Friday, March 21, 2008

Korean Management Practices at Hyundai USA

by David Welch, David Kiley and Moon Ihlwan

The Korean carmaker and its Kia subsidiary are trying to move upscale in the U.S.—but culture clashes, management turmoil, and strategic discord are making for a bumpy ride.

On the morning of Monday, Feb. 4, about 20 of the top executives at the Irvine (Calif.) headquarters of Kia Motors America left their warm offices to stand outside in near-freezing cold. They were awaiting the arrival of Byung Mo Ahn, the president of Kia Motors. The group organized itself into a receiving line and stayed in formation for more than 15 minutes until Ahn arrived in a chauffeur-driven Kia Amanti sedan.

Although some of the executives were shivering, it would have been bad form to return inside: Standing to greet top brass is customary at Hyundai Motor, Kia's Korean parent. After spending a full week in Irvine, Ahn performed another ritual that has become common at the company: sacking the American leadership team. On Feb. 8 he axed Len Hunt, president and CEO of Kia Motors America, and Ian Beavis, marketing vice-president.

It marked the fourth shakeup in three years for Kia's American operation. The U.S. unit of Hyundai, meanwhile, has churned through four top executives in five years. Many of the departures have come at awkward times. Hunt and Beavis got the news at the airport as they were about to fly from Irvine to an annual dealer meeting in San Francisco. According to several sources, Hunt's predecessor, Peter Butterfield, was dismissed during a dinner meeting with dealers at the Bellagio Hotel in Las Vegas—between the entrĂ©e and dessert. The companies declined to comment on any of these executive departures.

The management shakeups at the American divisions of Hyundai and Kia—two once-separate manufacturers that are now essentially run as one company—come at a critical period. Both brands, which were originally marketed to American consumers as utilitarian econoboxes, are trying to move upscale and sell sedans that can compete with Cadillac and BMW. They are also banking on rapid growth in the U.S. Next year, for example, Kia is opening a plant in Georgia that was built on the optimistic assumption that the company could sell at least 370,000 cars in the U.S. annually. But sales momentum has been slowing. Kia sold 305,000 cars in America in 2007, 13% shy of its target of 350,000. Given their aggressive growth plans, both Hyundai and Kia "need North American auto expertise," says James N. Hall, president of 2953 Analytics, an auto industry consultancy near Detroit.

The problem is that the companies keep booting out American talent. And many of the American executives who do stay find parent Hyundai Motor's corporate culture to be suffocating. According to several current and former managers, Hyundai Chairman Chung Mong Koo, Kia's Ahn, and other top executives run the companies in a far more authoritarian style than do most American CEOs. The critics say his team micromanages details, rarely listens to advice from local managers, and displays little tolerance for disagreement. "It's a very feudal approach to management," says Bob Martin, a former sales executive who left Hyundai in 2005 to become a consultant at CarLab, a Santa Ana (Calif.) consulting firm. "There's a king, he rules, and everyone curries his favor. It's very militaristic."

While Chung's top-down management style might rub some Americans the wrong way, his long-term track record in the U.S. is impressive. Under his leadership, Hyundai has nearly doubled sales in the country since 2000, to 467,000 cars last year. Kia has posted almost identical growth.

Chung, who was convicted of embezzlement in Korea last year but had his prison sentence suspended, has won praise for creating a highly disciplined company. When quality complaints started to plague Hyundai during the 1990s, he ordered engineers to attack the problem. By 2004, Hyundai had soared up the rankings in quality surveys. Unlike Detroit's Big Three, Hyundai and Kia have fewer management layers to hold up decisions. "I can see where Americans would feel uncomfortable," says Alice Amsden, a professor of political economy at the Massachusetts Institute of Technology who has written books about Korea and other developing Asian economies. "American management is used to a different style. But Hyundai deserves a lot of credit."

Both Hyundai and Kia, speaking through representatives at their American units, said that all of the American managers who have left the companies in recent years were treated fairly. Even some of the executives who have departed praise the companies' management culture. "Being aggressive doesn't make them bad," says Robert Cosmai, who was CEO of Hyundai's American unit for two years before getting fired in January, 2006.

