Jan 4, 2009 2219 Words  9 Pages

KIA in South Korea, A Porter’s Diamond Perspective
Timothy J. Rausch
Mount Vernon Nazarene University

MSM002MV
MAN6093 Global Business
October 11, 2008
Introduction
KIA, which means “arise from Asia” in Korean, started out making bicycles prior to World War II (Kia Motors Corporation, 2008). The company developed the manufacturing of steel bicycle tubing into a multi-national corporation producing cars and trucks. Prior to merging with Hyundai in 1998, Kia was the second largest producer of vehicles in South Korea (Kia Motors Corporation – Company Profile, Information, Business Description, History, Background Information on Kia Motors Corporation, 2008). Examining Kia’s transformation in a country lifting itself out of the wreckage of the Korean Conflict, is the focus of this study.
Factor Endowments
South Korea’s recent history has included conflicts between Russia and Japan, annexation by Japan, division in a post World War II world, and invasion from North Korea (Central Intelligence Agency: The World Factbook: South Korea, 2008). Yet, when examining the country based on Porter’s Diamond concept of Factor endowments, the author questions why, besides the political implications, this country was such a critical part of world history (Hill, 2007).
South Korea’s natural resources are limited. According to a study by the United States Central Intelligence Agency (CIA), South Korea has almost no natural resources suitable for the production of energy. Oil production is not viable. The only natural resources listed are coal, tungsten, graphite, molybdenum, and lead (Central Intelligence Agency: The World Factbook, 2008). Korea imports roughly 2.3 million bbl/day of crude oil, making it the ninth largest consumer of oil in the world (Country Analysis Briefs: South Korea, 2007). Its consumption of Liquefied Natural Gas (LNG) was 22.1 million Metric Tons of LNG in 2005 (Country Analysis Briefs: South Korea, 2007). The third factor in the carbon based energy triad is coal. South Korea has a limited amount of coal reserves, but these reserves are of a low quality. In 2004, South Korea consumed 90.6 million short tons of coal (Country Analysis Briefs: South Korea, 2007). Similarly, while South Korea’s POSCO is currently ranked fourth in the world in the production of steel, most of the raw materials used in the production of steel are imported (POSCO Looks North, 2008).
The climate and terrain of South Korea are polar opposites for this country. The climate is classified as temperate with seasonally heavy rainfall, heavier in summer. Monsoons are typical during the summer months. The terrain is mountainous with plains areas in the western and southern regions (Central Intelligence Agency: The World Factbook: South Korea, 2008). This author’s experience in South Korea found hot and humid summers with bitterly cold winter months.
The Korean peninsula straddles the 38th parallel of latitude. This line has taken on a significant political reference in world history. South Korea is situated below this parallel of latitude (Central Intelligence Agency: The World Factbook: South Korea, 2008). The peninsula divides the Sea of Japan from the Yellow Sea in Eastern Asia (Central Intelligence Agency: The World Factbook: South Korea, 2008). This proximity to China and Japan has opened market opportunities in the region.
The South Korean labor market benefits from a strong work ethic. One observer characterized the Korean work ethic as equivalent to the Protestant work ethic of Europe (Korea’s Dynamic Progress, 2008). Another author writes that an American working in South Korea may face challenges, if they are unwilling to work the amount of hours that are typical in South Korean business (Working in South Korea, 2008). A population of 48,379,392, where 72% is between the ages of 15 and 64 years, generates a workforce of hardworking, literate (97%) employees (Central Intelligence Agency: The World Factbook: South Korea, 2008).
Factor endowments are considered central to the Heckscher-Ohlin trade theory and a key component of Porter’s Diamond theory (Hill, 2007). Using these criteria, South Korea and Kia have a distinct disadvantage on the world market.
Demand Conditions
The demand conditions in South Korea have been unparalleled in other countries in recent history. In 1963, the per capita Gross National Product (GNP) was $100. This has grown to $20,000 per capita and South Korea is now the seventh largest trading partner with the United States (Background Note: South Korea, 2008). This growth in GNP is staggering considering that it took the United States 130 years to grow its Gross Domestic Product ten fold (1870-200) (Barro, 2003). Barro (2003) notes that this growth is “fairly” evenly distributed. This distribution of income has remained relatively unchanged from 1960 to today (Barro, 2003). Life expectancy and infant mortality indicators have also significantly changed. Life expectancy has increased from 54 years to 73 years and infant mortality has dropped from 8% to 0.8% since 1960 (Barro, 2003). This rapid growth and increase in personal income has led to a significant growth in internal demand for automobiles. According to a study conducted by AC Nielson, who developed an Aspiration Index (AI) to measure current ownership levels and future intentions to buy, over 60% of those surveyed indicated an intention to buy. This is compared to the same index in the United States of less than 30% (Consumers in Asia Pacific – Car Ownership and Our Purchase Intentions, 2005). Domestic car sales in South Korea continue to rise. In June of this year, Korean carmakers forecasted an increase of 6.8% in sales, despite the rising cost of fuel in the Korean market (Korea’s H2 Domestic Car Sales Expected to Rise 6.8%, 2008).
Relating and Supporting Industries
