Founded: 1944
NAIC: 336111 Automobile Manufacturing
SIC: 3711 Motor Vehicles & Car Bodies
Until its merger with Hyundai in 1998, Kia Motors Corporation was the second largest manufacturer of automobiles and trucks in South Korea. In addition to the core Korea market, Kia exports vehicles to Europe, North America, and several Asian countries. The company started out as one of Korea's giant chaebols (groups of companies), but was operating as an independent, publicly traded company in the early 1990s. It entered the world's largest potential market, the United States, in 1992 with the formation of subsidiary Kia Motors America. However, the Asian financial crisis forced Kia into receivership, until Hyundai bailed it out in 1998, obtaining 51 percent share of ownership.
Kia (Korean for "arise from Asia") was formed in 1944, shortly before North Korea invaded the South. The company would eventually succeed, first as a diversified manufacturer of bicycles and industrial products, and later as a manufacturer of trucks and automobiles. However, during the late 1940s and 1950s commercial expansion was effectively thwarted by the Korean War. By the end of the war in 1953, in fact, South Korea's industrial base lay in ruins. Throughout the 1950s and early 1960s, Korea's recovery was slow. The Rhee (Rhee Syngman) government resorted to favoritism and corruption to maintain power and became increasingly authoritative. Student revolts in the 1960s forced Rhee Syngman into exile, and the ruling party that finally emerged from the ensuing political fray was headed by military leader Park Chung-hee.
Park ruled Korea in characteristic military style. His regime during the 1960s and 1970s was marked by increasing centralization of power, both political and industrial. Importantly, though, his government was obsessed with economic growth and development. So while Park was widely criticized for his authoritarian style, his government is credited with laying the foundation for South Korea's economic renaissance. Between 1960 and 1980, in fact, South Korea's annual exports surged from a negligible $33 million to more than $17 billion.
Kia Motors benefitted from the economic revolution, growing from a small bicycle manufacturer to a global supplier of automobiles. Kia started out producing steel tubing and bicycle parts before building its own line of bicycles in the 1950s. It eventually parlayed that know-how into its own line of motorcycles, and later turned to truck production.
A key dynamic influencing Kia's (and South Korea's) gains during the 1960s and 1970s was the chaebol (a business group consisting of large companies that are owned or managed by relatives of one or two "royal" families). Park decided that the best way to develop South Korea's economy was to identify key industries and then select specific companies to serve those sectors. The government would work with the companies, providing protection and financial assistance as part of a series of five-year national economic growth plans. By concentrating power in the hands of a few giant, family-held companies, Park reasoned, impediments to success would be minimized and cost-efficiencies would result. The Kia chaebol was selected by Park to concentrate on trucks and various industrial goods such as machine tools. The company sold its first truck in 1962.
Kia grew quickly during the 1960s and 1970s through a combination of hard work and government assistance. Between 1962 and 1966, during the first of Park's five-year plans for the Korean vehicle industry, Kia acted much like an import processor. The company imported many of the parts used to build its trucks from foreign producers and assembled them locally. Kia was protected by the Motor Vehicle Industry Protection Law of 1962, which forbade the importation of already-assembled vehicles or major components. During Park's second phase (1967 to 1971), Kia increasingly developed its own parts using knowledge it gained from its outside suppliers. During the 1970s, Kia gradually weaned itself from extreme dependence on imports and started to develop proprietary technology that would eventually allow it to compete as an exporter of completed vehicles.
In accordance with Park's "Long-Term Plan for Motor Vehicle Industry Promotion" of 1973, Kia began manufacturing automobiles in 1974. Although that move represented new territory for the truck and tool manufacturer, another South Korean company--Hyundai--had preceded Kia's entry into the truck industry by about 15 years. In addition, Hyundai pioneered Korea's car industry with production of the Pony, Korea's first completely domestic passenger car, in 1968. Hyundai led Kia in automobile production throughout the 1970s and into the mid-1990s. However, the two companies did not directly compete in their home country because the government set car prices according to engine size. Kia's domestic car and truck business proved successful and allowed Kia to become the second largest domestic vehicle manufacturer and the tenth largest chaebol in the country by the 1980s. Hyundai was ranked second, and its giant Hyundai Motors division eventually became one of the 200 largest companies in the world.
