International -- Asian Business: AUTOS
TAKING ON TOKYO'S AUTO TITANS (int'l edition)
From Daewoo and Hyundai to GM, the challengers are up against formidable odds
The auto market in Asia has long been dominated by the Japanese, who have honed their prowess at both manufacturing and marketing. But some companies are out to challenge the Japanese inside Japan itself or elsewhere. In Japan, General Motors Corp. is introducing its Saturn cars to skeptical consumers. In South Korea, the major conglomerates are stepping up their efforts to create a world-class auto industry.
SOUTH KOREA: IT'S FULL SPEED AHEAD
But is a car crash looming?
No one has ever accused the Koreans of thinking small. This is the land of the giant conglomerates, or chaebol, where family-owned groups have as many manufacturing interests as there are types of kimchi. Now, the omnivorous chaebol are accelerating their rush into the global auto market. But they risk overextending themselves and triggering a shakeout in their own ranks.
The Koreans, of course, have been making cars since the 1960s, but they are really picking up the pace. Korea's auto makers will more than double their annual production capacity, from 2.75 million cars last year to more than 6 million cars worldwide by 2000. If that weren't enough, Korea's largest chaebol, Samsung Group, is pushing into an already crowded field, joining Hyundai, Kia, and Daewoo. It will begin making cars in an alliance with Nissan Motor Co. next year. "The Koreans continue to build, build, build," says James Tessada, president of Ford Motor Co. of Korea. "Somewhere along the line, the model is going to fall apart."
Korea has targeted emerging markets, spending billions to build plants from Indonesia to Kazakhstan to Venezuela. Hyundai Motor Co. has built nearly a dozen plants on four continents. In India, it is spending $1.1 billion to set up a wholly owned plant to produce 200,000 cars by 1998. Kia Motors Corp., Korea's No.2 auto maker, has nearly as many plants around the world and by 2005 plans to sell 1.3 million more cars than its 789,000 units last year. There's little doubt the potential in emerging markets is great. But so are the pitfalls, including unfinished roads and poor service.
The Koreans point out that their rivals are expanding fast. By 2000, reckons Autofacts Inc., a Pennsylvania consultancy, the global car industry will be able to make 20 million more vehicles than consumers will be able to buy. Joining the Koreans in the mad dash, Volkswagen, GM, Ford, Honda, and Toyota will add more capacity than any of the Korean companies.
But the risks may be greatest for the Koreans, because of their dependence on less stable markets. The carmaking chaebol are highly leveraged: Daewoo's debt-equity ratio, for example, is nearly 800%. And the Koreans remain far behind Japanese and Western auto makers in engineering, marketing, and design knowhow.
"ALL OR NOTHING." The Koreans are only just starting to recognize the problem. Daewoo Group founder and Chairman Kim Woo Choong conceded to BUSINESS WEEK editors in New York in late February: "There might be a little overproduction in Korea." Domestic demand is expected to grow just 4% from last year's 1.24 million vehicles, down from 20% growth just two years ago. "This will make it very difficult for existing manufacturers to compete in Korea," says Lee Hyoung Keun, head of international marketing for Hyundai, the country's biggest car company.
But the Koreans intend to keep charging ahead. "I have found that in every country, first you build the cars, then they have traffic, and then they [fix] the roads," Daewoo founder Kim said. Daewoo Motor Co., Korea's third-ranked auto maker, has plants in Eastern and Central Europe, is planning operations in Iran and the Philippines, and will market a new car, comparable to the Honda Accord, in the U.S. later this year, joining rivals Kia and Hyundai.
There are some successes. Sales of Korean cars in Western Europe jumped 11.4% in January in a weak market. But despite the Koreans' rhetoric and moderate gains, analysts expect an industry consolidation, with Kia in particular seen as vulnerable because it's not part of a chaebol.
The Koreans, however, keep pushing to reach critical mass. To compete globally, a company must make at least 2 million cars a year, explains Kim Jong Do, a director at Daewoo Motor. "It's all or nothing," he says. "Let the market decide who wins and loses." So as Korean carmakers step on the accelerator, they must watch they don't sustain major injuries.
