Business Strategy of Hyundai with respect to a Fuel Cell car in ...

Royal holloway, university of london

Business Strategy of Hyundai with respect to a Fuel Cell car in South Korea

Choon Peng NgEunsoo Moon

SebastienTawnya CheatheamVijyendra Niranjan

Yumin Huang

12/Jan/2009

This academic paper applies concepts of Business Strategy to the situation of Hyundai Motor Company and analyses the strategic implications of its new Fuel Cell car with specific reference to the South Korean market. The paper also offers some suggestions with explanations of what strategy Hyundai should employ.

TABLE OF CONTENTS

Introduction............................................................................................................................. 3

Product Concept.......................................................................................................................4

Strategy Analysis......................................................................................................................5

PEST Analysis........................................................................................................................5

A Five Forces Analysis...........................................................................................................6

Recommendations and Justifications.......................................................................................8

Target Market.......................................................................................................................8

Timing...................................................................................................................................8

Expansion............................................................................................................................. 8

Type of Car........................................................................................................................... 9

Pricing strategy.....................................................................................................................9

Sales and Numbers...............................................................................................................9

How to get fuel.....................................................................................................................9

Promotions and Marketing.................................................................................................10

Conclusion..............................................................................................................................11

Appendix 1 - References.........................................................................................................12

Appendix 2 – Bibliography......................................................................................................14

Appendix 3 – Assessment.......................................................................................................15

International Business Strategy – Hyundai / Korea 2

Introduction

For corporations all over the world, 2008 has been a tough year to go through and predictions for 2009 are worse. With the financial crisis, business’ tends to cut down prices and consumers look for even cheaper goods. However, besides this vital change, keeping sustainability of the organization is very important as well. Green customers and environmental friendly products play an important role in the department (Financial Times, 2008). Moreover, the instable oil price influences the world every day. This applies particularly to the car industry where there has been a changing trend to buy cars that give more mileage.

Car companies are eager to keep launching new more green products after the huge success of Toyota’s Prius which was pretty soon followed by majority of the car-makers announcing some or other form of green car initiative. However, there are criteria should be considered in launching a new product in the business world and this report would look into one of those manufacturers.

This report will analyze the strategic situations of Hyundai’s fuel cell car with respect to the dynamics of South Korean market. The report will consider multiple aspects of Strategy and will make some recommendations.


Product Concept

The core concept of Hyundai fuel cell car is focus on sustainability and climate protection and to fulfil the market demand (Schaefer, 2007). For the South Korean (Korean) market, the latest model of fuel cell car- Hyundai I-Blue represents this comprehensive requirement of reducing the carbon footprint. Introduced in 2007 Frankfurt, the image of I-Blue is not only environmental friendly product, but with other competitive advantages in the market. (Hydrogen Cars, 2007). Four salient features of the I-Blue are as follows:

Powered by a fuel cell battery, I- Blue is the third generation of fuel cell model in Hyundai. With the development in R&D, I-Blue can run more than 600 km per refuelling and achieves a maximum speed of 165 km per hour.

(source: Hyundai, 2007 News)

Based on sports tour car style, Hyundai adds more state of the art human machine elements in it. I- Blue present a new 2+2 cross-over body type which can let the consumers have a glimpse into the future of automobiles.

The fashionable design mixed with the philosophy of Ying and Yang. By turning the Chinese religion concept into the look of I- Blue, the square and the circle integrated on I- Blue make it a distinct look.

(source: Hyundai, 2007 News)

The balance between High-Tech and passenger comfort and safety can be found in I- Blue. I-Blue provides a relaxing stretched-out seating position for the driver and passengers. Safety has also received great attention with the driver being easily able to perceive outside environment through the full screen with the 3D vision heads-up display.

The concept of I-Blue model is the beginning to the future generation of automobiles as well as changing the fundamentals of the industry. With the help of electrical engine, drivers can


enjoy their journey noiselessly as though enjoying a no-stress, holiday drive feeling (Hyundai, 2007).

Strategy Analysis

This section would analyze the strategy of Hyundai with particular regards to the Korean market and would briefly consider two strategic models – the PEST framework and the Five Forces by Michael Porter. The choice of two frameworks would help in covering as much ground as possible.

PEST Analysis

To analyze the effects of the external environment, it would be prudent to go into the PEST analysis.

Political: With the Korean President announcing that from 2008, government will use ‘green growth’ plan which is designed to use 22 new engine technologies (Kim, 2008), which includes Fuel Cell. Considering the high levels of automobile pollution, the government aims to combat this by introducing more green technology and especially by incentivising the building up of more hydrogen-refuelling stations. With Hyundai also being a member of California Fuel Cell Partnership programme, it gets even more incentive and technology to go the fuel-cell way.