Boldness is part of Hyundai Motor's DNA. Like many of Korea's early corporate patriarchs, founder Chung Ju Yung had a simple strategy: Build factories first, worry about sales later. Starting with a small construction company in 1947, he moved into autos, shipbuilding, and other industries. Hyundai became one of the most successful Korean chaebols, family-controlled conglomerates with close ties to the government. But it was broken up into several pieces in the late 1990s in the wake of the Asian financial crisis. Last year, the global revenues of Hyundai and Kia grew 7%, to $63.5billion.

Chung Ju Yung's heirs continue to run Hyundai Motor, and his business philosophy still prevails. In America, the two companies often establish sales targets based on what their auto plants can produce—a persistent source of tension with local managers. Several past executives say that Hyundai and Kia have set unhealthily aggressive sales goals that are causing inventory to pile up. Hyundai has about 32,000 Sonata sedans parked in lots around its Montgomery (Ala.) plant with no orders from dealers. "The production-oriented style of pushing all the time won't work anymore," says Kim Ki Chan, professor of auto economics at Catholic University of Korea.

One consequence of this philosophy is that both Hyundai and Kia have been forced to sell more cars to rental fleets—a practice that tends to make brands lose cachet with buyers. But consumer psychology is something that Hyundai Motor has never mastered, says consultant Hall. At bottom, it has always had the mindset of a manufacturer, not a marketer. Many of the products made by Chung Ju Yung's original conglomerate, such as locomotive engines and tanks, were sold to business. Hyundai Motor's leadership team "lacks marketing savvy," says Yoo Young Kwon, a Seoul-based auto analyst at Prudential Investment & Securities (PRU). "What they need in the U.S. is to let American executives implement marketing strategy in a sustainable way."

But handing over the reins to American marketers is not something that seems to come naturally to Hyundai Motor. After walking through the receiving line on that Monday morning in February, Kia CEO Ahn spent the day criticizing the company's advertising. The brand has marketed itself as sporty and fun as opposed to the more serious Hyundai. In one of the meetings, Ahn said he hated an ad depicting a Kia dealer doing an impression of the film Flashdance, dancing wildly as the jingle "He's a maniac, maniac, and he's selling like he's never sold before" plays. Ahn halted the spots and said Kia's message should lose the campy humor.

Four days later, Kia America CEO Hunt and marketing vice-president Beavis lost their jobs. The firings came as a surprise to the Kia dealers gathered in San Franciso's Moscone Center. Some say they're worried that the brand's marketing message will become diffuse. "It doesn't inspire a lot of confidence," says Ed Tonkin, a Portland (Ore.) Kia dealer who opened one of the brand's original U.S. stores. "The danger is that every time you get a new person, they will go with different marketing and advertising."

Since the meeting, Ahn has taken over Hunt's old office and expanded it. He has tried to mollify dealers with offers of increased corporate support. Kia and Hyundai are also making a greater effort to improve the morale of disgruntled American executives. Kia spokesman Alex Fedorak says many of them get training from a Korean culture coach.

Cross-cultural outreach is long overdue. Several Americans expressed resentment at the so-called coordinators, the Korean overseers whose job it is to keep an eye on American managers. Culled from the ranks of up-and-coming stars in Seoul, they sit alongside American managers, monitoring decision-making and results. Both Hyundai and Kia have about a dozen coordinators. They must agree to major decisions—and sometimes smaller ones, such as whether to award vacations to dealers who hit sales goals. Japanese automakers also have coordinators in their U.S. operations, but they play more of an advisory role while the American executives have free reign to make major decisions.

Mark Barnes, chief operating officer at Volkswagen Group of America (VLKAY), who worked as a sales executive at Hyundai Motor America until 2006, says the coordinators applied pressure to achieve targets. "If you were subpar, they would ask what you're going to do to get your numbers up," Barnes says. During some conference calls, he adds, the coordinators would speak Korean to managers in Seoul, all but shutting out the Americans.

Kia spokesman Fedorak says the coordinators serve a valuable purpose: bringing the corporate vision from Seoul to America, then relaying the needs of the local market back to headquarters. Since few American employees speak Korean, the coordinators also act as translators. While acknowledging that Kia has a Confucian-influenced corporate culture in which "father knows best," he said this was not the main source of conflict with American executives. Instead, he attributed the tension to Korean managers' greater comfort with "stretch goals."

