Korean Automakers Should Learn from Toyota's Resurgence

      November 15, 2018 13:39

      Toyota suffered a severe cash crunch during the global financial crisis 10 years ago but achieved record sales from April to September of this year. Operating profit rose 15 percent compared to the same period of last year, resulting in the operating margin soaring to 8.6 percent. Toyota is also now a market leader in hybrid cars and self-driving vehicles. After suffering a W5 trillion loss in 2008 compounded by a global recall, Toyota's CEO was even grilled at a U.S. congressional hearing. But a decade on the carmaker has returned to its former glory.

      When Toyota was in the doldrums, Korean carmakers had a field day. Hyundai and affiliate Kia saw soaring demand around the world and managed to rise to the ranks of the top five automakers in the world in 2014. Their operating profits rose from W2 trillion just before the crisis to W12 trillion in 2012, while the operating margin rose to 11.4 percent. For a moment Hyundai looked poised to overtake Toyota, but the strong performance did not last. After peaking in 2015, Hyundai's operating margin fell to a mere 1.2 percent in the third quarter of this year, less than one-seventh of Toyota's. And its production volume, which soared to around 8 million vehicles, shrank to around 7.5 million. Their fates have been reversed.

      Toyota's revival is the result of cooperation between the government, management and labor. Management strove to improve quality and production processes while responding quickly to soaring demand for SUVs. The labor union voluntarily announced a wage freeze for four years, continuing 56 years without strikes, while the government kept the yen low so Japanese products would become cheaper to buy overseas. Japanese Prime Minister Shinzo Abe also use diplomacy to open new markets for Japanese businesses. There was no magic involved. Everything was simply common sense.

      But Hyundai went the opposite way. Management failed to respond to market needs and trends and spent a whopping W10 trillion to buy land for a new headquarters it did not need (US$1=W1,136). Spoiled unionized workers continue to strike for higher pay, causing their employer more than W7 trillion in production losses over the last five years alone. The government, meanwhile, has failed to tame militant unions and bring in more flexible labor market conditions.

      The average annual wage at Korea's top five automakers now stands at W90 million, way higher than the W84 million at Toyota. Labor costs compared to sales reached 12 percent, double the size of Toyota's. Yet productivity remains at a global low. It does not take a rocket scientist to see what is going wrong here.

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