HISTORICAL DEVELOPMENTS OF KOREAN

CAPITALISM

The Hyundai Business Group, 1940s-1990s

SCHOOL OF INDUSTRIAL RELATIONS AND ORGANISATIONAL BEHAVIOUR

WORKING PAPER SERIES ISSN 1325-8028

November 1997

115

HISTORICAL DEVELOPMENTS OF KOREAN CAPITALISM

The Hyundai Business Group, 1940s-1990s1

Seung-Ho Kwon Abstract The chaebol, family-controlled conglomerates, which now dominate the South Korean

economy constitute a unique type of business enterprise in the development worldwide of

capitalist economies. With the support of a developmentalist state, the chaebol played a

central role in rapid industrialisation of the South Korean economy, which in turn facilitated

the transformation of what were originally small, family capitalist enterprises in the late

1940s, to large scale industrial enterprises in the 1990s. The chaebol employed aggressive

diversification and expansionary strategies to achieve monopoly capitalism through dominant

market advantages derived from economies of scale and scope. While the chaebol was

initially managed by members of the founder’s family, as it expanded, increased reliance on a

cadre of professional managers was necessary. However, despite the inevitable devolution of

managerial control from founder to second generation and the rise of a powerful managerial

cadre, the essential nature of this unique form of proprietary capitalism has so far been

retained, along with its economic pre-eminence. The genesis and evolution of the chaebol is

examined through an in-depth case study of a leading Korean industrial conglomerate, the

Hyundai Business Group, from its origins in the 1940s to the early 1990s.

INTRODUCTION The historical development of large scale capitalist business entities is a frequently canvassed

topic of research across the economics, business history and organisational structure

disciplines. Most of these studies have focussed on large scale capitalist enterprises in

advanced countries such as the United States, England, Europe and Japan.2 In contrast, scant

attention has been paid to these enterprises in the newly emergent capitalist economies of the

1 I am indebted to Lawson Smith, Diane Fieldes and Ian Hampson for numerous helpful comments and suggestions in relation to an earlier version of this paper. Expressions of opinion, other than those referenced in the conventional way are my own. 2 See For examples, Chandler, 1962, 1990; Lazonick, 1991; Prais, 1976; Fligstein, 1990; Schmitz, 1993.

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East Asian regions, especially those in South Korea (hereafter Korea). This is surprising,

given the dominant role of family-controlled conglomerates, the chaebol, in the course of

Korea’s rapid industrialisation.3 This paper addresses the evident gap in the literature through

a detailed, in-depth case study of a leading industrial conglomerate, Hyundai Business Group,

in Korea from its origins in the 1940s to the 1990s.

One of the prevalent themes in the study of large scale industrial enterprises is the

evolutionary nature of capitalism, including the logic of economic transformation. Based on

his strategy and structure framework, Chandler charts the transformation of American

capitalism from that of single entrepreneur-owned and controlled enterprise4 to stock

exchange listed companies governed by professional managers, who initiated the

development of large scale and multi-divisional industrial capitalism in the early twentieth

century, in response to market forces (Chandler, 1962, 1977).

Some studies have provoked controversy by asserting that variations in the timing, degree and

forms of growth as between European and American firms, gave rise to somewhat disparate

enterprise and country-specific paths of capitalist transformation. (Schmitz, 1993: 28-48).

However, many studies have thrown up somewhat similar patterns of capital transformation,

for example, those of large scale industrial enterprises in Europe.5

Lazonick (1991) identifies a different pattern in Japanese capitalist transformation whereby

‘collective capitalism’ superseded the family-controlled zaibatsu. Large scale Japanese

conglomerates, the family-controlled zaibatsu, emerged in the early twentieth century with

strong support from the imperial state. Over time, the ultimate control by family members of

the business and managerial activities of zaibatsu was lost to the top management of core

companies in the zaibatsu, who implemented vertically integrated business systems across

3 For example, the top 30 chaebol contributed over 90 per cent of the nation’s gross national product (GNP) in 1991 (Bank of Korea, 1990). They employed about 20 per cent of the total Korean workforce in 1985 (Cho Dong-seong, 1991: 138). 4 For further definition of the entrepreneur capitalism, see ‘family’ capitalism in Church, 1993: 18, and ‘proprietary’ capitalism in Lazonick, 1991: 25-27. 5 For arguments of variations in the historical transformation, see British case studies in Elbaum and Lazonick, 1986 and of similarities, Schmitz, 1993; Lazonick, 1986; Chandler et al., 1980, Chandler, 1990.

