Detecting a Dynamic Change in Latecomer Hyundai Motor with the Quasi-vertically Integrated Modular Sourcing System: A Path Breaking or Path Dependence?

Publication Type:

Conference Paper

Source:

Gerpisa colloquium, Paris (2020)

Keywords:

Hyundai Motor, Modular Sourcing System, Quasi-vertically Integration

Abstract:

1. Purpose

Latecomer Hyundai Motor's growth into a multinational company has drawn attention from some researchers at home and abroad. Existing studies have explained that Hyundai Motor succeeded by displaying unique characteristics distinguished from major automakers in terms of corporate governance, production methods and labor-management relations (Lee and Jo, 2007; MacDuffie, 2013; Jo, Jeong and Kim, 2016). Unlike the existing work, this paper focuses on the relationships between the parent company and its parts suppliers and tries to explain Hyundai's rapid and high growth so far. This is because the competitiveness of the finished car maker depends not only on its own organizational characteristics, but also on how it efficiently organizes its transactions with a number of parts suppliers.

2. Theoretical and Practical Implications

According to the typology of Gereffi et al. (2005), where the nature of inter-firm relationships is characterized as ‘modular’, ‘relational’ and ‘captive’, Hyundai Motor’s case could have been referred as ‘modular’ since the 2000s, due to simplifying business-to-business transactions and increasing the portion of coded information exchanges, with the company realizing de facto standard in the domestic market. However, even if that is modular, it could be possible to have different characteristics of the parts supplier relationship depending on its strategy or path dependence of the inter-firm relationship (MacDuffie, 2013). The relationship between Hyundai Motor and its parts suppliers can be defined as the modularity of unequal vertical relationships rather than an equal relationship based on functional division among independent firms (Jo and Kim, 2013). Furthermore, Hyundai Motor's parts-supplier relationship includes the independent suppliers with no equity relationships but de facto control of the parent company as well as the Hyundai Motor Group's affiliates. It can be best described as the ‘quasi-vertically integrated and modular’ relationship between them.

This study attempts to clarify the characteristic of Hyundai Motor's parts supplier relationship, given different strategies to respond to the turbulent business environment. The inter-firm relationship is not a static, but a dynamic concept that constantly changes with the related actors’ strategic actions competing and cooperating in a combination (Young et al., 2014). In this respect, the inter-firm relationship could be identified as an ‘alliance’ between the actors involved (Whitford and Zirpoli, 2016), which implies that inter-firm relationship, formed at a certain point in time, has evolved into different ones, with the actors strategically responding to a change in business environment.

3. Research Design

Implied by this theoretical and empirical discussion, Hyundai Motor’s quasi-vertically integrated modular sourcing system could be regarded not as immutable but as dynamically responding to a change in business environment. Thus this paper focuses upon the path trajectories of Hyundai Motor’s quasi-vertically integrated and modular sourcing system in a theoretically and empirically consistent manner. To this end, some specific research questions will be addressed as follows:

First, how did Hyundai Motor, as a latecomer, form the characteristics of the parts supplier relationship that has realized high growth since the 2000s? How did Hyundai Motor and parts suppliers interact with each other in what strategies? What does the increase in overseas production imply in the relationship between the parent company and its parts suppliers?

Second, why has Hyundai Motor’s parts supplier relationship faced a crisis since the mid-2010s? How is the business environment of the global automobile industry changing? Why are the strategic responses of Hyundai Motor and its parts suppliers relatively sluggish compared to advanced car makers?

Third, how will the nature of Hyundai Motor's parts supplier relationship change in the future? How do Hyundai Motor and its parts suppliers respond with their latest response strategies? In the long run, what scenarios can be put forward for changes in the relationship between Hyundai Motor and its parts suppliers?

Finally, what are the characteristics of Hyundai Motor’s parts supplier relationship compared to advanced car makers? What are the theoretical and practical implications of its quasi-vertically integrated modular sourcing system?

4. Findings

Detecting path-trajectories of Hyundai Motor’s parts sourcing system

1. Prior to 2000s: Formation of a quasi-vertically integrated parts inter-firm relationship
- Subcontracting in the 1980s: Independent parts suppliers outside Chaebols under monopolistic conditions had been subcontracted.
- The parent company had provided stable demand for parts suppliers through subcontracting and stabilized the supply of parts through technology and management guidance and through mediating the introduction of overseas technology.
- At the same time, it restricts independent growth of parts suppliers through ‘cost reduction’ and demands for captive transactions.

2. 2000s: Development and expansion of a quasi-vertically integrated and modular parts inter-firm relationship

- There is the need for systematic and integrated management of production: the need of quality control for parts suppliers
- Hyundai Mobis has initiated to a sourcing strategy of building a vertically integrated and modular parts supplier relationship to support the “Quality Management” raised by the then Hyundai Motor chairman.
- Hyundai Motor has managed multi-layered parts suppliers by technical capability as ‘champion’, ‘partner’ and ‘competitor’.
- This quasi-vertically integrated and modular parts inter-firm relationship has allowed the profitability of the parent company of conglomerate to assure not only the performance of its affiliates but also that of non-affiliated parts suppliers.
- Continuous sales expansion is required for the quasi-vertically integrated and modular parts suppliers to produce good results. But, once no economic expansion of scale would be achieved, the system would have faced with difficulty in its sustainability.
- As Hyundai Motor's overseas production had expanded rapidly since the 2000s, the parts suppliers’ profitability had improved due to the spatial expansion of the quasi-vertically integrated and modular parts suppliers (Shintaku et al., 2006) and the consequent parts suppliers' enlargement in sales and size arising from the guarantee of market to some extent in spite of severe cost reduction in parts performed by the parent company.

3. Since the mid-2010s: the limits of the quasi-vertically integrated and modular parts inter-firm relationship

- The 2008 financial crisis, the massive recall of Toyota and the VW diesel gate have delayed the growth of the global auto industry.
- There has been a signal revealing a change in the paradigm of automotive technology such as eco-friendly and autonomous driving, car-sharing and super-connected technologies.
- We have witnessed that there has been Hyundai's relative slump and a delay in growth since the mid-2010s.
- Hyundai Motor has been hit especially hard in the era of global low growth since the mid-2010s.
- In the wake of the 2008 financial crisis, global advanced car makers have restructured their businesses. Instead, Hyundai Motor has faced limitations while continuing to expand as required by the quasi-vertically integrated and modular parts inter-firm system

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