Cliapter4

4. Technology Acquisition by the Chaebol: A Study of Samsung Semiconductor Unit and Hyundai Motors

The chaebol are the mainstay of the Korean economy. I As noted in the

previous chapters, in all. sectors they have dominated and have contributed

immensely to the nation's overall economic growth. In other words~ it would not

be unfair to say that they are the engines of growth. The overall technology

development strategies pursued by the chaebol to accomplish industrial

objectives are already discussed at length and breadth.

This 'chapter, however, outlines the technological capability building

strategies of two outstanding firms that have helped them sustain their exports

and remain competitive in the international market. The two firms taken for the

study are Samsung Semiconductor Unit and Hyundai Motors due to their notable

shares in Korea's total exports in the respective sectors. In doing so, the chapter

discusses the stage-wise approaches followed by the firms, their learning

mechanisms and R&D patterns in line with their product upgraqation. Moreover,

each sector's performance is assessed to measure their achievements.

For this purpose, this chapter is divided into three sections. The first

section presents a brief overview of the growth, evolution and performance of

the chaebol in general. The second and third sections focus exclusively on the

two sectors chosen for the study.

I Yeon-ho Lee, The State, Society and Big Business in South Korea, (London: Routledge, 1997), p. 18. The Chaebol can be defined as 'big business groups or conglomerates exclusively owned. managed and controlled by an entrepreneurial founder and his family. Chaebol have many similar features of the Japanese Kieretsus. However, the major difference between chaebol and kieretsus is that the chaebol do not all have their financial institutions.

150

4.1 GROWTH AND PERFORMANCE OF THE CHAEBOL

4.1.1 Growth of the Chaebol

The origin of most of the dominating chaebol can be traced to the colonial

(1910-1945) and the reconstruction (1945-1960) periods. However, it was during

the mid-1960s that they began to appear as major players with full'backing of the

government.2 Since then they have emerged as leaders in all vital industries. In

the first two decades the' industrial policies of the government were aimed at

creating strong capital-intensive industries that would boost exports and help the

econcmy grow at a faster pace. For that purpose, a limited number of big finns,

chaebol, were granted licenses to operate in various fields of business and were

fully protected by the government from foreign competition. The chaebol were

also provided with various financial incentives such as low interest loans, tax

benefits and favorable exchange rates and were encouraged to invest in the six

HCI projects.3

The HCI Plan was welcomed by the chaebol and it proved to be a turning

point for them. It provided them the suitable platfonn to grow and ever since

they have grown by leaps and bounds. By the end of 1970s one could easily see

their dominance on the industrial landscape. At the same time the relationship

between government and the big firms improved to such an extent that it was

impossible for the; policy makers to devise any plan without involving the

chaebol. This led to concentration of economic power in the hands of a few

chaebol. According to one estimate, from 1962 to 1982 almost 60 per cent of the

2 Myung-Hun Kang, The Korean Business Conglomerates: The Chaebol Then and Now, (Berkeley, University of California, 1996), p.28. One of the important factors behind the evolution of chaebol during the period was the allocation of the money in the form of aid provided by the US and UN to Korea. Beside, government alsOo offered favorable concession to the big firms as a result of which firms such as Samsung, Lucky, Ssangyong and Samho had already established their footholds by the early 1960s. As the industrial policies of the Park Chung Hee administration were directed at selective promotion of targeted sectors, it provided the golden opportunity for chaebol to venture into major areas using the government loans and to establish their monopoly. 3 K.H. Chung, Hak chong Lee and Ku Hyun Jung, Korean Management: Global Strategy and Cultural Transformation. (Berlin, New York: Walter de Gruyter, 1997), pp. 38-45.

151

total loans in Korea were allocated to the chaebol at subsidised rates.4 With the

help of these heavy amounts of loan they were able to establish giant sized

production facilities in their chosen areas.

The administration began to show some concern toward the rapid growth

of the chaebol in the late 1970s. But it could not implement' any effective

measures to reduce their hold on the economic wealth. This was largely because

of two reasons. First, the government did not have any other alternative except to

support the chaebol for carrying out the HeI projects. Secondly, the chaebol

fulfilled the criteria for establishment of HeIs and the government did not 'vant

to take any risk by selecting new firms. It may be said that the government

allowed them complete freedom. As a result, most of the largest chaebol such as

Samsung, Daewoo, Hyundai, Lucky Goldstar, Ssangyong, Samwha etc. were

granted license as general trading companies.5

As already discussed, the unchecked expansion of the chaebol along with

the heavy. investment in HeI by borrowing contributed to the negative growth of

the economy in the early 1980s. The government faced severe criticism and was

blamed for such economic inefficiencies. The 'octopus-like diversification' of

the chaebol could be seen in the doubling of the number of subsidiaries in six

years. For example, the number of firms owned by the top 30 chaebol increased

from 304 in 1974 to 608 in 1980.6 To curtail such unwanted growth the ;

government took various measures such as implementation of the HeI

Rationalization Plan and support based on export performance. These measures

worked well to some extent. But by the late 1980s the chaebol were self-

sufficient in monetary terms and they no longer remained dependent on the

4 H.J. Chang, The Political Economic of Industrial Policy, ( Basingstoke: Macmillan, 1994), p. 23. 5 S.H. Kwon and Michael O'Donnell, The Chaebol and Labour in Korea: The Development ~r Management Strategy in Hyundai, (London and New York: Routledge, 200 I), pp. 20-24. As the authors have pointed out, under the system the chaebol received orders frQm overseas buyers and were prO'.ic;::d with bank loans to fulfill the order. This gave the chaebol considerable economic leverage. 6 K.T.Lee, "Policy Measures to reduce Industrial Concentration", in Lee J. Cho and Y.H. kim (eds). Economic Development in the Republic of Korea, (Honolulu: East West Center, 1991), P 480

152

government. Moreover, growing pressures of competition from int~rnational

market forced the government to relax the stringent measures and continue

support to the chaebol.

Surplus in exports generated by the chaebol for three consecutive years in

the late 1980s further encouraged the government to foster their growth. The

decade from mid-1980s to mid-1990s (until the financial crisis) saw an

accelerated pace of growth and diversification of the chaebol both in related and

unrelated areas of business. While on one hand the firms diversified their

operations into an extended range of products, on the other hand they also

stretched their arms into unrelated business such as real estates. The effects of

globalization necessitated the diversification towards high technology intensive

sectors. Also at the same time the diversification towards estate business was

due to the threat.of survival. To put it differently the chaebol chose such strategy

to compensate in case of any failure in their core activities. They believed in the

twin motto, "Bigger the better; more the better"

The causes and effects of the financial crisis have been analysed in the

previous chapter. It is observed that the excessive reliance of the government on

the chaebol and the non-pragmatic practices of the chaebol were the two key

factors responsible for the crisis. Since the crisis the government has been

implementing the guidelines of IMF for corporate restructuring. As of yet it

appears that the government has succeeded considerably in this regard.

4.1.2 Economic and Export Performance of the Chaebol

The following figures indicate the contribution of the major chaebol in

export as well as the overall economic structure of Korea. In the initial stage

remarkable increase in the share of the chaebol in the total sales was observed.

For instance, the share of total sales by the twelve largest chaebol in

manufacturing increased from 14.2 per cent in 1972 to 31.5 per cent in 1981. In

153

the same period the number of chaebol affiliates in the HeI sector increased

from 30 to 122 and their workforce from 25,000 to 154,000.7

Table 4.1: Top Ten Business Groups (Chaebol) in Korea

1965 1975 1985 1995 2003

Samsung Samsung .. LG Hyundai Samsung

Lucky Lucky Hyundai Samsung LG

Ssangyong Hyundai Samsung LG SK

Pan bon Hanjin Sunkyong Daewoo Hyundai Motor

Sambo Hyosung Daewoo Sunkyong Lotte

Samyangsa Ssangyong Ssangyong Ssangyong Sinsagae

Tongyang Daewoo Hanjin Kia Hanwha

Taehan Doosan Korea Explosive Hanjin Hanjin

Kaeppong Dong-A Daelim Hanwha CJ

Hwashin ShinDong-A Hyosung Lotte Hyundai .Heavy

Source: K.H. Chung, H,C. Lee, K.H.Jung ., Korean Management: Global Strategy and Cultural Trans/ormation, (Berlin, New York: Walter de Gruyter, 1997). The ranking of2003 is reproduced from Korea Herald, April 25, 2003.