Despite Korea's economic gains, Park's government had many enemies, and Park was assassinated in 1979. His successor, Chun Doo Hwan, was also a military leader. His economic goals were similar to those articulated by Park, and he sustained Park's basic long-term economic plan. For the 1980s, that scheme entailed Korea's transformation into an exporting, rather than importing, nation. To that end, Chun's government continued to support chaebols like Hyundai and Kia while blocking foreign competitors from entering the South Korean market on a significant scale.
In 1981 the Chun government decided that South Korea's automobile industry was growing too quickly. It chose to limit the number of domestic vehicle producers to the five in operation at that time, and to freeze the particular areas of production. Thus only three companies, including Kia, were allowed to manufacture cars, and only Kia was allowed to build lightweight trucks.
Chun's overall economic strategy was generally successful, despite citizens' growing displeasure with South Korea's authoritative, centralized political and economic structure. While Kia enjoyed a relative dearth of competition in its core domestic market, it also launched an aggressive and successful export campaign during the 1980s that penetrated Japan and Europe, among other regions. By the mid-1980s Kia was selling about 300,000 cars annually, still mostly in South Korea. A major breakthrough for Kia occurred in 1987, however, when it started shipping automobiles to the largest single international car market, the United States. Kia reached an agreement to supply Ford with its Festiva model. The Festiva was a "microcar" aimed at the low-end buyer. Kia planned to ship about 70,000 units annually for Ford and a like number of the cars to other countries. Kia's sales topped US $2.4 billion in 1987 as its work force swelled to about 23,500.
Kia's arrangement with Ford reflected its strategy, first evident in the mid-1980s, to gradually assume Japan's role as the leading supplier of low-end economy cars. By the mid-1980s, in fact, it was clear to Kia executives that Japan was reducing its emphasis on low-priced cars and focusing on higher-priced, high-profit vehicles. Rival Hyundai had also observed the trend, as evidenced by its 1986 jump into the North American car market. Kia planned to use its low-cost production advantages to fill the void. Kia's greatest edge in comparison to U.S., European, and Japanese automakers was labor. Indeed, until the late 1980s Kia paid its workers a mere fraction of what their foreign counterparts earned. The savings were mirrored in cars like the Festiva, which enjoyed steady demand as a result of their extremely low prices. Over a period of about five years, Kia shipped 350,000 Festivas to Ford.
In addition to its low labor costs, Kia continued to benefit throughout the 1980s from rigid trade barriers imposed by its home country. Overseas producers had previously paid little attention to the restrictions because of the comparatively small size of the Korean market. By the late 1980s, however, foreign governments were pressuring South Korea to open its markets. The inequity was undeniable. In 1988, for instance, a total of 305 foreign cars were sold in South Korea. During the same year the country exported more than half a million automobiles, most of which were made by Hyundai and Kia. The government lifted some barriers in 1988 and 1989, but imposed less obvious restrictions. Nevertheless, foreign producers made inroads in the South Korean market during the early 1990s.
Besides proliferating domestic competition, Kia also suffered during the late 1980s and early 1990s from labor problems. Fed up with low pay and poor working conditions, South Korea's workers rebelled during the period. Union strikes forced many companies, including Kia, to significantly raise wages. The labor uprising was actually just one part of a much larger movement begun in the 1980s to dismantle South Korea's political and economic framework. Since the mid-1980s, in particular, the government had been working to decentralize. A corollary of that effort was the diminished dominance of the chaebols. In the late 1980s the Chun government was voted out and replaced by a more liberal administration. Privatization and increased competition ensued. By the early 1990s Kia jettisoned its own chaebol structure and became an independent, publicly traded company, although it continued to benefit from government ties and protected domestic markets.
Following a string of setbacks in the late 1980s and early 1990s, Kia experienced some major breakthroughs. One development was its 1992 introduction of the Sephia, a compact four-door sedan, to the domestic market. The car quickly became the best selling automobile in South Korea. The success of the car was a great relief to Kia, which was simultaneously preparing to enter the U.S. market with its own cars and dealers. Partly in preparation for that project, Kia invested heavily during the early 1990s to vastly expand its production capacity. By 1992 its debt load ballooned to more than $2 billion; by 1994 the company's debt had surged to $3.3 billion.
