After you have read the Davidoff article that was assigned for this week, please discuss a) why Marissa Mayer was chosen as C.E.O. of Yahoo and b) Marissa Mayer’s current employment status. Did Ms. Mayer successfully contribute as the C.E.O. of Yahoo or was she vastly overpaid?

How Picking a Chief Executive Is More Random Than Wise: [Business/Financial Desk]

Pushing to Make Hyundai a Global Player: Scenes in the Career of Chairman Chung Mong-Koo

Gale Business Insights: Global Case Study Collection

Abstract

This case study explores the actions of Hyundai Motor Chairman Chung Mong-Koo (MK) as he sought to make the company competitive globally throughout his career with the company.

MK’s corporate leadership and communication style are described in conjunction with the national culture of South Korea, beginning with his struggle to take over management of Hyundai. The family history is presented as it affected company history, including the philosophical differences of company structure between uncle and nephew. Chaebol is defined, along with the proposed changes to that system that have not achieved the expected results. The business ethics of MK are discussed in relation to the indictment of MK based on improper chaeboltransactions, his eventual conviction in charges of embezzlement, and its effect on the company. The study concludes with the steps the company is taking to face future competition in the automotive market as MK focuses on global market.

This case was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. Information was gathered from corporate as well as public sources.

Learning Objectives

This case examines moments in the career of Hyundai Motor Company Chairman Chung Mong-Koo (often referred to in South Korean media as “MK”). Episodes in this study are constructed based on stories reported in the South Korean local news media. After reading the case, students should be able to do the following:

• Apply leadership theories to explain MK’s actions and activities in various circumstances in his career
• Understand the role of corporate and national culture and its contribution or obstruction to becoming a global competitor
• Assess the role of communication in effective leadership
• Explore the ethical and social responsibilities of a company and its leadership in the local and global business context
• Analyze financial statements for performance management and strategic planning

Background

Activity at the site of the new Hyundai-Kia plant in West Point, Georgia, was buzzing. Staff members at the plant were finishing preparations for the visit of the company chairman, Chung Mong-Koo (often known as “MK” in the media and within Hyundai Motor Company). It was the last week of February 2010 and MK was attending the groundbreaking ceremony for a new Kia manufacturing plant. Construction of the plant was due to be completed in Spring 2011, with the capacity to produce more than 300,000 vehicles a year. If sales increase as projected, the plant was expected to operate at its full capacity by 2012 (Tae-gyu).

Everything seemed to be moving as planned. Visiting executives mingled with the hosting management team and workers. Local managers reported that the construction plan had been making steady progress, exactly to plan. There were lively greetings and excited talk about the prospect of construction and production. In the middle of the meeting, in a large conference room, an executive assistant quietly walked in and whispered something into MK’s ear. MK turned stiff and mortified. He could not hide the anger and frustration in his face.

It was just one day before Toyota’s chairman Akio Toyoda was due to appear in front of the U.S. Congress to apologize for problems that had surfaced with technical aspects of the company’s cars. Toyota’s sales had dropped as a result. Hyundai had been enjoying historically high sales in 2009 and projections suggested a continuing strong upward trend. It was a great opportunity for Hyundai to win market share from the dominant Toyota Motor Company. Or was it? A problem that bothered the management for a while was becoming an unavoidable reality: a faulty front-door latch in its Hyundai Sonata model. It was bad timing. The issue would cause Hyundai the same kind of bad media that Toyota was receiving in the American news media. MK had to make a decision and had to make it quickly.

Mong-Koo Takes over Hyundai from His Father

It was a rough beginning for MK, the second son of Chairman Chung Ju-Yung, founder of Hyundai Company. Taking over the motor company was not easy for MK. He had to replace his uncle, se-yung, who built the company and fiercely resisted MK’s attempt to take over the business. It was a tough fight from the outset. Everybody knew Ju-Yung had the ultimate authority over the fate of Hyundai. Since Mr. Ju-Yung Chung is the founder of the Hyundai Company and the ultimate patriarch (as father or oldest brother) of Chung family, he commanded unrivaled power and influence over the entire Hyundai chaebol group. As such, he was often called ‘King-Chairman.’

Ju-Yung began by selling rice in 1930, but after the Korean civil war in the 1950s, his business grew and he prospered. In the civil war years (1950–1953), the entire Korean peninsula suffered major infrastructure damage. During the following decades of the Cold War, the economy of South Korea improved dramatically. Under the strong leadership of Ju-Yung, Hyundai grew at a remarkable pace. Its presence in various industries grew, and its revenues multiplied. Ju-Yung’s businesses ranged from profitable sugar and flour to steel and machinery to ship building. To manage the company’s diversified activities, Ju-Yung delegated responsibility; for the motor vehicle manufacturing business, he delegated sole authority to his younger brother, Chung se-yung.