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core and satellite companies to obtain competitive advantages for all conglomerate activities

(Lazonick 1991: 36-43).6

The process of Korean capitalist transformation is generally characterised as ‘state initiated

family capitalism’. It is argued that the chaebol emerged as a consequence of the Korean

state’s rapid industrialisation programs, and that its business operations and governance were

under the direct control of family owners (Rhee, 1994; Eun-Mee Kim, 1997; Jones et al.,

1980; Kang, 1990; Kuk, 1988; Yang Yoo-jin, 19917). Besides this argument, because of the

evident similarities, the Korean chaebol is often compared with the zaibatsu in pre-World

War II Japan.8

However, such arguments are susceptible to criticism on several grounds. First, the general

lack of historical analysis concerning the capitalist transformation of the chaebol. There is an

on-going shift of chaebol ownership from the founder to the second generation9, which may

produce a different pattern of capitalism in the future. Secondly, the studies tend to

underestimate the role of professional managers in the historical transformation of the

chaebol. These managers underpinned the hierarchical managerial structure, which enabled

family dominated top management to retain central control of increasingly extensive, complex

conglomerate businesses. Thirdly, previous studies were limited in their capacity to

comprehend the evolutionary growth patterns and structures of the chaebol because of their

predominant interest in the state-business relationship or political economy of Korean

development. This research focus is quite understandable, given the ‘corporatist’ (Moon-kyu

Park, 1987), ‘developmentalist’ (Amsden, 1989), and ‘interventionist’ (Wade, 1990) role of

the state in the rapid industrialisation of Korea’s economy.

In this paper, it is argued that any account of the historical transformation of the chaebol

cannot ignore the related issues of business growth strategy and structure, and the dominant

role of the founder and family members. This is not to deny the role of the state in the

6 For further details of strategy and structure developments of zaibatsu in the pre- and post-World War II period, see Nikagawa, especially Part I. 7 In this paper, Korean names are given in their proper order, with the surname proceeding the given name. However, in the case of Korean authors writing in English, the order natural to English is preserved. 8 See for an example, Tamio, 1986. 9 For example, of 50 top chaebol in Korea, 22 chaebol have completed the succession by the second generations in the late 1980s. Cho Dong-seong, 1991: 407.

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transformation of Korean capitalism, but rather to ensure that an insightful politico-

microeconomic account of the chaebol’s historical development is obtained. .

The paper examines the historical transformation of Hyundai Business Group from its humble

origins in the 1940s, to a large scale industrial conglomerate in the 1990s. The analysis is

divided into three parts, following the distinctive stages of growth patterns and structure of

Hyundai, which also reflect socio-political and economic changes in Korea. In the

conclusion, the historical transformation of Hyundai is compared with that of other Korean

chaebol and business enterprises in advanced countries, in an endeavour to identify possible

variant forms and distinguishing characteristics of Korean capitalism.

FAMILY BUSINESS AND PATRIARCHAL CONTROL IN HYUNDAI: 1946-1960s Between the late 1940s and mid-1960s, the small family business of Hyundai was

transformed into a modern industrial enterprise engaged principally in construction activities.

When, Korea adopted an economic policy of rapid industrialisation in the 1960s, Hyundai

was chosen as a representative construction company by the Park military government.

This enabled Hyundai to aggressively expand and diversify its businesses and achieve

economies of scale and scope in production and market share in the heavy and machinery

industries from the 1970s onwards. In the process of transformation, the managerial structure

was formalised to underpin the founder’s continuing control over business and managerial

activities.

Hyundai had its origins in a rice wholesale business established by its founder Chung Juyung

in the 1930s and an automobile repair shop established in the early 1940s, during the Japanese

colonial period (1910-1945). The Hyundai Construction and Civil Engineering Company

(HECC) was founded in 1947. Until the mid-1950s, the growth of HECC’s construction

business was negligible. It operated as a small civil engineering subcontractor, undertaking

mostly simple maintenance and repair work (Park Byung-yun, 1982: 68-69).

The close ties that Hyundai’s founder developed with the state were a major factor in the

chaebol’s eventual transformation. HECC obtained a series of contracts with the American

Military Forces in Korea (AMFK) during the Korean War (1950-1953), and emerged as one

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of Korea’s leading construction companies, with well established political ties. It joined a

construction cartel, whose members were awarded the government’s major war recovery

construction projects implemented under foreign aid schemes.10 In being awarded the First

Han River Bridge Reconstruction Project in 1957, one of the largest national projects, at 32

million won, HECC became Korea’s sixth largest construction company (Lee Jong-nam,

1985: 102-107; Kong Jae-wuk, 1994: 221-222, 236; Lee Jung-jae, 1994: 107-109, 127-138).

