Case study analysis - Automobile Korean Industry 1
1. The patterns of Hyundai’s capability building
The learning process in accumulating technological capabilities at Hyundai developed
through 3 main stages.
1.1 Stage 1: Assimilation
Level 1 of technological capability
Learning from suppliers: At its birth in 1962, Hyundai’s initial capability in automobile
production relied on engineers with strong engineering background from Hyundai
Construction and experienced technicians with necessary tacit knowledge from military
depots. At this time, Hyundai’s level of knowledge in the industry was just sufficient to
enter an Oversea Assembler Agreement to assemble a Ford compact car. Explicit
information was transferred from Ford to Hyundai through blueprints, technical
specifications, and production manuals. Not to stop there, Hyundai also required training in
the agreement with Ford and all other equipment suppliers. This action facilitated the
explicit-tacit translation at Hyundai not only operative capabilities (such as product,
process engineering, painting and welding) but supportive capabilities (such as
procurement planning, coordination and production management).
Self-learning: To Hyundai, the technological accumulating did not only focus on the most
competent engineers, transferring knowledge throughout the organization was critical and
had to be done quickly. Engineers, technicians and workers lived together, strongly
interacted to intensify the knowledge. Furthermore, operative capabilities were gained
much among teams by reverse engineering. This allowed internalize the explicit into tacit
knowledge more deeply and quickly, making it become their own production know-how.
Case study analysis - Automobile Korean Industry 2
1.2 Stage 2: Imitation
Level 2 of Technological Capability
Hyundai made its second jump in the learning process when it shifted from assembling
foreign cars to designing its own cars. However, in respect to the independent
management strategy which was set at the beginning, they decided to buy technologies by
entering licensing agreements in unpackaged form. This kind of mechanism, to some
extent, restricted the level of knowledge, especially know-hows to be transferred. To
overcome this difficulty, the creative Hyundai engineers had found another way to
approach to suppliers’ technologies. Before selecting suppliers, they approached 26
companies in Japan, US, UK and Germany. They did not miss the opportunity to tour their
sites and more important, “those of the leading automobile manufacturing plants” that
these companies provided. Therefore, Hyundai upgraded its tacit knowledge to the lively
practical experiences: Now, they could not only know component technologies (such as
style design, casting and forging) but also learn how the other auto makers in the world
used them in their practices, then they could imitate. Furthermore, suppliers’ training,
hiring technical experts from Britain to integrate individual tacit knowledge into a workable
system and getting assistance from Japanese engineers for troubleshooting, all of these
actions promoted Hyundai engineers to absorb knowledge not only from the foreign
countries but also among members in the organization. This integrating learning improved
considerably Hyundai operative, transaction and supportive capabilities. These gains were
obviously shown in their first local car: the Pony.
Level 3 of Technology Capability
The capability level at Hyundai went up to a higher step when Hyundai decided to acquire
the FF (front wheel drive) technology. With enough experience of Pony, by licensing
agreements to many sources again, now, Hyundai could master the new technology and
CAD/CAM learning without outsiders’ assistance. With Hyundai capability level at that
time, technology suppliers were reluctant to share with them. To get over this hurdle,
Hyundai engineers pursued the self learning and transferring knowledge method which
proved the most appropriate one. For example, to deal with the CAD/CAM problem, a
project team to study new knowledge was organized, then some real systems such as
Case study analysis - Automobile Korean Industry 3
IBM, Mitsubishi are bought for comprehensive study. Up to this point, explicit knowledge of
technology owners (literature, catalogs) was moved to Hyundai in an secret way and were
translated into tacit knowledge by reverse engineering tactic. After all, project team
members “socialized” their learning to the other colleagues. Hyundai obtained much of
operative, supportive capability during this period of imitation which resulted in the FF
1.3 Stage 3: Innovation
Level 4 of Technology Capability
Due to the external pressure (its foreign suppliers were unwilling to reveal their latest
versions), Hyundai had to produce its own technology. They began to develop many R&D
centers in its home country and in Michigan, Los Angeles, Frankfurt and Japan. All of
these locations were very strategic. They were found near to the most famous inventors in
the world’s automobile industry so that Hyundai was able to catch up most quickly the
latest technological changes. Moreover, Hyundai Styling Studio was established at the
center of the most profitable market-America-to sense the trend of consumer preference.
These tactics gave Hyundai the always-updated information about market, competitors
and technological changes, thus drive the R&D activities towards the right direction.
Besides, its huge investment in R&D personnel and projects such as hiring Korean
engineers from U.S universities, with experience at GM or Chrysler, joining laboratories
with local universities and further training for researchers played crucial role for a
sustainable Human Resource development. Hyundai learning was changed from follower
and imitator to initiator. The technological knowledge from competitors, other countries and
US universities flowed to Hyundai in the form of “brain drain”.
However, in the early stage of innovation, Hyundai still lacked of capability and needed
assistance from outside. It acquired capability from other countries by sending 300
researcher abroad for training. Also, Hyundai learning jumped to systematic problem
solving which was shown in the task force for engine design. Six groups learned all of 6
major aspects related to the engine. From collected foreign literature, they mastered it in
Case study analysis - Automobile Korean Industry 4
the form of tacit knowledge. Also through experiments, experiences of the experts
improved the innovation capability. Alpha and beta engine generations were the result of
Hyundai incremental innovation.
Level 5 of Technological Capability
Hyundai capability is moving up. It now wants a breakthrough in technology: a
environmentally friendly car. To achieve the goal, its learning strategy is different. Through
joint R&D with US Ovonic Battery, Hyundai expects to accumulate more capability enough
for it to offer a new radical innovation in the future.