Nicknamed Pony Chung after his first successful model, the Pony, Chairman and President Chung se-yung dedicated himself to building the Hyundai Motor Company. Arguably the most successful Korean-made car since the civil war, this car was for many Koreans what the Volkswagen is for Germans: the people’s car. Given his illustrious career as Chairman of Hyundai, it was likely a surprise that se-yung was challenged so aggressively for the company’s chairmanship by his nephew, Mong-Koo.

Unlike many other family disputes, this Hyundai family conflict was not so secretive. Pony Chung acquiesced to his big brother Ju-Yung’s demand, giving up power to MK. The restructuring, announced on 4 December 1997, involved replacing all the people associated with Pony Chung’s leadership team. Everybody thought that Pony Chung was finished. At the shareholders meeting on 26 February 1998, however, many attendants were surprised to hear the announcement of four new board members, all from Pony Chung’s team. It was clear Pony Chung had fought back. Giving up the company he had built for the past three decades was too much for him to accept.

A debate ensued over whether to separate the car manufacturing from the other Hyundai businesses. MK wanted control of the entire company. After all, Hyundai Motor Company contributed more than 10 percent of the entire Hyundai group’s earnings. That percentage reached around 25 percent if Hyundai Motor Services were included. MK believed the motor side of the business could not be separated from the group; Pony Chung did not agree. He had a hidden plan, to break the motor company off from the group and put it under his sole control.

There was another complication. MK and his father were preparing to buy Kia Motors Corporation, Hyundai’s rival in the Korean domestic market. Kia was financially strapped and available to the highest bidder. MK and his father were involved in the aggressive bidding process. On this move, Pony Chung also disagreed. He believed a merger might jeopardize his chances to take over Hyundai Motor’s management. Ultimately, he hoped to separate the motor company from the entire Hyundai group, and was a passive player at best in the bidding process for Kia. Through many small and yet critical management decisions, Pony Chung attempted to stop or minimize his nephew’s influence. He made sure that all the board members were on his side in case the internal struggle evolved into a legal battle. Key sales managers and engineers were his loyal subordinates. But all of this effort was ultimately futile. Ju-Yung, the 86-year-old founder of the Hyundai, forced his younger brother to retire, giving up any claim to the Hyundai empire and acknowledging Ju-Yung’s son, MK, as its head.

New Challenges

Upon taking over the management of Hyundai from his well-respected uncle, MK had to be conscious of much criticism about his management abilities. While he had acquired some management training under his father and managed an automobile services company, he was accused of using vague language in his communications and was often portrayed as unintelligent in the media. No one could doubt, though, that he was determined and single-minded.

MK’s first challenge was to show he could do better than his uncle. He put forth his global vision, promising that he would make Hyundai Motors one of the top five auto makers in the global market. Engineers and manufacturing workers were put under extreme pressure to meet this goal. Sales managers were pushed. Employees at all levels experienced pressures and expectations that they had not previously been accustomed to. The existing engineering process and quality improvement expectations did not catch up with demand for production. The continuous push for sales and production generated some serious complaints internally and from consumers. So MK made a tough decision. On January 14, 2000, Hyundai Motors announced a voluntary recall of all minivans for free inspection and reinstallation of particular parts. The company distributed a press release about its voluntary recall to inspect and replace parts for any defect discovered in its product. The recall was unprecedented in Korea (Weekly Dong-A). Many thought the action unnecessary, given the company’s virtual monopoly in Korea. The move, however, was designed to change the international image of Hyundai, demonstrating the company’s transparency and quality. There were five recalls in six months. Management dismissed concerns about the frequency of recalls, suggesting that recalls are common even among top global automakers. The demand for cars in the domestic market of Korea practically exploded.

MK’s strong leadership helped Hyundai to make great strides in the global automotive market in the late 1990s and early 2000s, but his autocratic style also caused his company and himself controversy and punishment as well. To understand how MK was able to act so decisively, and to understand how this decisiveness nearly led to his downfall, it is necessary to understand the Korean system of chaebol.