Despite engaging with other leading chaebol in corrupt business activities during the 1950s

which exposed it to some political risk, HECC was selected as a representative construction

company by the in-coming Park Chunghee military government (1961-1979) under its policy

of rapid industrialisation of the Korean economy.11 In contrast, other large construction

companies, such as Daedong and Chungang, had a less favoured relationship with the

government, which allowed HECC to secure a position of market leadership. This market

position was enhanced in 1961 by the introduction of the Limit of Bidding Qualification by

the Total Contract Amount of the Previous Year of the Bidder and the Minimum Cost Bidding

System in relation to government projects. As a result, during the First (1962-1966) and

Second (1967-1971) Five Year Economic Development Plans (FYEDPs), HECC was

successful in obtaining a series of large national infrastructure construction projects, such as

highways and dams, power plants and factories, enabling it to grow rapidly.

The vital role of the state is readily apparent in an analysis of the contribution that

government projects made to the total value of contracts obtained by HECC. Their

contribution to HECC earnings grew from 41 per cent (732 million won) between 1953 and

1961 under the Rhy government to 88 per cent (44,555 million won) between 1963 and 1971

under the Park government (HECC, 1982: 579, 638-639, 1096-1143).

10 This is so-called, ‘Jayoudang (the Liberal Party) Five Main Contractors’, which initiated by Daedong Manufacturing Co., whose owner was chief officer in the party’s political finance department. Usually 10 per cent of the total amount of the contract was donated as political funds to the Rhy government (1948-1960) (Lee Jung-jae, 1994: 107-109, 127-138). 11 The Kyungpu Highway Construction Project (428kms length, 1968-1970) constitutes a classic example of HECC- government links and their style of doing business in this period. President Park Chunghee personally asked Chung Juyung to provide the government with a fully costed plan of the construction project before the government called for tenders. The project, as awarded to HECC, was worth 9,442 million won, and was the largest in the history of Korean construction at that time (HECC, 1982: 655-656, 1410).

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Once it was well established at home, HECC entered the overseas construction market with

the Pattani-Narathiwat Highway project (1966-1968) in Thailand. HECC then went on to

projects in Vietnam, Guam, Papua New Guinea and Australia. This diverse international

experience provided the basis for its rapid expansion into the Middle East construction market

in the 1970s, and resulted in HECC becoming the leading Korean construction exporter.12

However, of all HECC’s ventures in foreign markets, its participation in the economic boom

of the mid-1960s associated with the Vietnam War, contributed most to its growth during this

decade, as was the case for other chaebol. The annual earnings of HECC grew from 1, 500

won in 1947 to 200 million won in 1959, and then to 19,000 million won in 1969 (HECC,

1982: 588-590, 614).

Vertical integration of construction businesses During the 1950s and 1960s, Hyundai’s growth strategy was premised on the ‘one-set’

approach. This ‘one-set’ strategy constituted a typical diversification strategy of the chaebol

in the 1960s, the objective of which was to vertically integrate related business areas in order

to obtain a combined competitive advantage and capability. The core company, HECC,

generated a sizeable demand for building materials in connection with the large scale

construction projects it obtained, mostly from the government. Hyundai met this demand

internally, by establishing seven subsidiaries during the 1960s, six of which were dedicated to

the production, for internal use, of various construction materials such as slate, cement and

concrete. These subsidiaries supplied construction materials to HECC at a lower cost than

that obtainable from external suppliers.13 Hyundai Motor Company (HMC), established in

1968, was also incorporated into the ‘one-set’ system to augment the heavy construction

equipment capacity of HECC, when its large scale projects required a greater use of

complicated heavy construction equipment.

The ‘one-set’ approach to construction was vital to sustaining the leading position of HECC

in the construction market, which was based of necessity on a low cost and high volume

business strategy. Given that HECC was largely dependent on government projects during

this period, the introduction, in 1961, of the Minimum Cost Bidding System forced HECC to

12 For example, between 1966 and 1973, 43 per cent or $US281.9 million of total overseas construction sales by the 15 largest Korean companies, went to HECC (HECC, 1982: 598-590).