As shown in Figure 4.1, there have been changes in the ranking of the

chaebol. However it is noticed that the four corporations, namely Samsung, LG, i

Hyundai and Daewoo (in 2003, replaced by SK) have remained in the top ranks

most of the time. In 1979, monopoly power was exercised by the top three

chaebol, Samsung, LG and Hyundai, contributing over 89 per cent of total . . manufactured products in Korea.8 Moreover the combined sales of these three

chaebol as percentage of GDP rose from 9 per cent in 1974 to 35.8 per cent in

; These figures are taken from Kwon and O'Donnell, n. 5, p. 24 and 21 respectively. 8 Ibid., p. 22.

154

1984, while that of the top ten chaebol increased from 15.1 per cent to 67.4 per

cent between 1974 and 1984.9

According to the available figures, in 1995, the top thirty corporations

had in total 669 subsidiaries with the top five (the above three plus Daewoo and

SK) accounting for about one third (206 subsidiaries). These thirty chaebol also

accounted for 36.6 per cent in manufacturing value added, 52.5 per cent in total

assets and 13.8 per cent In employment in 1996. As usual the combined share of

the top four chaebol in manufacturing value added was 22 per cent and 60 per

cent of the thirty groups total added value. The share of the seven largest

companies in Korea's total exports and imports in 1996 stood at 47.7 and 22.2

per cent respectively.lo In the year 2000, the top four companies affiliated to the

groups, namely, Samsung Electronics, LG Electronics, Hyundai Motor Co and

Hyundai Electronics, together contributed 27.7 per cent of the nation's total

exports with Samsung alone accounting for 13.5 per cent. II

Table 4.2 shows the market-dominating enterprises III the technology-

intensive products. While in electronics and IT sector Samsung, LG and SK are

the dominant enterprises in transport and automobiles sector Hyundai, Daewoo

and Kia have emerged as clear winners. Another major trend in recent years is

the entry of Samsung Goint venture with Renault motors) into the automobiles

sector and Hyundai moving to the second position in semiconductor sector.

Besides, Daewoo has visible presence in the consumer electronics products in

9 Alice Amsden, Asia's Next Giant, (New York: Oxford University Press, 1989), refer to p. 116. Also see, Lynn Mytelka and Dieter Ernst, "Catching up, keeping up and getting ahead: The Korean

Model Under Pressure", in Mytelka, Ernst and Ganiatsos (eds.), Technological Capabilities and Export Success in Asia, (London and New York: Routledge, 1998), p. 144. In 1973, the five largest chaebol contributed 8.8 per cent to GOP in the manufacturing sector. The top 10 accounted for 13.9 per cent and the 20 largest for 21.8 per cent. 10 This paragraph is summarized from Serge Perrin, "Korean Direct Investment in North America and Europe: Patterns and Determinants", in Frederique Sachwald(eds), Going Multinatiunal: The Kurean Experience of Direct Investment, ( London and New York: Routledge, 200 I), pp. 86-87. II United Nations Commission for Trade and Development (UNCTAD), World Investment Report 2002, (New York, Geneva: UN, 2002), p. 179. The report further estimates that the leading 50 companies. subsidiaries of the thirty chaebol accounted for 68.7 percent of the total exports of Korea.

155

the domestic market. This reflects the chaebol's diversifications In both

industrial as well as technological fronts.

Table 4.2: Market-dominating Enterprises in Major Products

Major Products Enterprises

Color TVs and VCRs Samsung Electronics (SE), LG Electronics, Daewoo Electronics

(DE)

Telephone Switchboards Goldstar Info., SE, Oriental Telecom

Microwave ovens LGE, SE, DE

Sem iconductor SE, Hyundai Electronics

Compute~ system SE, LGE

Mobile phones Samsung Telecom, LG Telecom, SK Telecom

Passenger Cars Hyundai Motors, Daewoo Motors (now GM-Daewoo),

Motors

Transport Vehicles Hyundai Motors, Daewoo Motors

Source: Adapted and compiled from Sachwald, F. (eds.), Going Multinational: The Korean Experience of Direct Investment, (London and New York: Routledge, 200 I) and other sources.

Significant changes have also been witnessed in the export destination of

the chaebol. Since the early 1990s Korea's total exports to the markets of Japan

and US have been declining. In response they have relocated their exports in the

Asian and European market. They have adopted the strategy of establishing their

manuf::!cturing facilities in, these regions due to cheap labour costs and other

favourable macroeconomic environments. All the four major conglomerates are

investing heavily in the hvo largest developing markets of China and India. As a

result their market shares in technology intensive products has been consistently . . IncreasIng.

Examples of their growing presence in India may be cited here. Sam sung and

LG Electronics established their household electric appliance plants in the mid-

156

Kia

1990s. Encouraged by the initial success, they are now expanding their product

ranges similar to the kind of strategy they pursued in the advanced markets in the

past. In fact, as one industry source puts it, the Samsung group in its recent

executive meeting designated India as the second China and decided to

concentrate more in this market.

Similarly, as a high-ranking official from LG has stated, the company is

investing $20 million for construction of its second factory in India and will focus

on producing digital products. The well known business newspaper in India, The

Business S~andard, in its recent market survey indicated that the combined sales

of Samsung and LG airconditioners, refrigerators and mobile handsets accounted

for 55 percent, 38 per cent, 33 per cent and 60 percent respectively in the Indian

market. In the automobiles sector Hyundai has built its production lines and is

placed in the second rank in terms of its market share in passenger cars .. 12

There could be several reasons behind such remarkable changes in the

chaebol's strategy of export expansion. Firstly, as mentioned already, they began

to face stiff competition in the very products they enjoyed advantage from finns

from China, Malaysia and southeast Asian nations in the advanced countries'

markets. Secondly, growing trade frictions between Korea and US in the last

decade seem to have forced these firms to redirect their exports towards emerging

markets of Asia. The Korean firms have found it easier to maintain their

competitiveness in these markets. This is because these markets are new to the

already developed products elsewhere and require less innovative efforts from the

finns.

12 The contents of this paragraph are summarized from, "Major Conglomerates Rushing to India", Economic Report, (Seoul: August 2002), p.18. Daewoo automobile was the first Korean Company to make in roads into the Indian market back in 1994 and had achieved initial success.

157

4.2 SAMSUNG SEMICONDUCTOR UNIT

4.2.1 Profile 13

Samsung is Korea's largest conglomerate in terms of both assets and

turnovers. Established in 1930s it has emerged as a highly diversified business

group with 64 affiliates. As of now, it has 285 overseas operations in roughly 70

countries with 173,000. employees worldwide. Samsung Electronics is the

Flagship Company of the group accounting for more than 16 per cent of the total

Korean exports.

Since its foundation in 1969, the company has earned reputation as a

global leader in knowledge and high technology intensive products such as

semiconductors, mobile phones, flat panel display etc. It is now world's leading

manufacturer in 17 different product categories, including DRAM and SRAM

chips, TFT-LCDs, CDMA handsets, CRT monitors and microwave ovens. The

group is now determined to be the top manufacturer of more than 30 products in

the coming years. What explains the huge success of Samsung in these products

is its aggressive strategy to accumulate technological capabilities at a much

quicker pace than its competitors.

