Once poorer than Malaysia, how Korea’s car industry progressed further than ours?

Last week, we’ve chronicled how Hyundai grew from a small workshop to a world-class automaker. What was left out however, was the hows and the whys behind the rise of Korea’s car industry, which will be discussed in the following text.

When Malaysia gained its independence, Korea was a failed state. It relied on donations from the US for 70 percent of its budget, and had nothing worth exporting.

In 1960, Malaysia’s (Malaya) GDP per capita was USD 234. South Korea earned just USD 158 - poorer than Ghana (USD 183), Myanmar (USD 190), and even Ethopia (USD 203).

Most economists of that era, i.e. white, male ones, dismissed Korea to be a permanent aid recipient. Today, Hyundai is bigger than Honda, Samsung is bigger than Sony, and Hallyu is the new Hollywood.

The first Korean car was not a Hyundai or a Kia, but a 1955 Sibal, made using of surplus parts left behind by US Army’s Willy’s Jeep. The country was too poor to afford cars then, so the company folded not long after that.

Korea’s car industry formally began in 1962, when President Park Chung Hee announced a five-year industrialization plan. Imported cars were banned but local assembly (CKD) projects were encouraged.

The military dictator Park was a controversial leader but few will accuse him of being corrupt. He was feared not just because he ruled with an iron fist, but those who were given government contracts and failed to deliver the job would be permanently struck off his list.

Park worked round the clock to rebuild Korea and was known to make surprise visits to construction sites. Hyundai Motor’s founder Chung Ju Yung, who was given contracts to build roads and bridges before building cars, would sleep at construction sites in his company truck just to keep up with President Park’s demanding schedule.

In 1962, President Park announced an industrialization plan and banned automotive imports, not because he wanted a Korean national car, but because Korea was desperately short of foreign currency. Even imported cookies and chocolates were banned. Smoking imported cigarettes was seen as a national crime.

Park didn’t set out to build a national car, but a Korean car. The Korean flag was not pasted on any of the cars.

Manufacturing licenses and government loans given were tied to export targets. While the domestic manufacturers were protected from foreign competition, they still had to compete domestically. These were the biggest differences with Mahathir’s national car policy.

Four companies took up the challenge – Hyundai Motor, Shinjin Motors, Kia Motor, and Asia Motors. Each learned about manufacturing by partnering with foreign manufacturers to establish CKD projects.

Bus manufacturer Shinjin Motors was the first to sign up, in 1964. It partnered with Toyota to assemble the Corona.

In the next 10 years, Shinjin Motors, which later became Daewoo, would become the dominant player.

Daewoo’s undoing was the ’97 Asian Financial Crisis. The chaebol collapsed and Daewoo Motors was sold to GM, where it now exists as nothing more than an Asian engineering centre for GM.

Asia Motors was established in 1965, first partnered with Fiat to assemble the Fiat 124. It was later absorbed into Kia.

Kia was a bicycle maker that teamed up with Honda in 1961 to produce motorcycles. Later, it worked with Mazda to produce three-wheeler light trucks, before making the Mazda Familia, in 1974, which Kia would sell as the Kia Brisa.

Kia was the first Korean car maker to export – the Kia Brisa truck, in 1975.

The formation of Hyundai Motor in 1967 to do contract assembly of Ford Cortinas was already discussed in detail last week so you can read them here.

Part of the reason why Hyundai had such a poor reputation for quality in its early years was simply because the company had no choice but to export even before it was ready.

Remember that Korea desperately needed foreign currency and President Park couldn’t wait until Hyundai acquired sufficient knowledge before exporting.

By early ‘70s, President Park directed Korean automakers to produce a low cost ‘people’s car,’ with engine capacity no more than 1,500 cc.

Asia Motors couldn’t meet the target and President Park kept to his word and withdrew Asia Motors’ manufacturing license, and that was the end of the company, snapped up by Kia.

In respond, Daewoo deepened ties with GM’s Opel and Kia with Mazda. The contrarian Hyundai however, risked it all by taking the harder path to build its own model. Chun Ju Yung believed that building Ford Cortinas that didn’t belong to him was not a good business to be in, even though it was easier.

Ford had plans to make Hyundai part of its ‘world car’ project. Hyundai would assemble Ford engines into Australia-made Ford chassis, exporting finished cars to Japan. But Chung had no intention of becoming anyone’s contractor. So he parted ways with Ford in 1973, which Ford thought was a stupidly arrogant move by a poor Korean company who didn’t know anything about cars. 

Financed by ultra-low interest loans from President Park, Hyundai contracted Italdesign’s Giorgetto Giugiaro to design the 1975 Hyundai Pony – Korea’s first self-developed car. The flat panels, simple circular headlights, and angular lines made it easy to produce.

Next, they needed someone experienced to run the company. That person was ex-British Leyland’s President George Turnbull, serving as Vice President. Turnbull brought with him six engineers.

Hyundai’s hiring of an experienced Turnbull was crucial in ensuring that Hyundai didn’t get pushed around by its engine supplier Mitsubishi Motors, who wanted Hyundai to accept inferior engines.