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further pursue low cost business operations. The Limit of Bidding Qualification by the Total

Contract Amount of the Previous Year of the Bidder, also introduced in 1961, was yet another

reason to focus on volume oriented construction projects as this secured its position with

respect to the number and value of contracts to be awarded by the government in the

following year (HECC, 1982: 576-577, 637-638).

Although HECC’s business activities expanded rapidly throughout this period, they were

undertaken in a relatively disorganised manner owing to a sheer lack of managerial capability.

This made HECC excessively dependent upon a government-mediated external environment

as the primary source of growth.

Development of formal patriarchal control Until the mid-1950s, the management of Hyundai was typical of a small scale single family

business employing less than 100 workers. Its managerial structure was informal, organised

on the basis of Chung’s kinship, his friendships with business associates, and engineering

experts. Chung was intimately involved in daily management decisions, and managers were

assigned tasks by him directly (HECC, 1982: 141, 539-551, 561; Kim Beoyong-ha, 1991:

259; Cheon Beom-seong, 1984: 62-85).

However, this protean, idiosyncratic managerial structure and style yielded to development of

a formal managerial structure, largely based on kinship. For example, when the first formal

managerial structure was adopted in 1950, Chung’s two younger brothers and one brother-in-

law were placed on the top management board with four of Chung’s friends. The

formalisation of management was undertaken in parallel with the growth in scope and size of

the business. Figure 1 shows the evolution of the organisational chart from the late 1940s. By

the mid-1960s, the sectional organisation of HECC had largely been converted to a

department oriented one.14 The continued expansion of the business was the factor which

contributed most to the evolution of HECC’s organisational structure (HECC, 1982: 544-550,

573-574, 627-628; Monthly Chungkyeong Munhwa, December 1984: 150-151).

13 Here, Chandler’s term, the ‘visible hand’ (1977) can be applied in this context, i.e. the supply and processing of every major resource occurs within the extended business enterprise.

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Figure 1 Changes in the organisational structure of HECC, 1950-1971 1950 Late 1950s 1965 1971 Top Management Chairman President President Unchanged Unchanged VicePresident Unchanged Unchanged Planning Management Office Management sector Planning Sec General Affair SU General Affair Dept General Affair Sec Unchanged Accounting Sec Accounting Dept Unchanged Unchanged Factory Management Dept Unchanged Factory Work Affair Dept Material Management Dept Unchanged Unchanged Technology Dept Business sector Cement Dept Overseas Work Dept Unchanged Civil Engineering Dept Unchanged Architecture Unchanged Electric Dept Unchanged Machinery Dept Unchanged Trade Dept Unchanged Danyang Cement Factory Hyundai Cement Co. Commercial Apartment Management Dept Pusan Office Year 1953 1960 1966 1971 Employment size 23 120 846 1,575 SU:Sectional Unit, Sec.: Section, Dept.: Department. Source:Derived from the name lists and organisational chart in HECC, 1982: 544-545, 549-550, 573-574, 627-628. Table 1 shows that the number of top executives increased from a single person, President

Chung, in 1950 to eleven in 1964 and seventeen in 1968. The expansion of hierarchical

positions at the top management board level included adoption of the chairman system.

Expansion at the top management level was necessary for Chung Juyung to maintain effective

and efficient control over the increasing number of subsidiaries in the various areas of the

business. Each of Hyundai’s essential subsidiaries was managed by a member of his family.15

The kinship management structure was instrumental in Chung maintaining central control of

14 The ‘section’ stands for a organisational unit hierarchically located between a department (Bu) and sub-section (Gae). It is usually organised by five to eight members including a manager. 15 Chung Inyung, the first brother was appointed president of HECC in 1968; Chung Seyung, the third brother was appointed president of HMC in 1968; Chung Sunyung, and the second brother, as president of Hyundai Cement in 1970.

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the businesses of Hyundai and HECC (HECC, 1982: 623-625; Cheon Beom-seong, 1984:

91).16

Table 1 Changes in managerial structure of HECC by the number of position holders, 1950s to 1960s

Year 1950 Late 1950s 1964 Jan. 1968 1970 Chairman President Vice President Chunmu Sangmu Leesa

1

6

1 1 3 4

na

1 1 2 7

na

1 1 4

11 na

1 1 5 2 6 7

Total 1 9 11 17 15 Leesa was excluded in the total number due to its inconsistent data. The executives selected for the data were based on employment condition. Those who were appointed by the shareholders meeting were selected here, and other managers whose employment conditions were determined by company regulations were excluded. Source: Derived from HECC, 1982: 549-550, 572-573, 623-625.