By Steven V. Brull in Tokyo and James Lim in Seoul, with David Woodruff in Geneva and bureau reports
JAPAN: CAN SATURN LAND SAFELY?
It could break the U.S. hex
Divine intervention. That's what General Motors Corp. seemed to be looking for in Japan recently when it asked Shinto priests to stage a "good luck" ceremony for the company. On Apr. 5, GM launches its Saturn line in Japan. These models have been big hits in the U.S., and foreign nameplates have captured 10% of the Japanese market. But Detroit auto makers have had dreadful luck making inroads there, where consumers feel their cars are too big and don't match Japanese quality. It's the Europeans who lord over the imports.
Not very encouraging for GM. But the company has conducted detailed market research in Japan for years in the hopes of getting the launch right. Even Toyota Motor Corp. President Hiroshi Okuda, who has scoffed at Detroit's earlier Japan efforts, offers some praise. "Of all the U.S. cars imported to Japan, if there were to be a successful case, it might be the Saturn," says Okuda, who drove the car recently. The odds are still against Saturn, but it does seem to have a better chance than Detroit's earlier forays.
CUSTOM TOUCHES. The company plans to roll out right-hand-steering versions of the Saturn sedan, station wagon, and sports coupe, each competitively priced at about $16,600 or so. Saturn Corp. is hoping for some quick hits. Says Saturn President Donald W. Hudler: "Our best-selling vehicle will be the wagon. Wagons are booming in Japan." Saturn engineers have also made some sensible modifications for Japan's maddening patchwork of narrow streets. Imported Saturns have been narrowed to about 1.7 meters in width and come with retractable side-view mirrors. The floor pedals have also been raised for small-statured Japanese drivers.
Nice touches, but where Saturn really wants to shine is in customer service, its specialty in the U.S. In Japan, service is a weakness for most U.S. car importers, given their spotty dealership networks vs. the Europeans. But Saturn has recruited its own dealers and bypassed GM's Japanese distributor, Yanase Co. The initial 11 Saturn dealerships will keep some 400 most-often-needed Saturn parts in stock. Using a computer link, Saturn's service-and-parts center near Spring Hill, Tenn., will automatically track and replenish parts in Japan.
Saturn also wants to lavish attention on customers. Dealers will provide 24-hour emergency roadside service and dispatch mechanics to help owners with car troubles. GM is already running ads showing Japanese dealers attending its celebrated customer-service training center in Tennessee. Yet certain customs won't be exported, such as the rah-rah demonstrations by dealership employees when a customer drives off in a new Saturn. "A chant and applause at delivery are a little too embarrassing for the Japanese," says Hudler.
The Big Three certainly need a win in Japan, given that a weaker yen has translated into a 75% year-on-year jump in January of Japanese car exports to the U.S. And precious few American cars cruise Japan's roads. A right-hand version of Chrysler Corp.'s Neon subcompact, dubbed a "Japanese car killer" has proved anything but. Nor has the GM-made Chevrolet Cavalier, unveiled in 1996 bearing a Toyota nameplate, lived up to its pre-launch hype. "It was a major flop," say ING Barings Ltd. auto analyst Christopher Redl. Ford's Taurus did not fit into Japanese parking places.
Saturn's timing is not ideal. With the local economy limping, tax hikes scheduled for April, and Japanese auto companies vying for extra share, dealers have been shaving $2,000 or so off the sticker price of sedans, such as the Toyota Corona and Nissan Bluebird, and wagons such as the Subaru Legacy--all cars in Saturn's price category. So Saturn will find it hard to pursue its strategy of focusing on service instead of discounts. Another headache: It must build up awareness among Japanese consumers who associate the name Saturn with Sega Enterprises Ltd.'s game player with that title.
Saturn executives say they have a 10-year plan to see them through. When you're tackling Toyota, Nissan, and Honda on their home turf, thinking long-term is the only way to survive.
By Brian Bremner in Tokyo, with Katie Kerwin in Detroit