system’s radar capabilities on Chinese territories has resulted in a backlash against Hyundai sales[7]. The drop in sales made Hyundai unable to pay a supplier on time, resulting in suspended production at Hyundai’s Chinese factories as the vendor refused to supply parts[8].
In reaction to this recent rise of such political movements, Hyundai has shown commitment to its businesses in markets with strong demand. In the US, given Trump’s promise to spur job creation, Hyundai committed to increasing its investment in existing factories by $1 billion[9]. Hyundai is also considering switching the production of some of its models from South Korean plants to the factories in Alabama[10]. Likewise in China, Hyundai opened its fourth plant and is expected to open another plant in Chongqing this year[11].
In addition to these actions, Hyundai could take further steps to mitigate the risks associated with isolationist political movements.
In the short term, Hyundai could switch more of its suppliers for each factory to local ones instead using Korean suppliers, as is currently done in China[12]. This would not only result in cheaper costs, but also tie the local economy to Hyundai’s business. Governments would be more hesitant to act on policies negatively impacting Hyundai, and as a result, the local suppliers that would be dependent on Hyundai for business.
In the long run, Hyundai should map its current plant capacities to the expected demand across the world. Where isolationist policies are expected to increase tariffs as in the US and China, Hyundai should limit its manufacturing capacity to serve just the local demand. At the same time, Hyundai should consider alternative manufacturing plants for any other markets that are currently served by US or Chinese plants. For example, with the NAFTA negotiations potentially re-instituting tariffs between the US and Canada[13], Hyundai may consider sourcing its Canadian demand from the new Mexican manufacturing plant.
However, concerns remain around an extreme commitment to overseas production: Are there implications to committing resources overseas, such as a potential for protectionist South Korean government policies in response? How should Hyundai compete with local auto players in countries where consumers carry protectionist sentiment?
Word count: 787
Endnotes
[1] Bertel Schmitt, “Top 10 Global Automakers: Daimler Out, PSA In, Ford Up, Hyundai-Kia Down”, Forbes, July 7, 2017, https://www.forbes.com/sites/bertelschmitt/2017/07/07/top-10-global-automakers-daimler-out-psa-in-ford-up-hyundai-kia-down/#1b12902121b8, accessed November 2017
[2] Yonhap, “Hyundai Motor Aug. sales fall 6% on weak overseas demand”, The Korea Herald, September 1, 2017, http://www.koreaherald.com/view.php?ud=20170901000675, accessed November 2017
[3] Mauro F. Guillen, “NAFTA created thousands of good American jobs – just not for Trump’s Rust Belt supporters”, Quartz, February 22, 2017, https://qz.com/914363/nafta-created-thousands-of-good-american-jobs-just-not-for-trumps-rust-belt-supporters/, accessed November 2017
[4] Silvia Amaro, “The UK will not ‘cut and paste’ EU trade deals after Brexit, says trade chief”, CNBC, October 3, 2017, https://www.cnbc.com/2017/10/03/brexit-the-uk-will-not-cut-and-paste-eu-trade-deals-liam-fox-says.html, accessed November 2017
[5] Matthew Rocco, “Trump Effect? GM, Hyundai Pour Money Into America”, FOX Business, January 17, 2017, http://www.foxbusiness.com/markets/2017/01/17/general-motors-to-announce-1b-in-u-s-investment.html, accessed November 2017
[6] Sharay Angulo, Dave Graham, “Mexico to respond to tough U.S. proposals at fifth NAFTA round”, Reuters, November 14, 2017, http://www.reuters.com/article/us-trade-nafta/mexico-to-respond-to-tough-u-s-proposals-at-fifth-nafta-round-idUSKBN1DE1PQ?il=0, accessed November 2017
[7] Youkyung Lee, “Hyundai Motor’s China plant halts again on supply disruption”, FOX Business, September 4, 2017, http://www.foxbusiness.com/markets/2017/09/04/hyundai-motors-china-plant-halts-again-on-supply-disruption.html, accessed November 2017
[8] Shelly Banjo, “It’s Just Business, Hyundai”, BloombergGladfly, August 30, 2017, https://www.bloomberg.com/gadfly/articles/2017-08-30/don-t-blame-the-missiles-for-hyundai-s-china-shutdown, accessed November 2017
[9] Matthew Rocco, “Trump Effect? GM, Hyundai Pour Money Into America”, FOX Business, January 17, 2017, http://www.foxbusiness.com/markets/2017/01/17/general-motors-to-announce-1b-in-u-s-investment.html, accessed November 2017
[10] Reuters Staff, “Hyundai considers adding SUVs, pickup to U.S. factory: Seoul Economic Daily”, Reuters, November 9, 2017, http://www.reuters.com/article/us-hyundai-motor-usa-production/hyundai-considers-adding-suvs-pickup-to-u-s-factory-seoul-economic-daily-idUSKBN1DA070, accessed November 2017
[11] Bloomberg News, “Hyundai Is Caught in a Perfect Storm in China”, Bloomberg Politics, April 24, 2017, https://www.bloomberg.com/news/articles/2017-04-24/hyundai-faces-perfect-storm-of-china-woes-from-suvs-to-missiles, accessed November 2017
[12] Norihiko Shirouzu, Hyunjoo Jin, “Under pressure, Hyundai clashes with China partner over suppliers- sources”, Reuters, September 5, 2017, https://www.reuters.com/article/hyundai-china-suppliers/under-pressure-hyundai-clashes-with-china-partner-over-suppliers-sources-idUSL8N1LM0K6, accessed November 2017
[13] Leslie Shaffer, “This automaker may benefit from TPP’s demise. Hint: It’s not American”, CNBC, January 25, 2017, https://www.cnbc.com/2017/01/25/hyundai-motor-may-be-an-unexpected-beneficiary-of-trump-move-to-kill-tpp.html, accessed November 2017
This is a very interesting example being that Hyundai is headquartered in South Korea. On the one hand, finding local suppliers for the plants in China should have positive effects on simplifying the supply chain in an unstable part of the world. On the other hand, U.S. and South Korean interests are linked in the region, and the South Korean government might see such a move by Hyundai as self-interested and pandering to China. Economic and political tensions in the region are likely to stay the same or increase. So from a business perspective, I think Hyundai should start to move suppliers closer to the plants in China and elsewhere to preempt further economic deterioration and tariffs.