From the early 1970s into the 1990s, it has graduated from a stage of

fast-follower to that of a dynamic innovator especially in the field of digital

technology. For four consecutive years, it has been placed among the world's top

ten companies in patent~ granted by the US patent office. Mo!"e strikingly, the

company was recently rewarded for achieving highest growth in market

capitalization in the electronics sector. Taking note of the fact that

semiconductor has been the no. 1 export item of Korea since 1995 and Samsung

accounting for the major share, the following section outlines Samsung"s

U The profile is prepared from the exclusive section on Samsung Group, Economic Report, (Seoul: February, 2003), pp.12-15.

158

technology accumulation strategy in semiconductor. 14 The technological

trajectory of Samsung is divided into three phases as discussed below.

4.2.2 Three Phases of Technology Accumulation

A. Assimilation of Imported Technologies: -

Samsung ElectroniCs officially entered the semiconductor in~ustry in 1975

by acquiring Korea Semiconductor Company with the mission to develop Ie

(integrated circuit chips) and to reduce its dependency on J ap'anese firms. To

acquire the capability it began with assembly-based learning. However, the

actual progress started in 1983 when it decided to follow the Japanese example

of venturing into the mass production of DRAM chips. It may be mentioned here

that Samsung and other Korean firms chose to enter the DRAM business

because of its certain advantages. Being a standardized product, it required little

design capabilities and the steep learning curve ,promised significant scale

economies. The Korean chaebol had by the time a successful experience in mass

manufacturing of standardized products and they were confident of using it for

mass production of DRAM. 15

In its attempt to catch up with the leading companies, Samsung adopted

the leapfrogging strategy. Rather than following the usual pattern of SSI-MSI-

LSI -VLSI, it directly entered the VLSI stage where the first target was to

develop the 64K DRAM chips. A team of experts was formed to study the

market and technological requirements and was sent to the US for identifYing

potential technology suppliers. A licensing deal was reached with Micron

14 For instance in 1998, semiconductor accounted for 37 per cent of Korea's total electronics production and 44 per cent of its electronics exports. See Serge Perrin, n. 10, p. 132. 15 D.S. Cho, OJ. Kim and D.K.Rhee, "Latecomer Strategies: Evidence from the Semiconductor Industry of Japan and Korea", Organizational Science, (VoI.9, No.4, July-August, 1998), pp. 498-499. The Korea Semiconductor Company was established as a joint 'venture between Korea Engineering &

Manufacturing Company and Integrated Circuit International, a US firm. To support the development of Semiconductor industry the government also enacted a semiconductor promotion law in 1983.

159

Technology~ a small US based finn with credible record in DRAM technology. 16

Under the agreement Micron licensed its technology to Samsung and in return

Samsung made some investment in Micron. Simultaneously it also picked up the

design for a high-speed MOS from Zytrex of California for $2.1 million.

In the first phase Micron handed over 3000 units of 64K DRAM chips to

Samsung, which were mainly used for training researchers as well as for

assimilation purpose. Some engineers from Micron were also disp~tched to train

the staff of Samsung. The skilled professionals working in Samsung, who had

the experience of being in the LSI business, did not have much difficulty in

learning the assimilation process. The rapidity of learning was clearly visible

from the proportion of output to yield. For instance, the first batch of output in a

nonnal case is expected to yield about 10 per cent only. But surprisingly a 92 per

cent yield was achieved within 40 days, which was at par with that of Japan.

Within six months the development team succeeded in solving out the problems

in the last eight core process technologies out of the total 309 processes

involved. However, these problems were resolved by hiring the Micron-trained • 17 engmeers.

Subsequently, Samsung sent its own engmeers to the overseas

companies, from which it bought technologies, for further training required to

translate the tacit lq1owledge. Upon the realization that it did not have sufficient

chip engineers, the unit recruited and hired new talents, particularly Korean-

American scientists and engineers with sufficient research experience. On the

other hand, it started setting up research outposts in the Silicon Valley and other

important locations in order to upgrade its technological capacity. These R&D

institutes were primarily assigned with the task of (a) scanning infonnation on

16 Linsu Kirri, From Imitation to Innovation, (Massachusetts: H~rvard Business School Press, 1997). pp. 149-170. Samsung's multipurpose R&D institute in Santa Clara mediated the agreement. 17 Youngil Lim, Technology and Productivity: The Korean Way of Learning and Catching Up. (Cambridge, Massachussettes, London: MIT Press, 1999), p. 107.

160

potential technology holders and (b) recruiting capable personnel for production-

line operations in Korea.

Accordingly, a research institute, Samsung Semiconductor Inc. (SSI),

was set up in Silicon Valley with the objective to develop 64K and 256K

DRAMs. 18 Interactions, training and consultation with the US' firms helped

Samsung engineers to speedily accumulate the capacity to digest the VLSI

technologies. Besides what perhaps worked, as the greatest motiVating factor

was the introduction of the target setting or crisis construction approach in the

unit. It had to develop a working production system for 64K DRAM within six

months. To achieve the set target the workers at the unit worked round the clock.

Such practices gave a major boost to the organizational learning capacity. It

helped the firm move up to a much higher level for developing more advanced

chips in the later stage. The goal was soon materialized when Samsung hit the

market with 64K DRAM chips in 1984 thus enabling Korea to become the third

country in the world to introduce DRAM chips in 1984 after Japan and US. 19

So the first stage of developing 64K DRAM was realized with the help of

foreign firms. Samsung heavily depended on external sources for equipment,

production techniques and training. The mode of engagement with the overseas

firms was mostly, licensing in nature. Nevertheless, the prior knowledge

embodied in the workforce of the firm on one hand, and the commitment to

understanding the technologies through learning by the engineers, on the other,

underlined the success of Samsung.

18 Youngsoo Kim, ''Technological Capabilities and the Samsung Electronics Network". in Borrus, Ernst and Haggard (eds.), International Production Network in Asia: Rivalry or Riches?, (London, New York: Routledge, 2002), p. 149.This research institute began to playa leading rolP by collecting information about up-to-date technology and markets as well as a training post for Korean engineers. 19 Linsu Kim, n.16.Also see M. Hobday, Innovation in East Asia: The Challenge to Japan, (Cheltenham: Edward Elgar, 1995), pp. 79-86

161

B. Improving upon Imported Technologies:-

After developing the 64K DRAM the second target for Samsung was to

produce 256K DRAM. Similar to the earlier strategy, a decision was made to

source circuit design from Micron, but not the proces's technology. Instead,

Samsung decided to develop process technology on its own. T6 carry out the

project two task forces were formed, one to work in Korea and the other in

Silicon Valley. The Silicon Valley team was asked to develop the ~hole range of

256K DRAM including circuit design as well as process design to become

independent of foreign design suppliers. Its team in Korea decided to license the

technology from its partner.

The development of 256K DRAM involved more complicated

technologies and therefore required greater efforts. The Samsung team at its

headquarters surveyed and explored all related literature regarding the

technological specifications in 256K DRAM. Its engineers once again worked

hard for another eight months. In addition, the training provided at the suppliers'

site enhanced the capacity of the firm to absorb the tacit elements and secure

wafer fabrication and assembly technologies. The headquarters team

successfully developed the chip design in a record time, further reducing the

technology gap with the Japanese and American firms. It could be observed that

by this time Samsung had already mastered the basic technologies and was I

moving towards its own: innovative capabilityenhancement.2o In comparison the

Silicon Valley team of Samsung went a step further and produced a qualitatively

better design in terms of performance features and manufacturability, which was

used for production purposes.

20 Linsu Kim, Ibid. Also see, John A. Matthews and Dong-Sung Cho, Tiger Technology: The Creation of a Semiconductor Industry in East Asia, (Cambridge: Cambridge University Press, 2000), pp. 122-125. At the same time Samsung also was attracting OEM production contracts from major companies such as Intel and IBM, which acted as a further channel for technology leverage.