Kia bet heavily on its ability to market its Sephia and another new model, the Sportage, in international markets. The introduction was well-timed because car sales in many regions were booming in 1994. The big draw for Kia products was the low price. Kia claimed that products such as the Sephia were of comparable performance and quality to vehicles offered by other manufacturers, and Kia marketed them at a much lower cost.
By the time Kia entered the United States with its own nameplate in 1993, it was already selling its cars in about 80 foreign countries and building a total of more than 500,000 cars annually. The company hoped to achieve unprecedented global growth during the mid- and late-1990s. Kia increased production capacity from 650,000 in 1993 to 930,000 in 1994 and planned to boost that figure to 1.5 million by 1997. Kia's global strategy was multi-faceted. In addition to European and U.S. operations, for example, it aggressively chased the blooming Chinese market. To that end, Kia opened the Yanbian Industrial Technology Training Institute in China to train expatriates in production techniques. Kia planned to eventually build a network along China's east coast.
Kia's U.S. foray in the mid-1990s was conducted through the newly formed Kia Motors America. Heading that division was automotive industry veteran Gregory Warner. Warner planned to bring Kia into the U.S. market slowly, starting with selected dealerships in California and expanding into 11 western states. His initial goal was to sell 30,000 to 50,000 units annually.
In 1994 Kia's diversified operations generated about $6.8 billion in revenues. Most of that amount was attributable to shipments of automobiles and related parts, although about 16 percent came from truck sales. The revenue figure marked a significant increase over the $4.5 billion reported in 1993 and the $2.5 billion in 1990. Kia's profitability, however, was extremely weak. Net income fluctuated around a paltry $20 million throughout the early 1990s before bobbing up to $27 million in 1994. Kia's stock plummeted that year, and the company defended its stressed balance sheet by emphasizing anticipated profits from its popular new models. Kia entered the mid-1990s as the 20th largest car maker in the world and the seventh biggest corporation in South Korea. However, by July 1997 the Asian financial crisis would devastate both South Korea and Kia.
The financial woes of both South Korea and Kia were tied to the still-present chaebol structure. These 64 family-controlled organizations had over the years expanded and diversified into many different fields. The expansion and diversification was accompanied by huge debts exhorted from lending institutions afraid to jeopardize the business of these huge companies. Rather than risk family control by allowing outside equity purchases, the chaebols secured their loans with their own subsidiaries. These procedures allowed rapid capital expansion but reduced South Korean competitiveness. Most chaebols owned companies so diverse and so subject to price swings that usually only one or two subsidiaries were profitable at a given time. Moreover, the country was experiencing problems with labor and productivity. With the introduction of democracy in 1987, wages began a decade long climb of nearly 15 percent per year. At the same time, job security expectations weakened productivity. Even though the South Korea auto industry nearly matched Detroit with plant and production resources per worker, South Korea produced fewer than half the number of cars manufactured in Detroit.
Moreover, even before the Asian financial crisis, South Korean industry had been hurt by falling semiconductor prices and poor exports of chemicals and steel. Once the financial crisis arrived, the network of interdependencies rippled through the South Korean economy, causing large-scale collapse. While Kia's portion of that collapse stemmed in part from the foundering of Kia's steel subsidiary, Kia's fairly stable automobile industry was crippled nonetheless. By July 1997, Kia was $5.7 billion in debt and had experienced negative net income for three years in a row. Total revenues fell from $8 billion to $4 billion, and Kia was up for sale. Although numerous foreign investors considered bids for the company, the chaebol system prevailed, as the Hyundai Group purchased 51 percent interest of Kia. That same year Ford Motor Co. divested itself of its 17 percent interest in Kia.