The emergence of a cadre of professional managers within a structure dominated by the

family hierarchy was a significant, albeit inevitable, development. Of 22 managerial

executives hired in 1970, 11 were the product of the Open Recruitment System (ORS) for 4

year university graduates, a system which Hyundai had first implemented in 1958. These

recruits were internally promoted from their entry point at the bottom rung of the white collar

employees’ ladder where they were supervised by the founder’s kin and personal associates.

The professionalization of management effected a significant gain in the scope and quality of

decision making. A typical example was the evolution of planning functions. The first formal

planning function was developed in the form of a section in 1965 and of a department in 1967

in HECC to support the strategic action of top management. In conformity with the rapid

growth of HECC and Hyundai, it became a planning management office organised with four

sections in 1969, while its function and size further expanded to cover various policy

developments in business planning, personnel and finance (HECC 1982: 627). This allowed

the top management of Hyundai to maintain more effective control over its rapidly growing

diversified businesses. Direct supervision of operational workplace matters by top

management was gradually transferred to a developing professional management class. As a

16 For example, Chung Sunyung (Vice-President, management), Chung Heeyung (Leesa, a younger sister, Tokyo Branch) and her husband, Kim Youngju, (Vice-President, heavy machinery, 1970). This kinship pattern has remained to this day. Hence, the term `top management’ or `Hyundai top management’ implies the founder, Chung Juyung and his family appointees.

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result, various aspects of Hyundai’s business activities, including work methods, employment

and union relations, were gradually rationalised.

The formalisation of management was constrained however by the overall scarcity of

managerial resources relative to demand. For example, informal and ad hoc practices emerged

as one of the critical issues in the resistance of workers (including middle managers)

employed on the Pattani-Narathiwat Highway Project (1966-1968) in Thailand. This

construction project was the largest in the history of HECC and Korea at that time. Also, the

‘one-set’ approach was not systematically developed to sustain the long-term growth of

Hyundai as a whole. The supportive construction material businesses were totally

subordinated to the core construction business of HECC, as opposed to operating as quasi-

independent business units, with HECC as their major customer. Top management often

restructured its businesses to resolve unsatisfactory situations by way of merger or formal

separation. Despite their shortcomings, the management structure and practices employed by

Hyundai in this period functioned sufficiently well to allow development of monopolistic

capitalism in the 1970s.

DEVELOPMENT OF MONOPOLY CAPITALISM AND COMBINED PATRIARCHAL AND MANAGERIAL HIERARCHY IN HYUNDAI: 1970s-EARLY 1980s During the 1970s the Park Government, as part of its policy to rapidly industrialise the

Korean economy, promoted the establishment of large scale chemical and heavy industries.

This policy prompted some of the chaebol to aggressively diversify into these industries.

Hyundai was able to diversify into the automobile and shipbuilding industries by establishing

the Hyundai Motor Company (HMC) in 1968 and Hyundai Heavy Industries (HHI) in 1974.

This diversification was based on the construction business of HECC, which took on projects

requiring heavy and industrial machinery, thereby creating an internal market for such

equipment. To this end, the existing ‘one-set’ approach for low cost market competition, was

revised to suit the various heavy and machinery industries in which Hyundai was now

engaged. Heavy and machinery industries became the dominant business of three major

companies of Hyundai: the heavy construction works of HECC, the automobile production of

HMC and the shipbuilding of HHI. This enabled Hyundai to develop a monopolistic

production and market position in the Korean economy.

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Though HECC faced financial insolvency with the end of the economic boom generated by

the Vietnam war, the decline in overseas contracts was compensated for by obtaining a series

of large scale government construction projects which were part of the Third and Fourth

FYEDPs in the 1970s.17 The domestic market position of HECC was further strengthened by

changes in the bidding system for government contracts, especially the Turnkey Base

Contract System introduced by the government in 1977, to improve the engineering

capabilities of Korean companies. This was critical to HECC being able to participate in the

most advanced construction projects such as nuclear power plants, as a main contractor

(HECC, 1982: 658-719).