Economic: Korean economy is 97% dependent of foreign imports for energy and per capita energy consumption has already crossed that of Japan and Germany (Lee, 2008). With prices of conventional fuels rocketing, the government is looking for ‘green plan’ to reduce the traditional technologies with new ones, thereby also increasing jobs of about 150,000 by about 2018 and reducing 8% of petroleum consumption by then (Kim, 2008). It is common knowledge that eco-friendly transportation would be the driving force of the economy and thus Hyundai’s plans to go that way. It started in 1991 with producing Sonata electric cars, started hybrid production in 1995 and plans to mass produce hybrids by 2009, increasing production eventually to 3,000,000 by 2015 (Hyundai Company, 2007).

Social: The Korean society has a traditional patriarch way of performing business expressed by obedience and personal loyalty (Biggary and Guillen, 1999). Hyundai is owned by this family system and in a need to survive, it must change and bring in elements of meritocracy and this change is being reflected in its strive for greener cars.

Technology: The Ministry of Education, Science, and Technology (MEST) and the Ministry of Knowledge Economy (MKE) are the key players involving in Korea’s fuel cell Research and Development (R&D) project since 2004 (Lee, 2008). After two years, they launched two aggressive monitoring projects for fuel cell vehicles so that they can promote the hydrogen infrastructure by validating and demonstrating for fuel cell cars and hydrogen refuelling stations at the same time. Accordingly, due to the technology supports by government, Hyundai will have fuel cell cars road tests in 2009 which is earlier than many car companies, like Ford and Toyota.


A Five Forces Analysis

Analyzing the strengths and weaknesses of an industry by using Porter’s Five Forces model determines the industry attractiveness and the likelihood of achieving profitability (de Wit & Meyer, 1998). While there have been criticisms of the model, namely that it is static, a ‘snap shot’ in time, and does not give weight to any of the five areas, it is still a useful tool in determining the ability of a firm to achieve a competitive advantage within a given industry by pinpointing key success factors.

(Source: The Five Competitive Forces That Shape Strategy, Michael E. Porter, 2008)

The application of Porter’s Five forces is given below:

Threat of New Entry

Auto manufacturing is highly capital and labour intensive, so threat of new entry is low. Established in 1947, Hyundai enjoys a learning curve based on over fifty years experience (Hyundai, 2008) and is now the world’s 6th largest automobile manufacturer. It also has the benefit of economies of scale through the operation of the world’s largest assembly plant in Ulsan, Korea (Hyundai, 2008). Hyundai, along with subsidiary Kia, dominates the domestic market, accounting for 70% of all vehicles sold (Korea Automobile Manufacturers Association (KAMA), 2008).

Power of Buyers

With relatively few fueling stations and several substitute products in the form of traditional gasoline-powered cars and public transportation, the power of buyers is considerably high. According to the International Road Federation (IRF) (2007, as cited in the Korea Times,


2007), Korea ranks 40th in car ownership among OECD countries, with 319 vehicles per 1000 people. This appears low when compared with the US ranking of 5th (675 vehicles per 1000) and Japan at 11th (586 vehicles per 1000). The IRF forecasts 500 vehicles/1000 people over the next few years if the economy continues to grow (IRF, 2007, as cited in the Korea Times, 2007). Although there are substitutes and high switching costs, the fuel cell vehicle is unique and therefore has some differentiation advantage.

Power of Suppliers

Being fragmented and quite dependent on the large manufacturer, Hyundai’s many suppliers have little power. Their 400 1st tier, 2500 2nd tier, and innumerable 3rd tier suppliers have neither the brand identity nor the capital or R&D ability to threaten forward integration (Duplaga et al., 2000). Additionally, the fuel cell technology is created in-house, so Hyundai has little to no switching costs, giving them the upper hand with suppliers. Hyundai also has the leveraging power of their massive manufacturing centre in Ulsan, which capitalizes on its size to maximize economies of scale.

Threat of Substitutes

With an extensive and affordable public transportation system and high levels of vehicle ownership, the threat of substitutes is considerably high. However, high oil demand, along with rapid growth and urbanization will continue to push oil prices ever higher (Asian Development Bank, 2008). Being the 9th largest oil consumer (Energy Information Administration, 2007) and one of the highest taxed oil countries in Asia will make an alternative fuel highly attractive to many in Korea.