Problems lingered for South Korea and Kia. South Korea's domestic auto market declined by 50 percent and exports were growing by only two percent in 1999. Efforts by the South Korean government to eliminate the chaebol structure remained largely ineffective. The government did, however, effectively require more stringent reporting of financial data, outlawed the practice of using subsidiaries for securing loans, and insisted that companies reduce their debt/equity ratio below 200 percent. It also prodded the chaebols to sell subsidiaries to foreign investors. Still, the chaebols could circumvent most government provisions which were difficult to police. In 1999 South Korean policy still protected redundant labor practices, and the government continued to block the attempts some companies made to downsize.
In the late 1990s Hyundai and Kia announced an austerity program of selling off subsidiaries, consolidating manufacturing, and reducing the number of models produced. Hyundai announced it would streamline its subsidiaries from 79 to 26 and concentrate instead on five core businesses. Yet, by 1999 Hyundai had actually eliminated only four subsidiaries and had sold eight. Meanwhile, the company had expanded by its purchase of the majority of Kia, as well as acquiring an oil refinery, a computer chip business, and two fund managers. Meanwhile, Kia was strapped by a no-strike, no lay-offs clause in its labor contract that would require production of 800,000 units per year. Kia sold 460,000 units in 1998.
All was not dire for Hyundai/Kia, though. The combine was working to streamline its operations. New marketing plans called for Kia to focus on the young and stylish consumer, while Hyundai would target an older, more mature consumer. By July 1999 Kia reported rebounding sales with an expected net profit of $655 million by the end of the year. It also reported reducing its debt-equity ratio from 370 percent to 170 percent. In addition, Kia Motors America reported record U.S. sales in 1999 for the Sephia and Sportage models, despite a July 1999 recall of 32,653 Sephia compact sedans to replace ailing emissions systems. In fact, by mid-1999, Kia's auto sales were up 59.3 percent in the United States, and the company planned to enhance its three model lineup (the Sephia, the Sportage five-door, and the Sportage three-door) with at least three new models, including a four-door subcompact, a Sportage with V-6 engine, and a minivan called the Sedona. As Kia closed the century, its future remained unpredictable, though indications of an upswing in the Asian economy were apparent. Certainly, the company hoped Kia would again "rise from Asia' as its Korean name indicates.
Principal Subsidiaries
Kia Motors America.
Further Reading
Burstiner, March, "Kia Drives into Town with Nine Bay Area Dealerships,' San Francisco Business Times, April 15, 1994, p. 3.
Butler, Steven, "Korean Car Makers May Be Up for Grabs,' U. S. News and World Reports, May 18, 1998.
Darlin, Damon, "The Keep-it-Simple Strategy,' Forbes, August 16, 1993, p. 98.
Garrett, Jerry, "Seoul Survivors,' Car and Driver, August 1999, p. 41.
Harrison, Leah, "Dealers Hope Service, Low Cost Will Drive Kia Sales,' Puget Sound Business Journal, November 19, 1993, p. 3.
Hart-Landensberg, Martin, The Rush to Development: Economic Change and Political Struggle in South Korea, New York: Monthly Review Press, 1993.
"Kia Motors in Positive Mood on Rising Sales,' South China Morning Post (Web Edition), July 14, 1999, pp. 1-2.
"Kia Recalls 32,653 1996-97 Sephia Sedans,' Rueters, July 15, 1999.
Luebke, Cathy, and Vince Maietta, "Kia Sephia Isn't Too Good to Be True,' Business Journal, May 27, 1994, p. 26.
Nakarmi, Laxmi, and Larry Armstrong, "Ford, Toyota, Volkswagen, Fiat, Kia.... Kia?,' Business Week, December 12, 1994, p. 58.
"Nation-Builders,' Economist, July 10, 1999, pp. 53-58.
Nauman, Matt, "South Korea Import Tries to Crack Compact Car Market,' Knight-Ridder/Tribune Business News, April 12, 1994.
Onishi, Norimitsu, "Korea's Kia Motors Enters U.S. Market with Sephia,' Knight-Ridder/Tribune Business, September 22, 1993.
Shin, Yoo Keun, Richard Steer, and Gerardo R. Ungson, The Chaebol, New York: Harper & Row, 1989.
Whitehair, John, "Korea's Kia Arrives in Area,' San Bernardino County Sun, August 6, 1994, p. B8.
— Dave Mote; Updated by Shannon and Terry Hughes
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