162

Table 4.3: Samsung's Major Strategic Alliances in Semiconductor Sector

Year

1983

1985

1985

1987

1988

1990

1992

1993

1994

1995

1995

1995

Partner

Micron (US)

Zytrex (US)

Intel (US)

Intel (US)

Hitachi (Japan)

NEC (Japan)

Toshiba (Japan)

Micron (US)

ARM (US)

Toshiba (Japan)

Fujitsu (Japan)

Toshiba (Japan)

Subject

CMOS process and IC

8-bit DRAM

1M DRAM

DRAM & SRAM patents

64K & 256K DRAM

DRAM products

Development of Flash Memory chips

Development of synchronous

DRAM, Windows RAM, triple

Part ROM

Development of Micro processing

Unit

Technical exchange for

Memory & Non-memory <:hips

Technical exchange for TFT-LCD

Development of 64M Flash Memory

Source: Compiled from Yongil Lim, Technology and Productivity: The Korean Way of Learning and Catching Up, (Cambridge, Mass.: MIT Press, 1999).

The team emphasised on reverse engineering the 256K DRAM chips

developed by its Japanese and American counterparts thus maximizing the in-

house learning possibilities to achieve own designing capability quickly.21 Such

experience of technological accumulation provided a strong platform to

Samsung for subsequent development of 1M DRAM. However~ at the market

front, 256K DRAM could not generate significant returns for Samsung in the

21 Mytelka, Lynn and D. Ernst, n. 9, p. 130. Also see, Kim, Youngsoo, n.18. Samsung recruited several Korean DRAM experts educated in the US

who would be of great help in developing and commercializing the product for Samsung. Its Silicon Valley office started producing silicon wafers in 1985 with 300 engineers and was further expanded in 1987 to study IC applications in computers, office and telecom equipment. Samsung also opened its ToJ...)'o Design Center for ICs in the same year.

163

initial years because of the market downturns and fall in the price of memory

circuits.

In developing 256K DRAM also Samsung depended on the foreign finns

but this time to a lesser degree. The dual strategy adopted to carry out the

development project simultaneously at home and Silicon Valley worked well in

its favour at least on two accounts. Firstly by engaging in intensive training and

trial-and-error learning practices the workforce accumulated the skills for

undertaking production design. Secondly, the firm benefited a lot from setting up

outposts at strategic location, which actively followed the strategies of advanced

finns and provided critical infonnation to the firms.

C. The Stage of Design Leadership: -

The success with 64K and 256K DRAM within a short time further

inspired Samsung to surge ahead in the semiconductor sector. Now,

development of 1M-bit and 4M DRAM became the objective of the finn.

Samsung had the confidence to compete in the 1M DRAM segment with its own

in-house R&D. But it still depended on externally acquired technologies for the

design and developed only wafer fabrication and assembly technologies.

As eady as 1985, the Silicon Valley team of Samsung had already built a

prototype production line for 1M DRAM?2 But the finn decided to mass-i

produce the devices in Korea. It faced trouble securing explicit knowledge in

technical specification, literature on production processes and sample chips from

Japanese and US finns, which preempted reverse engineering. To overcome the

difficulties, Samsung's Chainnan approached the government with a plan for a

Korean 1M DRAM development consortium to be coordinated by the industry

research body, ETRI. The government showed positive response by rapidly

21 M. Hobday, n. 19, p. 82.

164

acting on the plan.23 This enabled Samsung's engineers to consult with scientists

and experts at universities and public research institutes in Korea and its Silicon

Valley staff on various complexities.

Samsung's team dissected the DRAM chips one-by-one, analysed the

structure through an electron microscope and used this information as a basis to

reproduce the design drawings. After rigorous research it became able to secure

technologies related to CMOS and managed to design 1M DRAM using the

CMOS technology. Mass production of 1M DRAM began in late 1987 and by

1988 Samsung invested US$ 800 million in semiconductor without any

significant return. But after that sale peaked up and Sam sung recovered all its

investment plus a huge profit24 Since the development of 1M DRAM Samsung

has never looked back.

Samsung has been consistently broadening its technology base to

develop indigenous capability for production of sophisticated memory chips

since 1988. The development of 4M, 64M and 256M DRAM within six years

reflects theremarkable innovative capacity of the firm.

Almost all of the 4M design and development work was carried out

within Samsung. However some of the success has its attributes in the support

provided by the government. The government announced the 4M DRAM as a

national project. Here also ETRI played a key role by making arrangement for a

consortium of the three chaebol with Samsung being the major one. It also

invested 10 per cent in the development project. The objective was to produce

4M DRAM by 1989 and maintain parity with Japan.25

23 Linsu Kim, n.16, p. 160. Also see, Matthews and Cho, n. 20. Two other firms, Goldstar and Hyundai also participated in the

consortium, which was subsequently extended to encompass the development of a 4M DRAM. 24 M. Hobday, n. 19, p. 83.The previous two devices, 64K and 256K DRAM, were based upon NMOS. an earlier generation technology. . 25 Linsu Kim, n. 16, p. 162. The success of Samsung encouraged other Korean firms such as Hyundai and LG to enter

Semiconductor sector.

165

In 1988, Samsung announced the completion of the project and started

4M DRAM chips shipment in 1989 closely following the Japanese firms.

Advanced firms such as IBM, HP, Sun Microsystems and NES acknowledged

the performance of Samsung and purchased its products in huge volumes. Intel

formed an alliance with Samsung to resell its DRAM chips in the US market.26

During the period 1989~1995, Samsung further intensified its R&D by

increasing investment and recruiting the best available talents. By 1995 its R&D

expenditures were estimated to be around 6 per cent of total sales. It also forged

new technical alliances with technology leaders such as NEe, Toshiba, Micron

and Fujitsu etc on equal footing (see figure 4.3). These alliances were made for

mutual benefit. For example in 1992 Samsung joined with Toshiba to jointly

develop flash memory chips. Despite the fact that Toshiba held the basic patent

in flash memory, it sought Samsung's help to establish the technology as an

industrial standard.27 At the same time its Silicon Valley team focused on

product development work, technology licensing and capital equipment

purchasing to expand the finn's product range.

Samsung announced the development of 64M DRAM chips, the world's

first production of that level, in 1992. Two years later it became the first

company to come Ol,lt with the fully working sample of 256M DRAM outpacing

its Japanese counterparts. This was possible due to its enhancement of in-house

R&D efforts by investing $150 million.28

Moreover, to produce the dream semiconductor, the I G DRAM, it

developed the electricity consumption technology of 1.8-2.0 volt, adopted

redundancy technology involving the process of 0.18 micrometre super precision

26 M. Hobday, n. 19, pp. 83-84 27 Ibid. 28 Linsu Kim,n.16, p. 163

166

mIcro fabrication and enabled a super speed of 30 nano-second and high . . 29 mtegratton.

It developed the 1 G DRAM in 1996, once again becoming the first in the

world to do so. In addition, the company completed the development of the 0.25

micron merged DRAM with Logic (MDL) chip that was a fusion of the 64M

DRAM and a non-memory device. It claimed that the new chip was 43 percent

smaller, 40 per cent faster and consumed less power than the earlier version. In

1999, Samsung became the first in the world to mass-produce 256M SDRAM

chips.3o

As discussed, the post 1M DRAM development period can be

characterized as Samsung's innovation phase. Although much of the innovations

are incremental in nature, these are nonetheless significant for enabling Samsung

to be recognized as an innovation leader in DRAM production. Samsung's R&D

activities have continuously been intensified both at home and abroad to update

the technologies as per the demand of the market. However, it cannot be said

that it has completely become self-reliant. It still depends on foreign firms, more

so, joint product development.

4.2.3 Performance in the International Market

From the ~eginning when it entered the field of semiconductor,

Samsung's strategy has been to achieve international leadership in DRAM

market through exports. As mentioned earlier, its 256K DRAM product in the

initial years failed to generate any significant returns. However, Samsung

encashed the opportunity in 1988 when there was a sharp rise in the prices of

memory chips. Its 256K DRAM chips were sold in large volumes and all the

29 Dae Hee Lee, " Samsung's DRAM Technology Development", in Yong Hae Bae et aI, Case Studl' 011

Technological Innovation of Korean Firms, ( Seoul: STEPI, 2002), p. 73. . 30 Adapted from the company website, hlle::.:'11'Ww.sal1/sung.com., Annual Report 1997 and Timeline & History.