Porter’s third attribute to evaluating national competitive advantage, relating and supporting industries, emphasizes the significance of industries that complement the national advantage (Hill, 2007). In the case if Kia, the most significant supporting industry is steel. Almost 55% of the total weight of a car is comprised of steel (How Much Steel is there in the Average Car, 1999). The largest producer of steel in Korea is POSCO, which ranks fourth in the world in steel production (POSCO Looks North, 2008). Approximately 72% of the 26 million tons of hot and cold rolled steel produced by POSCO remains in the domestic Korean market. Until 1998, POSCO was a government owned company. Privatization was completed in 2001 (POSCO, n.d.). Throughout the recent history of South Korea, strong emphasis has been placed on the development of a strong steel production strategy. The government of South Korea with the help of Foreign Direct Investment (FDI), established POSCO, formerly Pohang Iron and Steel (POSCO, n.d.). This development has led to a stable supply of steel for the domestic and export market of cars in South Korea.
Firm Strategy, Structure, and Rivalry
Kia was initially founded to produce steel tubing for the bicycle industry (Kia Motors Corporation – Company Profile, Information, Business Description, History,
Background Information on Kia Motors Corporation, 2008). This production developed into the light truck-manufacturing segment of its history. Domestic rivalry, strategy and structure were largely government mandated until the mid-1980s. During this time, Chaebols or groups of companies were part of the major economic development goals of the South Korean government (Kia Motors Corporation – Company Profile, Information, Business Description, History, Background Information on Kia Motors Corporation, 2008). Because of these government controls, competition was suppressed and rivalry was controlled through the restrictions placed on domestic manufacturers in the form of import restrictions and production area restrictions (Kia Motors Corporation – Company Profile, Information, Business Description, History, Background Information on Kia Motors Corporation, 2008). These restrictions allowed Kia to develop its domestic market and manufacturing base. The emergence of a global strategy can be traced to its partnership with Ford in 1987, when it agreed to begin selling the Ford Festiva in the U.S. market. This lead Kia executives to focus on a strategy of capturing the low-end economy car market in the Asian and American markets (Kia Motors Corporation – Company Profile, Information, Business Description, History, Background Information on Kia Motors Corporation, 2008). Kia had a distinct advantage during this time with its ability to provide a cheap labor force, paying its workers significantly less than its competitors on the world market (Kia Motors Corporation – Company Profile, Information, Business Description, History, Background Information on Kia Motors Corporation, 2008).
A drawback of this type of government intervention and market control did have a negative impact on Kia. Kia has finished last almost every year since 1994 in quality ratings in the U.S. market (Kohn, 2002). This has forced a significant turn in the focus of Kia. According to Peter Butterfield, COO of Kia America, “Up until 1999, the company wasn’t focused on quality” (Kohn, 2002). Since this change, Butterfield continues, “quality is being built into production” (Kohn, 2002). Kia’s quality has improved and continues to improve, however, it still is finishing significantly lower than most other car manufacturers, with 168 defects per 100 vehicles in 2003. The national average in 2003 was 133 defects per 100 vehicles (Kachadourian, 2004).
Conclusion
By examining Kia using Porter’s Diamond, several conclusions can be reached. Porter’s Diamond theory validly represents the success and failures of Kia. While Kia has had some success, the inability of the company to substantially enter the global automotive market has links to all four factors in Porter’s Diamond. Factor endowments are a significant contributor to the success or failure of any company. Korea has limited natural resources (or natural resource wealth), is isolated on three sides by ocean, has had until recent decades, limited capital potential, government restricted entrepreneurship, and based on these government restrictions no ability to acquire industry knowledge (Kia Motors Corporation – Company Profile, Information, Business Description, History,
Background Information on Kia Motors Corporation, 2008). The only positive factor endowment is labor. As discussed above, the work ethic of the Korean population is best characterized as the Protestant work ethic of Europe (Korea’s Dynamic Progress, 2008).
While most of the western world has enjoyed significant demand for cars in the last 50 years, domestic demand in Korea is a relatively new measurement. The last 20 years have seen the potential number of car owners in Korea explode in numbers. Compared to Western societies, this is a new market. Related and supporting industries is the one positive point on Porter’s diamond. The Korean steel industry is a global competitor. POSCO is the 4th largest producer of steel in the world (POSCO, n.d.).
The last point on Porter’s Diamond, firm strategy, structure, and rivalry, also explains Kia’s lackluster performance in the global market. Government restrictions on product line, competition, rivalry, and import restrictions have all contributed to Kia’s inability to perform on a global scale (Kia Motors Corporation – Company Profile, Information, Business Description, History, Background Information on Kia Motors Corporation, 2008). These restrictions have hampered entrepreneurship and limited its global market share.

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