Rivalry

With 8 of the top 10 best selling cars of 2007 (KAMA, 2008), Hyundai dominates the Korean automobile market and has low domestic rivalry. Hybrid imports, with the Toyota Prius expecting to be released in 2009 (Chosun Ilbo, 2008) and Honda planning to double the sales of their Civic Hybrid in 2008, pose a serious rivalry threat. In answer, Hyundai plans to commercialize their Avante hybrid for 2009 (Chosun Ilbo, 2008). This lays the ground work to build strong loyalty for Hyundai’s alternative fuel division and keep foreign rivals at bay.

Based on the Five Forces and the PEST framework, there are multiple recommendations and action points that can be derived for Hyundai with respect to the Korean market and plans for expansion that can be considered. They are highlighted in the next section.


Recommendations and Justifications

Based on the PEST and Five Forces analysis, there are multiple issues that Hyundai Motor Company can look into. Some of the recommendations along with their justifications are detailed below:

Target Market

During initial stage, Hyundai should focus on the Korean market before any overseas expansion. The primary customers to be targeted should be from young generation and / or having a small family. In recent years, car ownership among young population in Korea has been changing from a basic way of livelihood to a more convenient way of enjoyable lifestyle.

The increase in Korea’s GDP and introduction of the system of 5-working days indirectly impacts its local automobile industry. Generally, working people’s spare time is increased by approximately 23.6% and this boosts interest in sports and leisure among Koreans (Ministry of Commerce, Industry and Energy 2004). This has driven young people to buying a car for spending their leisure time more conveniently.

In addition, the increasing environmental awareness among Koreans on the severe hazard of global warming and the harmful effects of emission could potentially trigger their preference for green products. Besides, the young generation is generally more willing to try out new technology as has been seen in the case of youngsters continuously upgrading their mobile phones.

Timing A good estimated timing for launch would be about early 2011. There would be a requirement of pre-entry preparation and by that time, it is widely estimated that the economic upswing would begin fuelling demand.

Gaining customer’s confidence and setting up fuel supply, mechanic training and collaboration with government and fuel providers should be carried on along with perfecting the design and development of the vehicle.

Expansion

After about three years of focus on domestic market, Hyundai should expand to other Asian countries particularly China, India, Taiwan and other Southeast Asian countries by about 2014. The growing population of middle-class in these countries will provide plenty of long-term economic potentials. Unlike Japan, lack of a strong dominant local automobile brand makes foreign manufacturers in these countries would make these markets easier to


penetrate. However, collaboration with local governments on the refuelling facilities would have to be done in advance before entry.

Type of Car

Increasing number of nuclear family would lead to an increasing demand of small cars. With young people as the major customers, small cars would be most appropriate for them, especially considering their financial position.

Pricing strategy

A low price strategy considering the young generation customer base is ideal. However, the car should be an aspiration and thus the price should be higher than conventional fuel similar specification cars. The pricing has to reflect a profit motive and a high aspiration value for the car.

The pricing has to thus reflect the “upwardly mobile” class of individuals, who are not as wealthy as their parents would be at that time. However, the price should be lower than large sized cars.

The strategy to continuously innovate (ex. Launch a new model every year with incremental innovations) and to make it more environment friendly with each model would be a good approach. After gaining a critical mass of satisfied customers, pricing could be changed to derive profits or could be kept the same and with low costs from experience (learning and scale), more profits would ensue.

Sales and Numbers

There were 2000 units of monthly sales of i30 model in 2007 (Hyundai Motor Company 2008 Sustainability Report). This can be taken as the reference in setting sales target since the fuel cell model is within same category of i30 model. Moreover, the significant impacts of the recent economic crisis should not be under-estimated in setting up targets.

Thus, a relatively moderate annual sales target of 10,000-12,000 units for first few years would be appropriate. This should then be expanded with increasing customer confidence and along with the competitor’s moves.

How to get fuel

Prior to the official launch in 2011, negotiations with government and big Hydrogen suppliers (like Air Product) should be on to set up a minimum of 10 refuelling stations in a city (ex. Seoul, Kyounggi) where the car is proposed to be sold. Commitment and long term strategy would have to be demonstrated along with contingency plans to secure the supply of fuel; else the entire project could become worthless.


Air Product has already installed several Hydrogen fuelling stations in Seoul in 2007 as part of R&D demonstrations. According to K.S. Koh, global applications and development manager for Air Products Korea,“We commend the Korean government’s commitment to furthering the use of hydrogen for fuelling automobiles. Globally, we have placed more Air Product fuelling equipment in Korea than any country outsides of the US.”