167

losses were recovered. Samsung's total DRAM sales went up from US$ 12

million in 1984 to around US$ 600 million in 1990. Its operating profits on total

semiconductor sales of US$ 1.4 billion reached around US$ 165 million. Out of

the total integrated circuit sales by Korean companies in 1989, Samsung

accounted for 70 per cent.31

Table 4.4: Rankings of Global Semiconductor Companies

Rank 1998 1999 2000 2000 market share (%)

Intel Intel Intel 13.4

2 NEC NEC Toshiba 4.8

3 Motorola Toshiba NEC 4.7

4 Toshiba Samsung Samsung 4.7

5 Texas Instrument Texas Inst. Texaslnst. 4.1

6 Samsung Motorola ST Micron. 3. Source: Compiled and reproduced from KOTRA, Korea Trade and Investment

(KT&I), Vo1.20, No.3, 2002 and Vo1.l8, No5, 2002.

Samsung had a share of 5.5 per cent in the global semiconductor market

in 1995 as against 7.5 per cent of NEC. Ever since it has occupied the top slot in

the particular segment of DRAM and SRAM production.32 According to the ,

latest available figure in 2001, the company's global market share stood at 29

per cent in DRAM chips and 26 per cent in SRAM chips.33 It has also gained

substantial improvement in the worldwide ranking of semiconductor industry.

As figure 4.4 shows, it was ranked at No.4, two notches above that of 1998.

31 M. Hobday ,n.19, pp.81-85 . .12 Sergi Perrin, n.IO, pp.171-172. Also Samsung became the largest seller of TFT -LCD in world with a 18.8 per cent market share. 33 Economic Report, (Seoul: February, 2003), p .20.

Samsung Electronics had a share of23.1 per cent in total microwave oven, 22.4 per cent in TFT-LCO. 22.2 per cent in COMA handsets and 21.3 per cent in colour monitor sales in the world in that year.

168

Another notable achievement of Samsung Semiconductor Units is

indicated in its quickness in reducing the technological gap with the advanced

firms. Table 5.3 suggests the gradual closing of the gap. When Samsung first

developed 64K DRAM it was four years behind the Japanese and US firms. The

gap was reduced to 2 years in 256K DRAM, 1 year in 1 M DRAM and 6 months

in 4M DRAM. Samsung closed the gap completely when it produced 64M

DRAM in 1992. It was· clearly ahead by the time when it produced 256M

DRAM.

Table 4.5: Gap between Advanced Countries and Korea in DRAM

Production

Develop 64K 256K 1M 4M 16M 64M 256M menttime Pioneer m advanced 1979 1982 1985 Late 1987 Early Late Mid-countries 1990 1992 1995 Pioneer in Korea 1983 1984 1986 Early Mid-1990 Late 1992 Early

1988 1995 Ahead of

Gap 4 years 2 years 1 year 6 months 3 months Same advanced countries

Source: Adapted from Linsu Kim, Imitation to Innovation: The Dynamics of Korea's Technological Learning. (Boston, Mass; Harvard Univ. Press, 1997).

The overall performance of the Korean semiconductor industry is

noteworthy. In 2000, it ranked third in the global semiconductor market

accounting for 7.2 per cent share?4 As the following table shows, Korean

industries in total had 40 per cent share in the world DRAM market in 20020f

which Samsung alone accounted for more than 60 per cent.

However, some weaknesses still remain that need to be considered while

evaluating the performance of Samsung Semiconductor Unit in particular and

34 Korean Economic Trend, ( Seoul: Samsung Economic Research Institute, January, J 0, 2001), p.14

169

Korean semiconductor industry in general. It is established that Samsung,

Hyundai, LG and Hynix have emerged as global leaders in memory chips

business. But in the non-memory devices that constitute more than two-third of

the world semiconductor chip markets and therefore assu'me greater significance

than memory chips, the Korean firms are nowhere near the Japanese and US

firms.

Table 4.6: Korea's Share in the World DRAM Market (Unit: US$ millions, %)

1987 1990 1993 1995 1999

World market 2,902 6,525 14,581 42,233 23,149 size

Korea's 153 839 3,441 13,042 9,238 corporate sales

World ma:rket 5.3 12.9 23.6 30.8 40.0 share Source: Korea semiconductor Industry Association (KSIA).Adapted from Lee, D.H. "Samsung's DRAM Technology Development" in Yong Hae Bae et aI, Case Study on Technological Innovation of Korean Firms, (Seoul: STEPI, 2002).

While Samsung has become successful in the DRAM products, it has

grossly neglected the non-memory device sector. Maintaining a balanced grmvth

in both memory and non-memory devices is a necessity for the long-term

interest of the firm. Admitting its failure at this front, Samsung has been

focussing on the non-memory sector since the mid-1990s. It has made huge

investments for production facilities as well as tied up with advanced firms such

as Toshiba, ARM of Great Britain and ISD of US to make progress in this

sector.

The company is recently engaged in restructuring its business model into

a non-memory chip heavy system well before 20lO. Under this long-tenn plan,

170

the company is emphasising on the development of three non-memory chip

products - smart cards, complicated chips and LDI, to become a leading global

producer in all these by 2003.35 It is also focussing to upgrade its overseas

DRAM production facilities in the wake of increasing competition. It has

announced a plan to invest US$ 500 million to upgrade its chip plant located in

Texas that, it believes to be, is currently outdated.36 If such plans see successful

implementation, Samsung will be able to stay ahead of its rivals.

4.3 HYUNDAIMOTORS (AUTOMOBILES)

4.3.1 Profile

The Korean automobiles industry has made impressive strides in the last

three decades. It has emerged as a promising industry with international

recognition and contributed significantly to the nation's export-led economic

growth. In terms of production it has improved its position, i.e., from 8th place in

1998 to 4th place in 2000. In the year 2001 alone, Korea produced 2.95 million

cars, exported 1.5 million, accounting for 8.8 per cent of the nation's total

exports.37

Although many chaebol are involved in the automobiles industry,

Hyundai is the undisputed leader both in domestic as well as in the international

market among all Korean companies. Its share in the total automobile exports is

quite impressive. Rising from a new entity with little knowledge in the late

1960s, Hyundai is now globally recognized as a leading firm especially in the

international passenger car market. Among various factors, such as, management

strategy,· marketing skills, business policy etc., what is perhaps the most

35 Economic Report, (Seoul: March, 2002), p. 18. 36 Korea Herald, (Seoul: April 26,2003). }7 Business Korea, (Seoul: Vol. 19, No. 227, Nov. 2002), p. 12, stated in the interview with the CEO of Hyundai.

171

determining factor behind Hyundai's success, is the underpinning of technology

accumulation.

This section outlines the technology development strategy adopted by the

company for the production of different models over the period and assesses its

competence in car manufacturing. For the purpose the section is' further divided

into three subsections.

4.3.2 From Assembling of Semi-knocked-down Kits to Mass Production

Until 1962, a limited number of commercial trucks, buse's and passenger

cars were manufactured through assembling the parts left by the US troops in

Korea during the reconstruction phase. The industry can be s.aid to have taken

shape with the launch of the First Five-year Plan. During this period some firms

such as Sainara, Kia and Shinjin assembled the knocked-down parts imported

from European and Japanese manufacturers, which involved rudimentary

technology.38

Hyundai joined the automobiles industry as a latecomer in 1967 under the

banner of Hyundai Motor Company (HMC). Its first production system was

established in 1968 by a technology transfer agreement with Ford Motors. Under

the terms of the agreement Hyundai had to assemble two completely knocked-

down small passenger cars - the Cortina, and aD-series - both Ford models. Ford I

Motors transferred the blue prints, technical specifications and other production-

related information in packaged form. In addition, about fifty HMC engineers

received overseas training from Ford to install and operate the assembly lines

and ten Ford engineers were sent to the HMCplant to supervise the work. This

made the translation of explicit knowledge into tacit easier.

