Sibling Rivalry update from November 2014

On the surface, Hyundai and Kia appear to be fierce rivals, and even many insiders – loyal to the brand they work for – seem to view them that way.

But in reality, the two automakers are controlled by the same parent, and their business strategies are far more collaborative than combative.

When Kia announced its union had ratified a new labor agreement last month, it officially closed out this year’s negotiation period for the Korean auto industry.

The last of the country’s five automakers to tie the knot for another year with its union, Kia trailed family partner Hyundai by 27 days. That’s a familiar position for Kia, which seems forever to be in a slightly delayed lockstep with its big brother, with which it shares vehicle platforms, strategies and a common future.

Hyundai Group Chairman Chung Mong-koo did not acquire Kia in 1998 – outbidding former Kia partner Ford – to allow the brand to remain a competitor. And to view the two as distinctly different companies forging their own futures would be naive.

Yet, because each is a separate corporate entity that is funded by its own stock and borrowings, analysts must focus on each separately.

The difficulty lies in understanding the impact of one company on the performance and actions of the other. The centrally coordinated planning for both is done that way, always seeking to achieve ideal synergy and economies of scale in product development – including design; sales and marketing; and aftermarket sales and service.

Neither company does anything on its own. Both move ahead, or mark time if need be, in concert with the action plan of the other. It is always a 2-pronged assault on the competition, not a battle with each other. Their performance should be analyzed that way, but often isn’t.

The two companies share a common R&D and product-development center at Namyang, south of Seoul. The automakers portray Namyang as two separate operations for each of the brands, but redundancy is a bad word within Hyundai Group, and Chung put the two in one location precisely to extract maximum synergies.

At Namyang, bodies, engines, transmissions, suspension systems and manufacturing methods are developed for both companies for application worldwide, with a high degree of commonality. Essentially, the core vehicles of both brands and the processes used to produce them are the same.

Separate Companies Makes Legal Sense

Strategy is plotted as two arms of one company, with the goal to become the world’s fifth-largest automaker set by Chung a decade ago and achieved with remarkable speed – in no small part by coordinating output and sales of the once rival brands.

In some markets, such as Korea, it makes legal sense to keep the two automakers visibly separate. Together they control about 70% of industry sales, and antimonopoly charges could come into play if the two legally were spliced together as one corporate entity. General Motors faced similar concerns in the 1950s and 1960s when it dominated the U.S. market.

But as separate companies, neither holds a lion’s share of the market. Currently, Hyundai controls about 43% of the new-vehicle sector and Kia holds 27%.

Foreign brands are gaining ground and now hold about a 13% share, which is of grave concern to Chung and his top lieutenants. Imports are rapidly gobbling the high-end premium niches, and GM Korea, forged out of the former Daewoo operations, is closing in on its target to control a 10% stake in the market overall.

Is should be noted the Hyundai Group is not a legal entity. It is a management association, and it owns none of the stock of its member companies.

An insight into the centralized control of member companies is apparent in the recent labor agreement just concluded at Kia.

When Kia management made its offer to the union, it followed the roadmap drawn by Hyundai. The agreements at both companies boost monthly wages an average 98,000 won ($93), provide 4.5 months of salary as a bonus, plus grant an 8.9 million won ($8,500) payout as a bonus for meeting various production and performance criteria. The average worker is expected to receive an additional $22,000 of annual income through the new deal.

The agreements hike the retirement age from 59 to 60, and both companies have promised to implement two back-to-back 8-hour shifts by 2016, easing the workload.

Importantly, unions at both companies acquiesced to management and dropped demands to recalculate wage formulas so as to include bonuses as an element of the ordinary wage. This would have hiked labor costs by increasing the amounts paid for overtime and holiday work and for employee severance.

Instead, both unions and their members accepted the Hyundai and Kia “recommendation” they form joint committees with management to study the situation further.

Clearly, the terms came from a common author; from the same officials who meet and jointly have control over both of the companies.

As separate corporations both Hyundai and Kia have their own credit ratings. But if one gets into a financial squeeze, the other can come to its aid financially and in other ways.

The potential synergies also can come into play where a huge business venture requires an investment too big for just one of the companies to cover. So making a credit analysis requires a focus on all members of the group.

For example, in snapping up the site of the state-owned Korea Electric Power in Seoul’s ritzy Gangnam district for construction of a new skyscraper headquarters, Chung recruited both Kia and parts arm Hyundai Mobis to help finance the project and convinced board directors to approve the plan even before the price of the bid was set. The investment ratio: Hyundai 55%, Mobis 25% and Kia 20%.

Overseas Footprint Substantial, Flexible

Together, Hyundai and Kia have 14 very modern plants in nine nations outside of Korea, and Hyundai Mobis has factories operating wherever there is an affiliated vehicle production facility.

Hyundai has nine overseas plants, located in the U.S., Brazil, China (three), Czech Republic, India and Russia. Kia has five plants on foreign soil, in the U.S., China (three) and Slovakia.

Hyundai badly wants to build a new, 300,000 vehicle-capacity plant in Western China, but is hung up on government approvals and reportedly will build two instead of one to get around the problem.

Kia is set to build a fourth plant in China, and has started construction of a new, 300,000-vehicle-capacity plant in Mexico, the first vehicle-production facility for Hyundai Group there. It is scheduled for production in 2016.

One thing often missed about these plants is that they use virtually the same production technology and process identical materials. The plants are designed for product interchangeability not only within, but between the brands.

For example, Kia’s new plant in Mexico will ease supply constraints for both it and Hyundai in the U.S., augmenting production at both the Hyundai operation in Alabama and the Kia facility in Georgia.

This product interchangeability means labor at one company can produce products for the other, regardless of national boundaries. In Korea this interchangeability is a strong reason for achieving similar labor settlements for both Hyundai and Kia.

When it comes to brands and brand values, there is a curious divergence in the scores accorded the two companies by those who practice the alchemy of brand valuation and its global ranking.

Although the two essentially have the same products, new-vehicle warranties and aftersales services, perceptions differ dramatically, with Hyundai ranked 40th overall on Interbrand’s 2014 Best 100 Brands and Kia at 74 but climbing rapidly.

Joining the ranks of Mercedes or BMW at the upper reaches of the rankings likely would require the group to establish a separate luxury arm, but Chung has been reluctant to invest in such a strategy for either brand. Hyundai has an initiative under way to establish separate dealerships for the Genesis and Equus and Quorus in select cities, including New York and London, but for now that’s as far as Chung appears prepared to go.

But even the German marques Chung wants to emulate and surpass concede they need sales in the lower tiers and gradually are adding lower-priced models.

So Hyundai and Kia, never too distant from each other, may not be that far from where they need to be.