At the moment, the stretch goal that is stressing out American executives at Hyundai Motor is the company's insistence on trying to move into the low end of the luxury business. For years, executives in the U.S. have been telling their counterparts in Seoul that the two brands are not strong enough to sell for much above the price range of $12,000 to $25,000. But their warnings have been ignored. Chung believes that going upscale is essential for Hyundai and Kia. The weak dollar has hurt profits, and concessions made to the Korean unions are eroding the company's cost advantage. So both Hyundai and Kia have launched a slate of vehicles priced near or above $30,000. In 2005, for example, Kia released the Amanti (Ahn's limo) with a mandate to sell 20,000 a year.

The company didn't come close to hitting that number, selling just 5,500 of the sedans, priced between $25,000 and $30,000, last year. Still, nobody expects Chung to heed the advice of some American managers and pull back. "The top-down management style hasn't changed at Hyundai," says Lee Hang Koo, auto industry specialist at the Korea Institute for Industrial Economics & Trade. "This is bound to lead to cultural clashes with Americans. We've seen management churn in the past, and there's no reason to believe it will stop." ◦

Monday, March 17, 2008

New South Korean President is Struggling Early

Just sworn in, Lee Myung-bak already seems out in the cold

His thunder stolen internationally by the arrival of the New York Philharmonic in Pyongyang, Lee Myung-bak was sworn in as South Korea's 17th president on February 25th. In freezing weather in Seoul, Mr Lee pleaded for support. The audience, mostly from his Grand National Party (GNP), dutifully applauded—but with little enthusiasm. The president, elected last December, has made a poor start to his five-year term.

Mr Lee, cleared this month of any wrongdoing in a failed investment scheme, nevertheless faces public suspicion over the past business dealings that made him a multimillionaire. And some of his nominees for cabinet posts are already under clouds. Three of his ministerial choices—for sex equality, “unification” (ie, dealings with North Korea) and the environment—have resigned over criticism of their property dealings. This is a highly sensitive issue in Seoul, where many cannot afford to buy their own homes. Some of his nominees' children are foreign citizens. One was thus able to dodge the mandatory military service. This has raised hackles. Most South Koreans cannot afford to send their children abroad to acquire foreign passports.

Most economists think Mr Lee's bold promise of 7% annual growth is optimistic. His plan to build a canal system on the peninsula has united a coalition of civic and political groups in opposition. And his call for a “pragmatic not ideological'' relationship with North Korea has perturbed American leaders. In addition, Mr Lee has had to scale back his plans to trim the bureaucracy. Instead of 13 government ministries there will be 15, down from 18 under his predecessor, Roh Moo-hyun.

The president's difficulties are compounded by his shallow political base. In a pun on the name of a famous actress, South Koreans call it “Ko So Young”. “Ko” refers to his alma mater, Korea University, which has supplied him with prospective ministers and aides; “So” to the church he attends; and “Young” to the south-east of the Korean peninsula, which voted for him in huge numbers largely because Mr Roh is widely loathed in the region.

Even within the GNP, Mr Lee has few allies. Party heavyweights have long viewed him as an upstart without their own conservative convictions. Mr Lee is indeed a pragmatist. His landslide victory in December owed much to his success during his time as Seoul's mayor in solving practical problems, such as his reorganisation of the capital's traffic system.

Park Geun-hye, whom Mr Lee defeated to become the GNP's presidential candidate thanks to its system of open primaries, still commands more support within the party. She is engaged in a fierce struggle with him to have her nominees chosen as the GNP candidates at April's legislative elections. If she wins, or the GNP loses the election, the new president's legislative programme could be stymied.

Mr Lee is a somewhat remote and cold figure. He now needs to make himself popular. But both the economic and political climates on the peninsula seem to be worsening. Even when the snow that blanketed Seoul within hours of his taking the oath of office thaws, South Koreans may not warm to him.


Sunday, March 16, 2008

SKT and Citibank Partner to Offer new Mobile Banking Applications

SK Telecom said Thursday that it will set up a joint venture with Citigroup to sell mobile banking (m-banking) and payment solutions in North America and Asia.

The two firms will invest $8 million each to launch Mobile Money Venture, which will be based in San Francisco. The joint venture plans to provide various mobile money transaction services, such as SK Telecom's Moneta service in Korea, from the second half of this year in major American cities and Hong Kong.