A couple of thoughts I had after reading:
1) What would be the impact on general quality by shifting production from Korea over to the US? I think we’ve seen cases throughout the semester of companies going both ways. Will Hyundai be able to maintain its customer promise with such a drastic shift in its manufacturing origin? I’d also assume a shift to production in the US comes with significantly higher costs, specifically in labor. While I certainly think a more globalized supply chain is necessary for any business to continue growing, I question whether the timing is now, given the uncertainty in both the US and in Korea.
2) I also wonder how such changes would be received by the South Korean government and public. Koreans are proud folks, and I think it’s safe to say that a major shift in production to China would be met by significant media resistance, especially given recent tensions between the two countries.
I wonder if the current isolationist mood is the crest of the wave or just the start?
If the current isolationist sentiments are just the beginning, I think the countries with the biggest economies and domestic markets will stand to benefit at the expense of smaller countries. If United States and China continues to become more focused on requiring foreign manufacturers like Hyundai to locate factories domestically, then the manufacturer will almost be compelled to do so or potentially become unable to access the largest markets in the world. The global economy will be worse off, but individual countries with a certain heft will stand to benefit.
At the end of the day, we should try to understand the roots isolationism and nationalism, which I believe is the deterioration of traditional factory jobs. Just re-training these workers with new computer science or tech-related skills will not be enough. There are simply fewer technology/technology-service jobs gained than the factory jobs lost. Countries around the world will need to figure out address structural unemployment and the ongoing technological shift to machines or risk severe civil discontent.
After reading this article, I come away with the sentiment that Hyundai’s problems and the effect of its business due to political sentiment and policies are difficult for the company to grapple with. While the solutions you suggested about limiting manufacturing supply to match demand and moving manufacturing to more politically advantageous countries make sense in concept, they seem more reactive rather than proactive may not be feasible due to 1) the differences in labor costs in different countries and 2) fixed cost of having already built plants and long lead time to build new plants. I do like the idea of sourcing more materials from local suppliers, as this is a more preventative measure. Hyundai has no idea what the next big political disruption will be, so focusing on more preventative measures is key. I think a way to do this is to focus on what are traditionally the more stable markets: the US, for example.
Thank you for posting. I appreciate your perspective on potential short term and long term changes to the business model to make the business more defensible to isolationist policies. In the short term, your recommendation was to switch to local suppliers. While I agree that this would protect the business from the changing political environment, I disagree that this strategy would reduce costs. It may decrease transportation costs of input materials, however, the price of these materials would surely be more expensive than sourcing them from emerging markets such as China.
This increase in costs would be directly be at odds with Hyundai’s customer promise of offering good value cars to its customers. Do you believe Hyundai can sustain its value proposition globally if input costs rise?
While your recommendation for Hyundai to erect plants in foreign countries to mitigate the risks of isolationist policies is very logical and innovative, I think one must also consider the negative externalities as well.
1) Increased raw materials and labor costs
Building plants in Mexico or Alabama may mean higher costs. If Hyundai is importing a large portion of its raw materials from neighboring Asian markets today, building a plant oversees will see a significant jump to accommodate for transport costs. Furthermore, labor costs may be higher in the Americas compared to Asia.
2) Lack of relationships
As seen in the Asahi case, relationships with suppliers are critical in ensuring production process efficiencies, lowering inventory levels, and ensuring quality. If Hyundai wants to enjoy these efficiencies, it would need to source new suppliers locally, and build these relationships from scratch, which would take time.
3) Cultural differences
There are material differences in the way people work and communicate at work between different countries. Hyundai would need to invest in bringing a significant number of experts from its current plants to new plants over seas to train local personnel. This requires time and a financial investment, with risks that new plants will never attain the same levels of efficiency, as we saw in the Fuyao Glass case. Hyundai needs to assess whether it is worth it to take this financial hit to build plants in these markets.