38 Kyun Chang Oh, Korea's Automotive Industry: A Study on the Competitive Advantages in the Production System, Occasional Paper no. 20, (Seoul: Korea Institute of Industrial Economics and Trade. KIET, January, 1996), p. 4. In 1962, a local company Sainara established the assembling plant with a production capacity of 2600 vehicles per year. The production capacity increased to 28,000 units as Shinjin (the predecessor of Daewoo) and Kia entered the industry.

172

In order to internalize the technology and to minimize the production

lead-time, HMC set an ambitious target to accelerate the pace of plant

construction. Such crisis construction approach facilitated interaction and

knowledge sharing among the workers, engineers and . technicians who were

working diligently. As a result HMC assembled the first completely knocked-

down passenger car, the Cortina, in a record 400 minutes involving a total of 349

workers. In this phase the technical involvement of Hyundai's workforce was

insignificant. But it gave them a first hand experience of organizational

learning.39

The alliance with Ford Motors ended in 1973 when Hyundai refused to

the demands of Ford on administrative and management related matters. At the

same time also Hyundai decided to focus on mass production rather than

continuing assembly-operations. It began emphasizing on development of its

own model. Meanwhile, the government formulated the Automobile Industry

Long Term Promotion Plan following the HCI Plan in 1973 and supported three

domestic passenger carmakers - Hyundai, Kia and Daewoo - with a number of

incentives. Encouraged by the supportive attitude of the government Hyundai

submitted its master plan for a new plant with a capacity of 80,000 cars.40

Soon after the announcement of the plan, HMC contacted a number of

foreign motor companies for importing the design, engine and manufacturing

technologies as well as to train its workers. It concluded a technical agreement

with Mitsubishi of Japan for core components such as gasoline engine,

transmission real axle design, casting technology etc and a designing agreement

with Ital of Italy for body styling and design. As the company had limited

professional engineering expertise it recruited foreign engineers mostly from

39 S.H. Kwon and M. O'Donnell, n.S, pp.69-84. 40 Linsu Kim, n.16, p.113.

173

Mitsubishi and some engineers from the British Leyland Motor Company.41 The

entire production facility was placed under the supervision of these engineers.

Mitsubishi trained the HMC employees in design drawings and supplied

machinery equipment. It also made strategic investment in HMC equal to 10 per

cent of the company's total capitalization.42

On the other hand, its engineering team engaged in joint working with

Ital-Design, which helped them to observe the entire design course and learn.

The engineers were sent to Italy and then spent one and half year to acquire the

styling design through training. Finally in 1975, Hyundai came up with its first

proprietary model "Pony", also designated as the national car, with 90 per cent

local content. This enabled Korea to become the second nation in Asia after 4~ Japan and also the first developing nation with its own model..) The

development of Pony provided the company with highly valuable experience in

complete assembly-led manufacturing of a car. In doing so, it also improved its

image from assembler of semi-knocked kits to assembler of final car.

The next phase of 1975~1982 could be characterised as that of

development of a mass production system. Hyundai concentrated on upgrading

its production base from manual assembly to mechanized and large-scale

assembly. Influenced by Mitsubishi's management system, Hyundai introduced

a similar type of quality control system. It made partial improvements in its Pony

car usmg new styling designs. Hyundai formed strategic alliances with other

overseas parts and servIce companies to acquire advanced technologies for

conducting tests on car's internal and external body decoration. In the meantime.

41 Ibid, pp. 114-115. Also see, Richard M. Steers, Made in Korea, (New York, London: Routledge. I 999),pp. 78-79. Under the agreement with Mitsubishi, it could build its own nameplate cars using technical designs from Japan for everything from engine to transmission. Seven British technical experts were employed as chief engineers of chassis design, body design, development and testing etc. to assist Hyundai's engineers in understanding the explicit elements and converting it into tacit knowledge. 42 Kwon and O'Donnell, n. 5, pp. 75-76. 43 Alice Amsden, Asia's Next Giant, (New York: Oxford University Press, 1989), pp. 175-179.

Before the introduction of Pony eighteen technology transfers took place. Much of the technical assistance came from Ford. However, Japan provided production know-how. Also see, Linsu Kim, n. 16, p. 115.

174

it also established product technology department, which constituted different

divisions such as car body, commercial car chassis, and passenger car chassis

and test production. However, these assembly lines were later transfonned into

eight workshops.44

During the period Hyundai also started exporting its Pony model to

Europe, Middle East and Asia. Its second model was born in 1982 for the export

market and Hyundai's production capacity increased to 300,000 cars a year.,

Practices such as study on industrial engineering, value analysis techniques and

time and motion study were introduced which helped the engin'eers to fragment

the complex tasks into simple works. More importantly, the company introduced

scientific management practices i.e., computer aided design and manufacturing

into the production system in 1979. At the same time Hyundai licensed more

than 30 different technologies from Japan, England and US to meet the quality

standards of major car markets.45

In sum, during this phase Hyundai' s emphasis was placed on successful

assembling of imported parts and components. Although the technical tasks

required to perfonning such operations were relatively simple, it gave an

opportunity to the workforce to understand the basic manufacturing technique of

a car. Hyundai depended entirely on foreign firms on technological matters.

4.3.3 Expansion of Product Range and Quality Upgrading

In the wake of second oil crisis, the automobiles industry underwent

several changes in the early 1980s. The government announced drastic

rationalization measure in order to establish high volume production facilities

and also to help industries grow in qualitative tenns. The enonnous deficits

44 Kwon and O'Donnell, n. 5, pp. 74-75. 45 Ibid.

Also see, Amsden, n. 42, p. 175. "In 1982, HMC's cars met Ewopean Economic Communit\! requirements on emission controls, noise levels, and safety, but they fell short of the more stringent US

175

incurred by the automakers became a major concern for the government and to

reduce the deficits it decided to support the model maker, which had

specialization. This policy favoured HMC by granting it a monopoly to make 46 passenger cars.

The HMC at this stage began to focus more on the intern'ational market

by pursuing an export-driven manufacturing strategy. It became essential for the

company to build up its own image through expansion of product range. To this

effect it adopted a dual strategy of (a) importing more advanced technologies

from overseas firms and improving the absorptive capacity, and (b) focusing

simultaneously on acquisition of indigenous capabilities. Hence, emphasis on

R&D appeared to be crucial to become technologically independent. The HMC

began to step up its R&D activities and broaden technical links with more

foreign firms. However, Mitsubishi continued to be its largest ally. The strategy

of creating a crisis situation or target setting was once again followed up.

By 1985, Hyundai had signed 54 licensing agreements with firms from

UK, US, Germany and Italy. But Mitsubishi accounted for half of the

agreement.47 Its R&D efforts took shape in 1984 after the establishment of a

specialized R&D centre at Mabookri. This centre was set up for manufacturing

high-tech engine and conducting transformation research. In addition, two more

centers were set up ~n the 1980s. Of them Ulsan became the core centre for R&D

specializing in development of new car and small-sized commercial vehicle.

Similarly, an overseas technical center, Hyundai America Technical Center

(HA TCI), was set up. This centre was assigned the job of analyzing information

on cutting-edge technologies and elaborating advanced design solution.

standards. The Pony failed to meet 12 of 35 US safety requirements, among them the ability to absorb adequately head-on and side collisions." 46 According to the HeI Rationalization Plan the number of passenger carmakers was reduced from three to two (Hyundai and Daewoo). Kia motors was forced out of passenger car segment and, instead, was given the right to manufacture light commercial vehicle. However, later Kia was again allowed to make passenger car with the reversal of policy in order to facilitate competition. 47 Linsu Kim, n.16, p.117.