"We are exploring a new mobile era with Citi, a global financial services provider,'' said So Jin-woo, president of Global Biz Company, SK Telecom. "With our expertise in telecom and mobile finance, SK Telecom is proud to provide our advanced technology to customers worldwide and deliver the next-generation mobile banking technology.''

SK Telecom will be developing the mobile banking software and hardware systems for Citibank customers in Hong Kong and major cities in the United States first. "This is not an exclusive deal, so we will be able to sell the platform to other banks and mobile carriers in other countries later on,'' said SK Telecom spokeswoman Cindy Kang.

After testing the mobile banking system, the firm will then move onto mobile payment and electronic coupon services, Kang said. The joint venture will be run by Steven Kietz, who oversaw e-commerce and direct banking initiatives at Citi.Mobile commerce is gaining popularity all over the world, especially in the Asian region. Most services enables customers to check their balance, pay taxes and utility bills and transfer money by accessing the banks' online service.

More complicated ones such as SK Telecom's Moneta provides a system where people can pay at shops, restaurants, on buses and subways by swiping their mobile phone. Often called the "electronic wallet,'' such a phone payment system uses a chip, which is inserted in the handset and electronic readers.

Three Korean mobile firms ― SK Telecom, KTF and LG Telecom ― and a number of commercial banks have been actively developing the mobile commerce services, hoping phones will someday replace wallets and ATM machines. But competition between mobile operators and banks for the initiative of the business has caused delays in the deployment of the services, said SK Telecom's Kang, adding that the SK Telecom-Citi venture will not have such problems.

Monday, March 10, 2008

South Korea's First Astronaut

An artificial intelligence expert lost the chance to be South Korea's first citizen in space after reading and removing manuals from Russia's cosmonaut training center without authorization, the government said Monday.

Instead, a female bioengineer will conduct scientific experiments on a Russian voyage to the International Space Station next month, the South Korean Ministry of Education, Science and Technology said.

Russia's Federal Space Agency asked for the change last month, saying Ko San - the original choice - repeatedly violated regulations at the training center near Moscow, Lee Sang-mok, a senior ministry official, told a news conference.
He was replaced by Yi So-yeon, a 29-year-old with a doctorate in bioengineering who had been South Korea's second choice for the mission.

Russian authorities said Ko took his training manual out of the center without permission and sent it to his home in South Korea in September, Lee said. Ko later returned the manual, explaining he accidentally sent it home together with other personal belongings, Lee added.
In February, Ko again broke the rules by getting what was believed to be a manual used by space pilots from the center through a Russian colleague - material he was not supposed to read, Lee said. Ko had signed the center's instructions on the rules.

"The Russian space agency has stressed that a minor mistake and disobedience can cause serious consequences," Lee told reporters.

Lee said he believed the materials in question were not classified.

The state-run Korea Aerospace Research Institute - which employs Ko - has rebuked him, both verbally and in writing, Lee said.

The institute offered an apology to Russia both times, he said. The institute has no plan to take further disciplinary measures.

Anatoly Perminov, chief of the space agency, said in a statement on its Web site Monday that the change was because Ko "violated the code of conduct for cosmonauts," adding that the substitution would cause no complications for the mission.

Yi is scheduled to work aboard the space station for about 10 days with five other cosmonauts, including an American woman, according to Lee's ministry.

The Soyuz spacecraft is scheduled to lift off from a space center in Baikonur, Kazakhstan, on April 8, the statement said.

Ko, 31, will remain at the training center in Star City near Moscow and train with Yi, Lee said.
The mission will make South Korea the world's 36th country to send an astronaut into space, said ministry official Kim Ki-seok.

South Korea plans to complete its first space center by the end of next year as part of a program to lay the technological and scientific groundwork for space exploration in coming decades.
Since 1992, South Korea has had 11 satellites launched, mostly for space and ocean observation and communications. ◦

Saturday, March 08, 2008

The Seoul of World Design

The Korean capital, soon to host the Design Olympiad, is funding projects to promote style in Korean brands—and help keep growth on track

Korea's economy has long been one of Asia's success stories, but pessimists fret for the future as Korea is sandwiched between fast-growing China and longtime rival Japan. Could a government-backed plan to raise Seoul's standing as a city focused on design help keep its growth on track?