To brief the process of technological capability accumulating at Hyundai, the operative and
transactions capabilities were to develop first, then supportive and innovative was the last.
2. The role of government in the capability building process in Korea
The strong and highly centralized development of Korean government was relatively
effective in orchestrating technology learning in the 1960s and 1970s. Government created
and imposed series of crises on the firm to accelerate technological learning in order to
survive and develop.
In 1962, in the first five-year economic development plan, Korean government enacted the
Automotive Industry promotion law. The law not only provided tariff exemptions for imports
of parts and components but also for the assemblers. By issuing the law, government
provided local market protection from foreign Car Companies. It was a suitable period of
time for government to establish this law. At that time, automobile industry in Korean was
not developed, just was young industry that step by step went on the way to find how to
develop. Government created strong barrier to prevent competition and help encourage
citizens to buy domestic products. Government action led to create the first assembly plant
in Korean and three locally owned assemblers soon later including Hyundai that began in
1967 to assemble Ford cars.
Case study analysis - Automobile Korean Industry 5
After the first oil crisis and structural adjustment toward heavy and chemical industry,
Korean government rapidly shifted its automobile industry policy from CKD assembly of
foreign car to develop of local design car. The policy implementation was highly
centralized by government. In 1973, government formulated the automobile industry long-
term promotion plan to promote native model development and foster industry growth.
Government plan was very specific. In this plan, the government stated the product
design, local content, cost, time, etc. The situation led to appearance of two original new
vehicles: Hyundai’s Pony and Kia’s Brisa. It was the time that marked the sudden jump of
domestic firms from the first level of capability to the second one. At this stage, firms
simultaneously continued to import foreign technologies and carry out actions to enhance
the knowledge accumulated from various lisencing agreements. It required learning
effectively to strengthen local firms’ capability. As a result, the first model Pony with 90%
local content developed in 1975.
The second energy crisis led to another change in government policy to bring about
greater scale economics at cost of market competition, reducing numbers of passenger
car producers to two companies. The government wanted to reduce the numbers of
producers because many reasons. They realized the need to increase power of R&D in
automobile industry. In addition, two large companies that implemented policy to invest in
the same areas in R&D cause to waste of resources and insufficient. It was better to
centralized to one firm. Korean government supported chaebols but they could not provide
fund for R&D in both firms. It helped to enhance firm technology capacity.The domestic
oriented automobile business moved to highly export-oriented. Korean government
supported for export-oriented transformation and chaebols to influence technology
learning. The reason why chaebol played a major role in expediting technology learning
was that their demonstrated economic and political viability enabled them to obtain new
business licences and preferential financing from government. Chaebols helped
strengthen Korean technology capability because they had necessary organizational,
technical and financial resource. Thanks to government’s help, Korean chaebols could
have enough money to acquire foreign technologies, thus creating an independent
management strategy. Moreover, they could invest more in R&D and R&D personnels.
Case study analysis - Automobile Korean Industry 6
Hyundai opened Advanced Engineering and Research Institute, Commercial vehicles R&D
center, joint laboratories with research oriented local universities.
However, while focusing on nourishing chaebols, Korean government did ignore the small
one such as Kia and Asia. This policy had killed all opportunities of growth in these
companies where innovation ideas often emerge and develop.
Korean automobile industry could not develop without government’s stimulating role in
directing chaebols and selectively allocating resources to them to achieve ambitious
growth objectives in the early years and its support role in lowering corporate R&D costs.
3. Implication for management of technology transfer and of R&D
From the case, we can learn many lessons in management of technology transfers and of
Management of technology transfer
Firstly, it is important for managers to understand deeply their firms’ technology
capabilities at a given time to have right strategy in dealing with lisensors. Knowing our
strength and weakness of our own and transferers will enhance our bargainging power.
Secondly, managers should consider when selecting the right suppliers for firms. In some
cases, firms have to share equity with suppliers but note that it should not give suppliers
management participation. Managers need to have full control power in their companies.
Daewoo is an example reflecting a failure lesson to avoid when they lose their
independence to GM. Thirdly, all explicit knowledge will become their own technology
capabilty and competitive advantages if they rely on self-reliance, total quality learning,
continually accumulate learning to get power to make sudden jump. Fourthly, companies
should find the most appropriate and effective way to change explicit knowledge to tacit
knowledge in a time as short as possible.
Case study analysis - Automobile Korean Industry 7
Management of R&D
Diversify the method to train firms’ human resource: send to foreign countries or
suppliers, create team works, attract foreign specialists to train your workers, etc.
Invest more at the right time when companies achieve a high level of technology
capability, especially in R&D personnel. Specifically, in the early time, when the
company concentrate to develop its operative capabilty and innovation is a weak
requirement, R&D should not be invested.
Implication for Vietnam
Vietnam and Korea have similar situation after wars but why Korea can develop
successfully. It is a big question with many reasons. This case gives Vietnamese people
lessons to study and apply in correct way.
It is obvious that government plays a stimulating role to create incentives for the
development of an industry. Vietnamese government should concern to support both
strategic and potential infant industries, which contribute to country’s growth. Unlike
Korea, in Vietnam small and medium promising enterprises, not chaebols, should be
supported through laws, policy, investment, connecting to suppliers, etc.
Technology capability of Vietnamese firms is just in the first or seconds stage. It is
important to choose appropriate suppliers to make technology transfer.
Find the way to accumulate learning knowledge from partners and foreign countries
Case study analysis - Automobile Korean Industry 8
Patterns of capability accumulating at Hyundai
Licensing FF technology
Local designed car-Pony
Government stimulus ASSIMILATION
Assembling Ford car