Providing such well-equipped environment convincingly shows the readiness of promoting fuel cell product to the public. Consumers will then have peace of mind without worrying about the insufficient fuel cell services, which is an important part of the car.

Promotions and Marketing

Environment consciousness development and advertising needs to go hand in hand for this type of car. There could be multi levels of advertising and promotions campaign detail the ill-effects of greenhouse gasses and the negative effects it has on the planet. Realization of how this car would help save the disaster with each trip would be a good strategy to look into. Publicity of Hyundai brand as an environmentally responsible company also needs to go hand in hand with this campaign so that people are drawn towards it and not to another rival.

A second form of promotion could be live demonstrations with multiple of cars (painted in sharp colours) are visible of the streets. The ease of driving these cars, the ease of re-fuelling and the ‘fill it, shut it, forget it’ type of branding could be a plus as consumers start getting more aware of Hyundai’s offering in this segment. Promotions could also be in the form of quizzes, campaigns, gifts, etc. in the form of generating awareness, especially in college and young business environment.

Sales promotion would also play a fundamental role. Since our official launch would be proposed to happen in early 2011, there should be pre-launch promotions in conjunction with Christmas and Thanksgiving festivals at the end of 2010. Discounted price, extended warranty period, free refuelling vouchers and car accessories will be offered upon making purchasing orders during this promotion campaign.

A plethora of incentives would thus be a good position to take. Since this would be a new car and a new concept, people would have to be actively promoted to take part in a green campaign which would also go with their aspired lifestyle.


Conclusion

Based in South Korea, Hyundai is well poised to employ its strengths in developing a new fuel cell based car. Current technology and mindset is towards development of more fuel-efficient and greener cars. Being one of the leaders in this technology will also help it expand into other profitable markets. It can also use the Korean experience to make more significant inroads into other world markets, not only the developed ones but also the developing ones.

Emerging a leader in the fuel cell business could transcend the company to a position of dominance if it can get it right, the first time and this could help it reap significant profits later on. The automobile industry is changing, and changing fast. It is entering a phase were every cost would need to be justified (buying, fuel, maintenance, etc) and compared (with trains for example). In this regards, a good strategic positioning from Hyundai evolving from its home turf – South Korea, would make good business sense.


Appendix 1 - References

Asian Development Bank, 2008, Reasons to be nervous: commodity prices and The Chosun Ilbo (2008, March 24), ‘Korea’s auto market turning green’, (Digital Chosun Ilbo – English Edition) Available: http://english.chosun.com/w21data/html/news/200803/200803240010.html, Accessed: 2008, December 18

Biggart, N.W. and Guillen, M.F., 1999, Developing Difference: Social Organization and The Rise of The Auto Industries Of South Korea, Taiwan, Spain, and Argentina, American Sociological Review, 64, pp722-747.

De Wit, B., & Meyer, R., 1998, Strategy - Process, Content, Context: An International Perspective, 2nd ed. London: International Thompson Business Press.

Duplaga, E., Hahn, C., & Hartley, J., 2000, Supply-chain synchronization: lessons from hyundai motor company, Interfaces, 30 (July-August): 32-45.

Energy Information Administration, 2007, South Korea oil overview (Energy Information Administration - official energy statistics from the US government), Available: http://www.eia.doe.gov/cabs/South_Korea/Oil.html, Accessed: 2008, December 18

Financial Times Special Report, 9 Oct 2008, Staying on course in a tougher climate.

Hawkins, S. and Hughes, N., 2005, Technological Characterisation of Hydrogen Fuel Cell Vehicles, UK SHEC, 22.

Hydrogen Cars, 2007, Hyundai I-Blue, Available at http://www.hydrogencarsnow.com/hyundai-i-blue.htm, Accessed: 2008, December 23

Hyundai Motor Company, 2008, Sustainability Report The Road to Sustainability

Hyundai Motors, 2008, About Hyundai (Hyundai Motors), Available: http://www.hyundai.co.uk/aboutHyundai/past/, Accessed: 2008, December 18

Hyundai Company, 2007, Hyundai Planning LPG Hybrid Avante in Korea for 2009, Hyundai company.

Hyundai, 2007, September 11, 2007 news, available: http://worldwide.hyundai-motor.com/common/html/about/news_event/press_read_2007_22.html, Accessed: 2008,December 23

Kim, H,C., 2008, ‘Green Energy’ is Key to Growth, Korea Times.