Seoul Mayor Oh Se Hoon certainly thinks so. Oh, leader of a city home to nearly a quarter of the country's population of 48 million, is convinced Korea can stand out from its larger neighbors by establishing the capital as a international design center.

The 47-year-old mayor says thinking about design will have numerous benefits. At an individual level he believes cultural benefits can enrich the daily lives of work-obsessed Koreans. Just as important, a renewed creativity can help the economy.
"Design is everything," declares Oh.

The hyperbole isn't pure talk. Since taking office in July, 2006, Oh has set about turning Seoul into a global design hub with a slew of initiatives. He quickly established a new design division headed by a vice-mayor and initiated design competitions aimed at improving the city's looks. He has also begun offering training and seminar courses for young designers. The effort will kick into high gear in October when the city hosts the first Seoul Design Olympiad. It has also commissioned international "starchitect" Zaha Hadid to design the $98 million Dongdaemun Design Park.

Seoul Named 2010 World Design Capital
Oh's ambition got a huge boost last October when the city was designated as the World Design Capital in 2010. The title is bestowed biennially by the International Council of Societies of Industrial Design (ICSID), which represents some 150,000 designers from scores of countries.
These combined efforts, Oh reckons, will help increase the size of Korea's design market—measured by the total of revenues by design houses and investments in design by ordinary companies—to $15 billion in less than 10 years, from $7.4 billion last year. "In coming years we'll see aspects of design in our everyday life," predicts Lee Kun Pyo, president of Korea Society of Design Science and an acolyte of Oh.

Understandably, some find the challenge daunting. After all, Seoul isn't alone in seeking to boost its global standing through design. Hong Kong, Shanghai, Tokyo, and Yokohama all hold ambitions to be design centers. Then there's global competition from cities like London, Paris, Milan and New York, with many decades as leading arbiters of design. Yet Oh and design industry leaders insist there's big potential in Korea. For one, Seoul beat some 20 rivals, including Singapore and Dubai, to be named ICSID's first World Design Capital to be chosen through competition. (Torino, the first city to win the award, was named as pilot.)
Better Design Boosting Korean Blue Chips
Perhaps more important, Korean companies have also made great strides in recent years in improving brands through design. Companies like Samsung Electronics, LG Electronics, and SK Telecom (SKM) boast leading designers in the fields of digital displays, handsets, and mobile products and services, garnering international design awards along the way.
The fruits of their efforts are reflected in the improved global standing of Korea's blue chips. Last year Samsung overtook Motorola (MOT) to become the world's second-largest cell-phone maker (, 12/16/07) after Nokia (NOK).
Samsung also beat all Japanese rivals to become the No. 1 flat-TV brand, and LG consolidated its position as No. 5 in handsets and No. 4 in flat TVs last year. "In the TV market, design will be a critical differentiator," Simon Kang, president in charge of LG's digital display unit told BusinessWeek earlier this year.
Promise from the Next Generation
The argument is straightforward: In a world awash with digital and high-definition TVs boasting super picture quality, it takes more than technological superiority to win business. Consumers may consider the purchase of a flat-screen TV as much for its look as a piece of furniture as for its technogical capabilities (, 1/16/08).
Korea also has a remarkably large number of wannabe designers. In Seoul alone about 11,000 students are majoring in design at 18 universities, while another 2,600 students in 51 graduate schools attended design programs in 2007. Recognizing this potential talent, Japanese auto companies, including Nissan (NSANY), have begun hiring young Korean designers. "When I first saw the sketches that Korean students were drawing, I was utterly shocked. Their design is very emotional and powerful," Shiro Nakamura, Nissan's chief creative officer, said last year.
The city government has set aside $180 million to finance projects ahead of Seoul becoming the first World Design Capital, part of which will go to sprucing up Seoul's streets, buildings, parks, and the Han River running through the city. Big business, sensing an opportunity, will lend a helping hand by dispatching senior designers to help out on projects. Cha Kang Heui, chief designer at LG's handset division, reckons the overall effect could echo the impact of the Seoul Olympics in 1988. "Just as the Olympics often serve as a coming-of-age party for a developing country, design could provide momentum for Seoul," he says.
All Eyes on Seoul This October
For Seoul mayor Oh, though, the highlight of the design drive will be the Design Olympiad in October. Oh plans to invite top designers from fashion, graphics, and other different design fields. He's counting on attracting 2 million people to the 21-day event featuring competitions, exhibitions, live performances, and light shows. If that doesn't whet the world's appetite for Korean design, perhaps nothing will. "I want people around the globe to say, 'If you want to check out the latest in design trends, go to Seoul,'" says Oh.
For more, see BusinessWeek's slide show.


