Steely Resolve

Hyundai Motor Group's steel-making ability is getting a boost under the guidance of Chairman Chung Mong-koo, who is on a personal quest to eliminate dependence on outside sources of steel.

Chung's goal is to make both Hyundai Motor Co. Ltd. and Kia Motors Corp. totally self-sufficient within the group and for the group to become the world's eighth-largest steel producer by 2010. Analysts say he is well on his way to achieving his target.

Following the Asian financial crisis of 1997, Chung's father, founder Chung Ju-yung, stepped down from the Hyundai Group and with the government-mandated breakup of his company ordered his two sons to relinquish their posts and let professional managers take over.

Chung Mong-koo refused to step aside, and his father eventually appointed him chairman of Hyundai Motor. The younger Chung wrested full control of both Hyundai and Kia auto-making arms, supplier Hyundai Mobis and other automotive-related companies and organized the present Hyundai Motor Group.

Included in this package were three major steel companies, which Chung now is transforming into a powerful network that will be able to meet the total steel requirements for both auto makers.

The second phase of the plan falls into place in 2010, when newly acquired Hanbo Iron and Steel Corp., referred to as the Dangjin steelworks, will be in full production, boosting the group's steel-making capacity to more than 18 million tons (16 million t) annually.

Those who know the enigmatic Chung say he has long held a passion to control steel making in Korea. This may be true, but analysts say his strategy makes good business sense.

However, there is more to Chung's plan than first meets the eye. All the companies within Hyundai Motor Group are interconnected by various contracts, management schemes and stock ownership concentrations. The baffling interrelationships are not meant to discourage analysts, officials say, rather they are conduits for quick action when needed.

When an investment opportunity arises, some of the affiliated companies can provide loans, sell some of their holdings to raise capital or ask outside partners to invest. Kia, for instance, is a major holder in the group's flagship steel company, Hyundai Hysco, and its affiliated steel company, Hyundai INI Steel.

On Aug. 3, Kia, which held a 24.1% stake in Hysco, sold 8.14 million shares to take a profit and boost its own earnings performance. The stock sold for $120.7 million and reduced Kia's stake to 13.9%. Analysts believe the cash raised from the sale will boost Kia's net profit by about 3%.

Nevertheless, Hysco firmly remains under Chung's control, and its steel production capacity is growing dramatically. As of May, Chung owned some 8 million shares, or 10%, of Hysco, having increased his stake from the 4.09% in 2004. Hyundai Motor owned about 21 million shares, or 26.1%, of Hysco.

INI Steel sold off its 6% Hysco stake, or 5.3 million shares, in order to raise money to help pay for the acquisition of the failed Hanbo Steel facility, on which much of Chung's expansion strategy depends. It also was a government condition for the acquisition.

Including Kia's reduced 13.9% stake, Chung and his affiliated group companies own slightly more than 50% of Hysco's common stock. Also holding a strong hand in Hysco is Japan's JFE Steel Corp., which has a 12.9% stake, down slightly from the 14.5% share held in 2004.

Prior to 2001, JFE Steel was known as the Kawasaki Steel Corp. It is the second-largest steel producer in Japan, with roots going back to its founding in 1878. The Hyundai group affiliated companies and JFE Steel, together, own fully 60% of Hysco common stock. Chung is Hysco's chairman, with responsibility for manufacturing and capacity planning.

JFE likely will play a vital role in Chung's expansion plans. Hajime Bada, president of JFE Steel, said in a published report earlier in the year he and Chung were discussing a plan for JFE to engineer and develop on a turnkey basis two blast furnaces for Chung's newly acquired and reactivated Dangjin steel works.

Hyundai Motor Group issued a statement in May saying it now had a steel blast furnace construction plan. The statement said Chung's goal is to achieve a stable supply of high-quality sheet steel for producing motor vehicles. Ground will be broken for the project in 2007, with operations beginning in 2010.

Analysts generally agree the blast-furnace program will require an investment of approximately $6 billion — a very large undertaking even for Chung Mong-koo, but one that Hyundai Motor Group and its string of backers can handle.

The blast-furnace project is an enormous breakthrough for Chung. For years, Korea's largest steel maker, POSCO, has held the only government permits to operate blast furnaces. All other steel makers have been relegated to less-efficient, low-volume electric smelting methods.