Korean Culture and Chaebol

Korean culture and chaebol are factors in the process and determination of management succession. Chaebol is the Korean version of a corporate conglomerate. A chaebol group has many companies under its control. It is similar to Japanese keiretsu (e.g., Mitsubishi or Sumitomo group) and U.S. conglomerates (e.g., Citigroup or GE) but not identical to them. Unlike an American conglomerate, which integrates many companies in related industries, a chaebol extends to any lucrative industries under the ownership of one person or family. The Chaebol Hyundai, for instance, was involved in various related and unrelated industries such as automobile manufacturing, shipping, transportation, electronics, and steel. Although each member company is legally independent and has its own board and chairperson, its strategic decisions and operations are heavily influenced or controlled by the parent company or the group chairperson. Japanese keiretsu stresses the integration of smaller companies, whereas chaebol is managed top-down by a person or family.

In the early period of Korea’s economic development, President Park Chung-hee (1917–1973; president of South Korea, 1963-1979) supported a few large companies (e.g., Hyundai, Samsung, and Daewoo) so that each company was large enough to get international funding and to undertake major national building contracts such as the construction of highways and railroads. These selected few companies monopolized the market—domestically at least—and were able to grow into international corporations. Following South Korea’s initial nation-building period during the 1960s and 1970s, these few chaebol groups accumulated wealth and exercised considerable political influence. They also had access to virtually limitless finances via the mostly state-run banking system, whereas ordinary citizens had only meager banking resources for financing their homes or small businesses.

Like any industrialized and capitalistic country, the ownership of individual member companies of a chaebol in Korea is broken into millions of shares. However, founders of the chaebol are still perceived to be the owners of these publicly traded companies, wielding complete and unchallenged control of management. Consequently, chaebol founders, including Ju-Yung Chung, built formidable business empires. Ju-Yung’s authority over the Hyundai chaebol group was never challenged or threatened by any internal or even external force. This fact reflects the traditional Korean patriarchal system.

In the early 2000s, public pressure to separate chaebol management from business ownership mounted in South Korea. But as of 2010 there was no sign of the owner family system changing or relinquishing power over large companies. Attempts have been made to ease their control over an entire group of companies. The most recent reform allowed a nominal parent company to be set up to manage subordinating companies in exchange for banning their cross-investment back to the parent company. However, controlling shareholders of the parent company can control all the subordinating companies even without owning a single share of them. The net result is not significantly different from the old legal framework.

For many chaebol corporations, a surprisingly small percentage of the total shares is actually owned by the controlling family. The average ownership (shares owned) by the controlling family of 100 chaebol groups is between 4.5 percent and 5.2 percent. MK, for instance, owns about 5 percent of the Hyundai Motor Group, though he has complete and unchallenged control of the business. Because the chaebol groups have significant influence in shaping industrial policy and daily business practices, they also wield financial power via banks and stock markets. They use these financial resources in expanding their businesses. Here is how it works.

Suppose one wealthy person invests US$10 million and establishes a parent company. It attracts another US$10 million in the stock market (50 percent minority investment) and 100 percent in loans from financial institutions. (See Figure 1.) Total assets are now four times the initial investment or US$40 million. This parent company reinvests 50 percent (US$20 million) of the total assets and establishes two subordinate companies. Each subordinate company multiplies its assets four times (total assets of US$40 million) and reinvests its 50 percent in another two subordinate companies. In summary, with US$10 million investment, the wealthy investor has complete control of five companies with the aggregate total assets of US$280 million.

Chaebol Policy and Corporate Governance

Corrupt Practices for Inheriting Management Control

Figure 2 shows a recent partial relationship among owners of Hyundai Motor Company Group. Cross-investment between the parent company and subordinating companies was used both to expand the business and as a tool to pass on ownership and management control to children. A new parent company, Glovis, was created with major shareholder investment by both the father (MK) and his son (Chung Eui-Sun), who owned significantly more shares. All businesses (trucking, all completed products, and parts within the group’s companies) were directed to this new company. This type of internal transaction is technically illegal, but legality is often determined by how the law is interpreted and on how transactions are written in a contract. After a while, this nominal parent company was enrolled in the stock exchange, and its share price soared quickly. This outcome was predictable. Such stock-market manipulation is designed to pass the fortune from father to son. But due to MK’s high profile, the scheme got attention and led to a national policy debate on inheritance of wealth and management, leading to charges being filed against MK and other executives in a South Korean court.