Monday, March 03, 2008

Rise in the Price of Gold is Bad Luck for Korea's Babies

Thirty-four years ago, each of the guests at Moon Sang Soo's first birthday party brought the customary baby present: a 24-karat gold ring.

When Moon was accepted to college, his parents had 20 of these rings, each weighing one don (3.75 grams, or an eighth of an ounce), melted down and recast as a miniature crown, which he now proudly displays in his living room.

But in December, at his own son's first birthday party, only half of Moon's 50 or so guests brought a ring. The others presented the baby with cash, slipping it into his parents' sleeves.

Gold is the traditional Korean gift to wish a baby good health and fortune in life, but with the world price of gold soaring to more than twice the level of just three years ago, that custom is breaking down. Guests at first birthday parties are resorting to alternatives. Some parents who do receive gold in their baby's name are even reselling it as soon as they can.

Gold has been a marker of many life passages in South Korea. Gifts of gold jewelry and watches used to be almost obligatory at weddings. Companies often awarded their employees with gold medals and gave them gold key chains when they retired. It was assumed that gold could be turned into cash in case of emergency.

As the country modernized, other items came into play as gifts. But the tradition of baby rings, valued not just for their monetary value but auspiciousness, has persisted. Most households have from 5 to 20 rings, or more, stashed away for each child, and resistance to selling them remains high.

"People gave us the rings to wish my children longevity," said Joo Sae Hoon, 37, a marketing director at an online bookstore who has two children, aged 7 and 11. "So I wouldn't feel comfortable cashing them in. Maybe I will have them made into necklaces when my children turn 20."

Attaining one's first birthday was a major cause for celebration when South Korea was poor and infant mortality rates were much higher. The gold rings were cherished as talismans safeguarding the children as they were growing up.

Moon said he preferred the gifts of gold to the cash at his son's birthday in December. The gold, he explained, was more likely to end up in his son's hands.

"It's less liquid than cash," he said. "So I can keep myself from spending it."

But the trend toward cash in place of rings seems likely to continue given rising gold prices, which in January surged past the 1980 record of $850 an ounce and are now hovering around $950. Rings that cost about 50,000 won, or $60 to $70, about three years ago have been priced at more than 100,000 won since the beginning of this year.

"A couple of months ago, I paid 95,000 won for a baby gold ring. I thought it was too expensive," said Lee Yon Jeong, a journalist.

Jewelers have been hit hard. According to the Korea Jewelry Association, sales of baby rings are down by half since the typical cost rose above 100,000 won.

"Customers keep coming in to buy baby rings," said Yoon Jae Hee, owner of Kobo Jewelry in central Seoul. "But once they find out that they cost 130,000 won, they hesitate."

"They might buy a ring half the standard size," he said. "Or they resort to cheaper accessories."
Gold jewelers have been trying to lure customers with lightweight baby necklaces or bracelets with bells - supposed to prevent a baby from going missing.

And several jewelers say that now more people are selling gold than buying it.

People have been bringing in graduation rings, lucky charms, key chains, mismatched earrings. A few have even started selling their baby's gold rings.

"The other day a woman pushing a child in a stroller sold us three," Yoon said. "As she did so, she murmured, 'Sorry, son.' "

He said he gave the woman 91,000 won for each ring.

Still, Cha Min Gyu, public relations manager of the Korea Jewelry Association, said he doubts the custom of giving babies gold rings will disappear completely.

"Families will never give up gold rings for their own precious children," Cha said. "In Korea, gold will always be a symbol of health, wealth and prosperity."

Judging by the current level of baby ring production, Cha said he believes that about 40 percent of guests are still bringing gold rings to first-birthday parties. "Otherwise the baby ring jewelers would be out of business by now," he said.

Moon, who received a crown made from his gold baby rings when he was accepted to college, says that once his own son reaches that point, he'll sell the 27 rings presented to his son in December to pay the first semester's tuition.

"For the rest of his higher education," Moon said, "he can support himself."