POSCO maintained that if the government licensed other companies to operate blast furnaces, it would lead to an oversupply situation that would destroy South Korea's steel industry.

However, the former Hanbo, which folded in 1997, already had a deal to operate blast furnaces. Chung knew this and successfully acquired the bankrupt company and now is in the clear to construct his own furnaces. Hysco and Hyundai INI jointly acquired the steel maker last September.

Under Chung's direction, the Hysco-INI team hurriedly got Phase 1 of the Dangjin works into operation, and by June it was capable of producing some 350,000 tons (317,513 t) of cold rolled automotive sheet annually.

Phase 2 will be in operation by August 2006. At that time, the Dangjin works' total cold rolled sheet-processing capacity will be 2 million tons (1.8 million t) annually.

Half that amount reportedly will go to Hyundai Motor and Kia and the remaining half will be marketed to construction and household appliance industries. Additionally, Hysco operates a cold rolled sheet mill at Junjeong, which has an annual capacity of 1.8 million tons (1.6 million t).

The total cold rolled sheet requirement of both auto makers is estimated at 1.2 million tons (1 million t) annually, says a report by steel analyst Suh Sung-Moon of Dongwon Securities. That requirement should be handled entirely by Dangjin in 2006.

This year's total requirement for all types of steel used by combined Hyundai and Kia vehicles is estimated at 2.9 million tons (2.6 million t), up slightly from 2.6 million tons (2.4 million t) required in 2004, the report says. Of this year's total, POSCO is supplying about 40%; Hysco about 50%; Japanese steel makers 7%-8%; and other suppliers 2%-3%.

The two blast furnaces that Chung wants JFE to design and fabricate will give Hyundai Motor Group enormous capacity. At present, the group's cold rolling mills work with semi-finished steel, much of which is supplied by competitors.

With the blast furnaces in operation, Hyundai Motor Group will be able to produce its own crude steel in volumes up to 7 million tons (6.4 million t) annually and thereby remove reliance on semi-finished steel from competitors.

But Chung's complex steel maze does not end there. According to governance and shareholder disclosures, he is chairman of Hyundai INI Steel.

Kia owns 19.9% of INI's common stock; Chung holds 11.7%; Hyundai Motor 5.3%; Hyundai Mobis 6.4%; and financial-arm Hyundai Capital 5.9%. BNG Steel, a small company located in Changwon controls 49.1%.

BNG is a specialist in cold rolled stainless sheet products, with Chung as its chairman, and is wholly owned by Hyundai INI. INI also has steelworks in Pohang, near POSCO, and in Chiangtao, China, where its Shandong Chingtao Jiaozhou Gyoman joint venture produces 60% of all excavator undercarriages used in China.

Additionally, Hyundai Motor Group controls a U.S. steel plant in Alabama operated by Hysco, which supplies Hyundai Motor's new Montgomery, AL, assembly plant, which builds the '06 Sonata.

Hysco announced in July plans for a steel plant adjacent to the Kia plant under construction in Slovakia. Ground breaking is set for February 2006, with start-up operations scheduled for November.

Chung not only has strengthened his companies, but has enriched himself. The Korea Exchange listed him as the country's second-biggest beneficiary of stock market appreciation. Chung's holdings within Hyundai Motor Group appreciated by 290.3 billion won ($290 million) in the year's first seven months.

Market value of his holdings in the period totaled 1.57 trillion won ($1.5 billion).

Chung also has ownership positions in other major companies within Hyundai Motor Group and in non-registered private companies that do business with the group.

His shares in Hyundai Mobis appreciated by 68.4 billion won ($68 million) in the first seven months. His Hyundai Hysco holdings rose in value by 56.7 billion won ($57 million) and his stake in Hyundai INI Steel grew by 26.1 billion won ($26 million).

Chung does not have a direct ownership position in Kia, but he does own 5.2% of Hyundai Motor, which holds a 37.3% stake in Kia.

Hyundai Motor Group now has almost total integration, with the exception of automotive glass, rubber and plastic.

With the steel holdings in place, Chung seems to have secured his goal. Hyundai Motor Group today can develop and supply virtually any part or system required by the various platforms produced by Kia and Hyundai Motor anywhere in the world.