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." ◦

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