Cross-investment of Hyundai Motors Group and Corporate Governance

Prosecutor general Choung Snag-Myoung assigned the case to a special team of national prosecutors, who indicted MK for tax evasion, manipulation of the stock market, and other charges. It became clear that he would be convicted and that he would be sentenced to a jail term. MK was arrested in April 2006 and placed in prosecutor’s custody until the trial ended. For several weeks, MK’s high profile trial fueled a national debate, equally weighted on both sides. The prosecutors asked for a six-year jail term, while MK’s defense lawyers called for leniency. In early February 2007, MK was convicted of embezzlement and sentenced to three years in prison, but given a chance to appeal the verdict before having to serve his sentence. After his conviction he was set free by authorities and was left in operational and managerial control of Hyundai. In the end, MK got the leniency his lawyers requested. Although he was convicted of embezzlement, the appellate court suspended his sentence MK and ordered to pay 1 trillion won (about US$1.1 billion USD) to society and 300 hours of community service. The court based its decision upon the possible economic consequences for the country of sending MK to jail. The public was left to reflect on questions of judicial fairness. The outcome seemed the expression of a distorted justice system, in which guilty individuals without money go to jail, but those with money do not. Judge Lee Jae-Hong, who presided over the appellate court panel that suspended MK’s jail term, reflected “I am also a citizen of the Republic of Korea. I was unwilling to engage in a gamble that would put the nation’s economy at risk” (Associated Press).

Continuous Success amid Turmoil

Despite all the turmoil and difficulties, Hyundai Motor Company has steadily increased its car sales in the domestic South Korean and global markets. Its presence and sales in the United States market significantly increased between 2000 and 2010 (See Table 1). The company sustained an average 6 percent annual sales increase between 2001 and 2007. The global economic downturn of 2008 was chaotic for every major corporation, and Hyundai was no exception. In 2009, it rebounded and achieved an 8 percent sales increase. In 2010, Hyundai achieved 13 percent increase from the previous sales and far surpassed 2007 sales record.

Hyundai Motor Co. Car Sales

Moreover, Hyundai’s market share is steadily increasing in the United States: 2.02 percent in 2001 and 3.03 percent in 2008. It celebrated the 2.5 percent market share increase in 2005, which many analysts thought Hyundai Motor Company would never be able to reach in the U.S. market. In fact, between 2008 and 2009, the company showed even stronger market share increase, though total sales volume was hit hard due to the economic downturn in the United States. As of early 2011, Hyundai has well over 4 percent market share and is forecasting 5 percent. Even amid the global economic downturn, Hyundai’s financial structure is getting stronger (See Table 2). Its revenue increased 14.5 percent between 2007 and 2008, though its net income shrunk from US$1,555,536,000 to US$868,828,000.

Consolidated Balance Sheet and Income Statements (U.S. Dollar in thousands)

Behind the steady success was MK’s patriarchal leadership and determination. MK made tough decisions, sometimes contrary to the recommendations of his engineering and managerial staff. Confident of quality improvement advances over the past years, Hyundai launched “the industry’s best warranty,” a 10-year warranty on all Hyundai cars in the United States. No one in the automobile industry at this time had such a long-standing warranty. Responses to this extended warranty in the U.S. market were very positive. Hyundai was becoming competitive with Japanese and European cars.

From the day that MK took over as Chairman, his focus was on the global market. He integrated management control of both Kia and Hyundai Motors and placed the management team in the new head office in Seoul. Both manufacturing plants in India and China were producing to full capacity. The plant in Alabama produced cars for the North American market, while the plant in Brazil manufactured them for South Americans. Kia Motors opened a plant in Zilina, Slovakia, in 2007, and produced more than 200,000 vehicles during the first year, primarily targeting the European market. A plant in Turkey also provided vehicles and parts for the European market. These plants were welcomed by their local communities and supported by the local governments.

Recall and Vow for Continued Quality Management

In West Point, Georgia, MK acted quickly regarding the Sonata faulty front-latch problem: a voluntary recall. In the U.S. Congressional hearings on Toyota’s safety defects, United States Secretary of Transportation Ray LaHood accused Toyota of being “safety deaf,” and the panel accused Toyota of delaying a recall to fix a mechanical defect in its accelerator pedals. Toyota would be fined US$16 million by the U.S. Government, the largest ever levied on a automobile company, and the controversy drastically affected auto sales for Toyota. MK would not allow the same distrust and bad publicity to affect Hyundai. Above all, he wanted Hyundai car buyers to trust that warranty services are not an empty promise; they are a part of any sale of a new Hyundai. In response to the faulty front-latch problem in Korea and elsewhere, MK was quick and decisive in his response, and even at the cost of short-term benefit and profit.

• Given the success of Hyundai cars in the U.S. market in recent years, are they going to be another major competitive forces next to Japanese cars that three American automakers must pay attention to?

• Would Chaebol contribute positively or negatively to the further economic development and the social justice in Korea? Why do you think so?
• Would you call Hyundai an ethical company, given these scenes in the career of Chung Mong-Koo? Why or Why not?