Kim, T., 2007, Development and Exploitation in Korea – the way to Commercialisation, presented at the 10th Grove Fuel Cell Symposium


Korea Automobile Manufacturers Association, 2008, Member companies: Hyundai, Korea Automobile Manufacturers Association, Available: http://kama.melita.co.kr/eng/MC/K_eng_mc1.jsp, Accessed: 2008, December 18

Lee, T.H., 2008, Hydrogen and Fuel Cell Activities in Korea, Korean Economic Institute Policy Forum.

Lee, M.K.,2001, Overview of Energy Subsidies and a Reform Plan of Energy Tax System in South Korea, UNEP Collaborating Centre on Energy and Environment.

Ministry of Commerce, Industry and Energy, 2004, Development strategy of sports and leisure textile Industry

Natural Gas Association Vehicles, 2007, NGV Country Report (2007), South Korea, NGVI.

Porter, Michael E., 2008, The Five Competitive Forces That Shape Strategy, Jan 2008, Harvard Business Review

Schaefer, P. , 2007, September 01, ‘Hyundai to Unveil Fuel Cell Electric Vehicle’, Environmental News Network, available: http://www.enn.com/top_stories/article/22588, Accessed: 2008, December 23

The Korea Times, 2007, December 14, Korea ranks 40th in car ownership.’, The Chosun Ilbo (English Newspaper), Available: http://www.koreatimes.co.kr/www/news/biz/2008/09/%20%20123_15561.html, Accessed: 2008, December 18

http://www.airproducts.com/PressRoom/CompanyNews/Archived/2007/06Nov2007.htm


Appendix 2 – Bibliography

McGee, J., Thomas, H., & Wilson, D. (2005). Strategy: Analysis ad Practice. McGraw Hill.

Segal-Horn, S. & Faulkner, D. (1999). The Dynamics of International Strategy. Thomson Learning.

Segal-Horn, S. (1998). The Strategy Reader. Blackwell.

De Wit , R. & Meyer, R. (2004). Strategy: Process, Content, and Context. Thomson.

Mellahi, K. et al (2005). Global Strategic Management. Oxford University Press.

Websites: (accessed multiple times during Oct, Nov, Dec, 2008 and Jan 2009)

Fuel Cell Organizations available at http://www.business.com/directory/energy_and_environment/alternative_energy/hydrogen_and_fuel_cells/organizations/

Fuel Cell Today available at http://www.fuelcelltoday.com/

The Online Fuel Cell Information Source available at http://www.fuelcells.org/

California Fuel Cell Partnership available at http://www.cafcp.org/

Fuel Cell Vehicles from US government available at http://www.fueleconomy.gov/feg/fuelcell.shtml

European Commission Energy Research available at http://ec.europa.eu/research/energy/nn/nn_rt/nn_rt_hlg/article_1261_en.htm

EV World available at http://www.evworld.com/


Appendix 3 – Assessment

The module will be assessed through one piece of coursework (20% weighting) and an unseen three-hour essay-based examination (80%). The coursework will comprise of self-managed groups of 4 or 5 devising and presenting an outline strategic plan for a fuel cell based car. The context can be commercial, non-profit, government agency or any other. The plan may be devised around an actual prototype but must not simply replicate an existing plan: it must be original. You can take the perspective of an existing player in the car sector or that of a newcomer. This brief is deliberately broad to encourage creativity but realism is essential. Marks will be awarded for the plausibility of the plan, for creativity, for presentation skill, for research and for the correct use of strategic concepts. The group report is limited to a maximum of 3,000 words. Ideas should, therefore be presented succinctly and professionally in an executive style. The report does not have to adhere to precise report conventions. It must have a title, a beginning, middle and an end. It can have appendices. It should contain the essential elements of a strategic plan at the product/market level i.e. it should explain

What is going to be the firm’s competitive/corporate strategy? What is the product/service concept and what consumer benefits does it address? What are the main decisions regarding the corporate/business strategy and positioning? How are these decisions justified?

To get you started, you will find two articles on fuel cell technology in your study pack. Some additional references are given below but please be aware that one of the objectives of the group work is to encourage you to develop the skills of informational retrieval and analysis. Therefore you should not expect the list of additional readings below to be a complete list – you should find some relevant articles independently.

Deadline: The group report should be handed in by 12.00 noon Friday 16th January 2009.

Additional readings (only to get you started): Price Waterhouse Coopers (2003) Cropper et al (2003) Walsh et al (2002)


Business Strategy of Hyundai with respect to a Fuel Cell car in ...

Documents

Transcript of Business Strategy of Hyundai with respect to a Fuel Cell car in ...