176

Hyundai's mass production capacity witnessed a sharp increase in the

1980s with the construction of its second and third automobile factories. For

instance, its second plant was established in 1988 with a production capacity of

300,000 passenger cars and third one in 1990 with 240,000 cars annually. These

facilities have been continuously updated with the application of automation,

mechanization and advanced manufacturing system. Introduction of such

techniques has shown effective results by reducing the overall production costs

and optimizing inventory levels.

In lIne with the process automation, the skill intensity of the workforce is

being enhanced through training practices. A number of training institutes have

been established to improve the skill level of workers. For example, the

company's 22,879 trainees undertook an average of 54.6 hours of training in

1986. By 1991 this figure rose up to 99,994 trainees with an average of 74.4

hours training. Similarly, the number of quality control units increased from 670

in 1979 to 1,700 in 1987 thus leading to the improvement of production

quality.48

Hyundai was able to introduce a wide range of models by actively

pursuing leaming-by-research, strategic partnership and engaging in intensive

research. It launched new models namely, Excel, Grandeur (Ll and L2), Stella

and Sonata series by the end of 1980s and started exporting these to the North

American and European markets.49 Although it did not produce any completely

indigenous model it made visible progress at product development front.

48 The above two paragraphs draw heavily ITom Kwon and O'Donnell, n.5, pp.138-143. 49 Jung Urn Mi, "Technological Capability Building in Hyundai Motor Company", in Yong Hae Bae et ai, n. 29, p. 94. Although Grandeur Ll was launched as a joint development project in 1986, actually Mitsubishi accomplished most of the work. But in case of the Grandeur L2 , Hyundai made significant contribution. For instance, Hyundai was in charge of styling and ,body design, while Mitsubishi did the chassis work.

177

4.3.4 Building Indigenous Model through Innovation

Hyundai has been constantly upgrading its R&D base since early 1990 in

order to produce indigenous design as well as to fulfil the international standard

in car manufacturing. Also gradual changes in the international automobile

market related to safety concern, fuel efficiency, environmerit-friendly and

changes in consumers' preferences compelled the firm to enhance its technology

base.

The determination of Hyundai to become a globally competitive finn is

clearly demonstrated in its announcement of the 'Global Top Ten project or GT-

10' in 1994. The GT -10 was conceptualized as a strategic intent to become one

of the top ten automobiles in the world by the end of the century i.e. 2000.50 As a

part of this drive the firm made commitment to introducing a new model every

year and reducing the leading time in production.

Realizing the necessity to sustain the ever-increasing pressure of

competition, Hyundai has reoriented its R&D functions more towards

innovation. As a result an increase in investment in R&D can be seen from 1993

in order to double its production capacity to 2.16 million vehicles by the year

2002 as well as to make qualitative improvement. The Chonju pla'lt and Injau

plant were established in 1995 and 1996 respectively to produce bus, trucks and

medium-sized cars for export. 5 I

Its ratio of R&D investment to sales grew from 2.2 per cent in 1992 to 4.6

per cent in 1994. Although no figures are available for recent years, it is

estimated that the company is spending about five per cent of its sales on R&D.

This has enabled the firm to reduce its royalty payments, which indicates that the

50 Michael McDermott, South Korea's Motor Industry: New Global Pacemaker. Research Report. (London: Economic Intelligence Unit, 1996), p. 65. 51 Ibid., pp. 69-70.

Originally HMC decided to establish three big plants. However, the construction of the proposed plant at Yeochon was cancelled and the funds were diverted towards R&D activities.

178

company is rapidly becoming self-reliant. The ratio of royalty payments to sales

fell from 1.3 per cent in 1991 to 0.3 per cent in 1995.52

In addition, two more research centres were set up in Korea. With the aim

to strengthen HMCs competitiveness in medium-and-t'arge-sized commercial

vehicles, the Commercial Vehicle Engineering and Research center was

established in 1993. The Namyang R&D Institute was constructed in 1995 to

help vehicles meet the most stringent environmental and safety regulations.

While the research facilities at Chonju are engaged in conducting simulate test

crashes, aerodynamic tests, combustion simulation tests, the Namyang test track

has been used as road testing station to check the friction, anti-locking braking

system etc.53 Both the centers are equipped with state-of-the art facilities.

Instead of importing production-related technologies in the fonn of

licensing agreements, the finn has started allying with overseas finns on equal

footing. Strategic alliances have been made to conduct joint and cooperative

research with speciaiized service firms. Besides, Hyundai has set up more R&D

centers especially in the US, Japan and Germany to analyse the technology and

demand trends and to provide technical and design inputs to its manufacturing

units.

Some of Hyundai's major achievements in this phase are illustrated

below. The successful manufacturing of the 'Alpha' engine in 1991 was the first

product that exemplified the indigenous technological capacity of HMC. This

engine outperformed the functions of the Mitsubishi-designed engine that

Hyundai had been using. 54 The development .of Alpha engine was the outcome

of eight years of research by Hyundai engineers in its Mabookri research centre.

52 Marc Lautier, 'The International Development of the Korean Automobile Industry', in F. Sachwald(ed.), n.lO, p.218. 53 Michael McDermott, n.50, pp.79-80. 54 Richard M. Steers, n.4l, p.90.

179

Its Scoupe model became the first to use this engine. The Ulsan

production centre developed non-polluting electrical cars as well as non-

polluting fuel vehicle for North American market in 1992. The company

introduced its classical style sports model 'HCD-I and HCD-2' with the

assistance of its overseas HA TCI R&D center in 1993 and commercial ized these

models in 1996.

A remarkable achievement for Hyundai came when it. unveiled the

subcompact design Accent fitted with Alpha engine. In fact, 'Accent' was the

first indigenously developed model by Hyundai. It also introduced the updated

version of Alpha, called 'Beta', in the second hundred percent Korean model

'Avante'. Hyundai's most sophisticated recent model engine is 'Equus'

developed jointly with Mitsubishi.55

In recent years Hyundai has been able to meet the high siandards of the

world market by producing new models such as Avante XD, new EF Sonata,

Grandeur XG etc. Moreover, its upcoming two new intelligence concept cars,

'HIC and HDC T are equipped with Around Monitoring System, Intelligence

Cruise Control and Night Vision instruments. While the HIC was a byproduct of

eighteen months of research in its R&D centers in Korea and Japan, HCD 7 was

designed wholly by Hyundai's research unit in California. Recently it has

formed a strategic alliance with Daimler Chrysler in an engine production

venture to enhance the international competitiveness in engine manufacturing.56

Also the company' claims that its battery fuelled Santa Fe model, the high

performance Alpha/Beta VVT engine and the.world's first automatic Advanced

Geometry Control Suspension for securing stability in driving are the examples

of Hyundai' s innovative capabilities.

55 lung Urn Mi, n.49, p.94. 56 This paragraph is summarized from the interview of the CEO of Hyundai Motors, Business Korea. (Seoul: Vo1.I9, No .227, November, 2002), pp. 12-13.

180

4.3.5 Performance of Hyundai Motors

Although Hyundai introduced its Pony model long back in 1976 and

started exporting the model, it was not until the mid-1980s that Hyundai' s export

share showed remarkable trends. Since the introduction of the Excel model, the

company's share in automobiles export has hardly seen any declinIng trend. (See

Figures 7 and 8). It began exporting the FF Excel to the US market and in two

years 432,500 Excel model cars were sold in this market. In 1987 Excel became

the best selling import car surpassing similar products from Nissan, Honda and

Toyota. Export of the Elantra model to Canada, Australia and other regions

improved the corporate image of Hyundai. For instance, Elantra was selected as

the car cf th.e year in Canada in 1992. Australia also designated Elantra as the

best car in 1992 and 1993.57

Beginning with the export of 1042 Pony cars in 1976, Hyundai added

more than three million cars to its export list by 1994, accounting for 68 per cent

of Korea's total auto exports.58 According to the latest statistics released by

Korea Automobile Manufacturer Association (KAMA), in the first half of 2002

alone Hyundai sold 190,109 units and was placed at number four among foreign

players in the US market in terms of sales.59 The success in European markets

and the US encouraged Hyundai to diversify its exports to Asian and African

markets. Hyundai h~ been successful in achieving a more balanced distribution.