In the video below, Turnbull explains the rapid pace that Hyundai is working on, a pace that's unseen in England, due to the intense pressure from President Park to ramp up exports.

Again, this was another difference with Proton, which also relied on Mitsubishi Motors. With an experienced Turnbull on their side, Hyundai made sure it got a fair deal from the Japanese, its one-time oppressors, and maintained full control over its business.

In contrast, Proton paid royalty fees to Mitsubishi Motors but it couldn’t export the Proton Saga without prior approval from the Japanese – a scenario which Hyundai knew would happen if they were not careful. Slowly, the Japanese accepted that the Koreans were no push overs.

In its early days, the production line of the Ulsan plant was only running no more than 30 percent of the time because parts didn’t fit and quality was horrendous. But President Park wanted exports ASAP and Chung had little choice but to commit to a 5,000 cars per year export plan.

Hyundai knew the cars would be poorly accepted so to mitigate the risk, the company spread its exports over many countries, selling only a small number in each market.

In Nigeria, the roof liners peeled under the heat. In Saudi Arabia, paints faded, and mechanical problems were reported in nearly every market. Its early venture into USA with the Hyundai Excel in 1985, was a complete disaster.

Still, they kept learning. Korean car makers were under no illusion that the government would protect them from foreign competition forever, and the pressure to export meant that they had to keep improving.

Of course, the downside was that the poor Korean drivers who lived through ‘70s, ‘80s and ‘90s had no choice but to buy rubbish Korean cars. The myth that Koreans bought Korean cars out of patriotic pride was only half true. They didn’t had any choice to begin with.

The Korean government lifted the ban on imports in 1986, but introduced a 60 percent import duty. Foreign brands were subjected to excessive scrutiny - unnecessary paperwork, compliance to odd regulations, all aimed to make things difficult for foreign players.

Even showroom sizes were limited, as were TV air time. Buyers of foreign cars were also subjected to unnecessary income tax audits.

Overtime, these practices had to be pulled back before other countries agreed to accept more imports from Korea.

Today, the Korean car market is an open one and complies with WTO requirements. Free trade agreements with the US and EU means that US-made Toyotas and Volkswagens, as well as Germany-made Audis and Mercedes-Benzes can now enter the market freely.

Last year, Mercedes-Benz Korea was the top import brand, selling nearly 80,000 cars – 8 times more than Malaysia. Korea is now Mercedes-Benz’s fifth biggest market.

Mainstream foreign brands are still not popular there though, because Korean buyers see little reason to buy a Toyota/Honda/Volkswagen when a domestic Hyundai or a Kia is already this good.

Of course, we also can’t discount the fact that Korea’s bigger population – nearly 52 million today, 38 million in 1980, versus Malaysia’s 32 million today and 14 million in 1980 - allows it to support a more competitive domestic car manufacturing industry.

Still, let’s not make excuses for ourselves. For decades, Sweden supported Volvo (and Saab) with a population of less than 10 million because it grew its export market.

Malaysia got lucky in the ‘80s and '90s. Hot money was flowing into the region and when high tide came, even the weakest boat floats. All our neighbours were also growing rapidly. That era of easy money is now over.

Proton’s business goals were muddled by political ambitions, and at its peak, it was never held accountable for the many benefits it enjoyed. The only consolation is that it's now better managed under Geely, just don't call it a national car.

In Korea, President Park kept businessman who benefitted from government contracts on a tight leash, cutting them off when they fail.

The Koreans are driven by a deep desire to beat the Japanese, under which Korea once suffered great humiliation. Even though Hyundai had to cooperate with Mitsubishi Motors out of a practical need when it first started, they never forgot the past.

If there is one thing North and South Korea will cheer for each other, it is when either country’s national football team is competing against Japan.

Chung Ju Yung once said in an interview, “We have a competitive mind like the Japanese. But in some ways, we think we are cleverer than they are. We think we have better brains. That’s why so many Koreans excel when they attend American universities.”

For the Koreans, beating the Japanese is not just about attaining business leadership, it’s about seeking revenge and getting even on the humiliation they once suffered. When your rival’s motivation goes beyond money, competition will be extremely tough.

That’s the other factor that is missing from Malaysia’s (or Britain's) automotive players, a deep competitive desire to do better than others, rather than just merely completing a job given to us. Like Turnbull said in the video, it all goes back to the differences in attitude.

Fun fact: Korea has a long history in innovation. The Cheomseongdae astronomical observatory is one of the world’s oldest. The Sungkyunkwan University, established in 1398, is the oldest in Asia.

In 1429, the Nongsa jikseol was probably the world’s first manuscript on farming methods, distributed to farmers, many whom knew how to read the Hangul text, a simplified text developed by King Sejong for commoners. The 1445 Uibang Yuch’wi was an ancient encyclopedia of medicine, as was the T’aesan Yorok’ medical text on pregnancy and childbirth.

The Korean ‘Turtle Ship’ was the world’s first armoured vessel, used by the fabled Admiral Yi to defend Korea against Japan.