F or example, in 1995 its composition of exports was as follows;

~ 25.9 per cent to North America,

~ 29.7 per cent to Europe, and

~ 44.3 per cent to other developing country markets.6o

57 Kim, Linsu, n.16, pp. 105-129. 58 Ibid. 59 Economic Report, (Seoul: August.2002), p. 28 60 McDermott, M., n. 50, p.72.

181

Figures 7 and 8

Yen:

Korean \!ehicle Prccuction and Excc:r! (1962-2"c(1 ~}

Source: Jung Urn Mi, "Technological Capability Building in Hyundai Motor Company", in Yong Hae Bae et ai, Case Study on Technological Innovation of Korean Firms, ( Seoul: STEP!, 2002), p. 80.

182

Table: 4.7.: Product profile of Hyundai Motors

Category 1960s 1970s 1980s First half of Since mid-I 990s 1990s

Sub-compact Pony Pony, New F,xcel, Excel Scoupe, Click,

Accent series Verna series Compact Cortina New Cortina Mark V, Elantra,

Mark IV Stellar A vante series Avante series Medium Sonata series, Sonata series

Marcia Large Ford 20M Granada, New Grandeur

Grandeur# Grandeur# series, EQuus#

Note: Normal:- foreIgn models; Highlighted:- indigenous models; Underlmed and highlighted:-completely indigenous models; # :- in joint research with Mitsubishi Source: Reproduced from Urn, Mi-Jong, Technological Capability Building in Hyundai Motor Company, in Y ong Ho Bae et aI., Case Study on Technological Innovation of Korean Firms, (Seoul: STEPI, 2002).

Simultaneously, Hyundai ahs also focused on establishing and expanding

its overseas production facilities in order to set up a global production network.

However, most of these facilities are located in emerging markets rather than in

advanced ones. This implies that Hyundai has captured the markets, which are

relatively less competitive. For example, over the last decade its network has

been extended into many countries such as Thailand, Indonesia, Vietnam, India,

China, Malaysia in Asia; Botswana in Africa and Turkey. Of these, the

production facility in India constructed in 1998 is Hyundai's largest unit outside

Korea. Hyundai is trying to develop India as a base for key production and

exports in the southwestern Asian region. In the last couple of years Hyundai has

consistently maintained its position at number second after 'Maruti' in the Indian

market.6J

61 Economic Report, (Seoul: August, 2002), p. 18.

183

Table 4.9: Hyundai's Main Technical Relationships

Type

Capital stakes, licensing agreements

Technical cooperation

20% stake in a joint venture in Korea Joint venture

Partner

Mitsubishi

Energ. Conv. Dev.

Ricardo GKN AVL

Motoren Technik FEV Borg-Warner

Robert Bosch Mitsubishi Electric Daimler Chrysler & Mitsubishi

Project

Manufacturing of cars, engines and transmissions under license

Development of electric Car batteries

Engine technology Component development Development of a 3000cc V 6

engine 2L car diesel engine development PC diesel engine development Component development and

Electronics components and injection system Global Engine Alliance for manufacturing soph isticated Passenger car engines

Source: Reproduced from Marc Lautier, "The International Development of the Korean Automobile Industry", F. Sachwald (ed), Going Multinational: The Korean Experience of Direct Investment, (London, New York: Routledge, 200 I).

i

Hyundai has also become a technology exporter in recent years. It has

struck a deai with Mitsubishi (the very firm which 'suppiied the largest amount of

technology to Hyundai in the past) and Daimler Chrysler on a joint venture to

manufacture passenger car engines. Under the agreement called 'Global Engine

Alliance' Hyundai will offer its self-developed mid-sized engines to its alliance

partners.62 According to the recent assessment of Strategic Vision, a leading US

market research and conSUlting firm, the brand value of Hyundai models has

62 Economic Report, (Seoul: May,2003), p.2S

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improved in the US market by moving up from 27th rank in 1999 to lih rank in

2000 in the total value index composition. In the words of the executive of

Strategic Vision, Hyundai's edge over its competitors was due mainly to the

improvement in quality of its EF Sonata model. Moreover, in the latest Car and

Driver Publication, the Elantra model came second out of ten cars in the

compact-size category due to its quality enhancement.63 Hyundai has been listed

as an International Fortune 500 company since 1975.64

The achievement of Hyundai motors within a relatively short period of

time is in real terms unparalleled when compared with other developing nations.

Due to its commitment to the motto of "quality first, customer first", Hyundai

has been able to emerge as a strong contender in the world automobile industry.

As discussed above the driving force behind the success of Hyundai is its

continuous improvement in technologies in line with the demand of the market.

But still there is room for improvement. Hyundai has a lot more to do to be at

par with firms like Nissan, F ord, Toyota, Chrysler etc.

Some production related defects have come into notice indicating

technological weaknesses of the firm. Although Hyundai has succeeded in

shortening the product development time in recent years, it still lags behind the

advanced firms. Due to lack of sufficient technological capabilities the firms is

taking longer time to develop new parts and hence the delay in product

development. According to a study by McKinsey in 1998, new parts

development takes around 52 months in Korea while the corresponding time is

36 months in Japan.65 Another survey by J.D.Power and Associates observed

63 Korea Trade & Investment, (Seoul: KOTRA, Yo 1.1 8, No.5, 20(0), p. 44. 6-l Steers, Richard M., nAO, p. 84. 65 Does not refer to the direct source. Quoted from Lautier, Marc, n.51, p.265.

185

that the defect rates of Hyundai were much higher than that of Toyota and

Nissan although during 1990~97 Hyundai succeeded in reducing the defect rates

by almost half.66

It is observed that Hyundai has adopted an innovation-baseq strategy

since the early 1990s to improve its brand image in the international market and

has even attained considerable success. But much of these efforts are directed

towards assembly and process innovation rather than product design. It still lacks

much in basic core technologies.· Amidst growing challenges Hyundai r.eeds to

redouble its efforts in R&D and building technological networks in the coming

years.

To sum up, the domination of the chaebol throughout the developmental

phase has led to a monopolistic market structure. The government's policies to

nurture the conglomerates at first and then to curtail their influence seem to have

been patterned according to the requirements of the different times. Until the

crisis it could be said that the overall attitude of the government was to support

the chaebol and rest on them the burden of exports. With complete government

backing the chaebol emerged as dominant players in every sphere of industry

and they became successful in their missions of becoming front-runner in the

international market. This would not have been possible had they not

emphasized on techpology accumulation.

As the two studies, Samsung Semiconductor Unit and Hyundai Motor

Company, suggest from' the very beginning the importance of developing

technological competence is underscored. Both the firms have adopted the

gradual pattern of moving up the ladder but with the fastness never seen before.

In terms of strategy, while Samsung has chosen the leapfrogging one,

Hyundai practises the normal process following the leading firms from advanced

countries. In both cases the time taken to squeeze the gap with their advanced

66 lbid" p. 225.

186

counterparts IS relatively smalL Starting from duplication of the products

developed elsewhere they have reached a stage of indigenous product

development in the respective sectors by consistently upgrading their

technological base. The firms have resorted to various mechanisms in pursuit of

acquiring the technological capabilities. Quality improvement as well as price

competitiveness has remained at the center of their industrial strategy.

In comparison to many similar firms from other developing countries, the

performance of the two companies in the international market is unquestionable.

However, some weaknesses still prevail as pointed out earlier and adequate

measures are necessary to tackle the obstacles to sustained growth.

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