However, the most important business development was its entry into the Middle East

construction market with the Arab Shipbuilding and Repair Yard project ($US114 million,

1975-78. Bahrain). With its success in this benchmark project, HECC expanded its market

position in the region through winning various large and heavy industrial projects such as the

Jubail Industrial Harbour Project ($US940 million, 1976-1982, Saudi Arabia). The aggressive

entry into the Middle East market had important implications for the growth of HECC and

Hyundai. With the resultant sharp increase of its total sales18, this market expansion enabled

HECC to become an international construction company no longer dependent on its domestic

market, which decreased from over 80 per cent of total projects up until 1975 to less than 30

per cent between 1976 and 1981. As will be discussed below, the rapid expansion of its heavy

industrial construction projects created a large scale internal demand for materials, enabling it

to enhance its monopoly position in the domestic construction market during the

1970s.(HECC, 1982: 706, 735, 913, 1088-1089).

In 1968, Hyundai set up HMC with support from the Park government. Like existing Korean

automobile companies, HMC began as a completely knocked-down (CKD) assembler, under

Assembly and Technological Cooperation Agreements with the Ford Motor Company of the

USA. In early 1973, the partnership between HMC and Ford ended due to disagreements over

17 In the 1970s, typical construction projects from government bodies were an iron and steel mill for Pohang Steel Corporation (1970-1980), a series of Kori Nuclear Power Plants (1971-1978), a series of subway projects (1972-1980) and chemical industrial plants in Ulsan Industrial Park (1972-1974). 18 It increased from 54, 540 million won in 1975 to 135,048 million won in 1976 and to 1,659,215 million won in 1981.

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managerial control of HMC.19 Consequently, in 1976 HMC developed and produced its own

model, the Pony, using a low cost concept (around $US2,000) of a small sized passenger car

(under 1,500cc) with the technological support and 10 per cent capital participation of

Mitsubishi Motors of Japan. Based on the success of the first model, the initial stage of a mass

production system was established in 1979 to annually produce 100,000 passenger cars, with

the development of the models, Pony II and Excel (HMC, 1987: 34-38; HMC, 1992: 362,

364-547; Monthly Chungkyeong Munhwa, February 1986: 166-167).

However, Hyundai’s expansion was hit by the second oil price hike, a crisis from which it

then recovered with the assistance of the industrial restructuring policies of the new Chun

Doohwan military government (1981-1988), which granted a monopoly of the production of

small-sized passenger cars to HMC. Internally, HMC changed its production strategy from

being content with the small domestic market to an export focus, entering the export market

in 1983 with the shipment of automobiles to Canada. As a result of the establishment of the

initial stage of its mass production system in the late 1970s, its sales sharply increased from

528 million won in 1968 to 26,092 million won in 1976 and 430,149 million won in 1982

(Lee Ho, 1993: 121; HMC, 1992: 418, 548-628, 1084, 1099).

The establishment of HHI in 1974 was a significant milestone in the history of the Korean

economy and the turning point for its entry into large scale shipbuilding industry, which, with

the automobile industry, was one of the strategic industries in the government’s economic

policies. Thereafter, whenever the shipbuilding industry hit a crisis, the government

intervened to protect it.20 For example, in the aftermath of the first oil shock of 1974, the Park

government implemented the New Policy for Heavy and Chemical Industries to offset the loss

of exports through generous loans and tax policies. HHI received the most assistance of all

Korean shipbuilding companies, gaining 67.2 per cent of all government-backed orders from

1975 to 1980. As will be discussed below, the expansion of HHI was also associated with the

expansion of HECC into the Middle East construction market. HECC functioned as a

supportive base through its requirements for various heavy industrial products, such as off-

shore steel structures and barges. Sales rapidly increased from 58,840 million won in 1974 to

19 This was an inherent conflict with Ford, which cooperated with HMC under its international market strategy to confine HMC to its regional domestic market as a distributor. 20 For this aspect of government assistance in details, see Amsden, 1989.

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992,876 million won in 1983 and HHI became the leading international shipbuilder in 1983

(HHI, 1992: 391-392, 459, 461-463, 547, 1487).

The total sales of Hyundai increased more than a hundred fold over the period from 1973 to

1984⎯from 5,200 million won to 69,792 hundred million won. Its contribution to the

national economy increased from 8.56 per cent to 9.5 per cent of GNP between 1978 and

1980 (Park Dong-sun, 1979: 364; Kuk, 1988: 67; Lee Sung-tae, 1990: 16). Table 2 shows the

rapid growth of Hyundai with the significant role of HECC, HMC and HHI in Hyundai

clearly apparent from the late 1960s. As detailed above, Hyundai’s rate of growth increased

sharply from the mid-1970s with its diversification away from a construction dominated

business base into large scale heavy industrial businesses. The role of the three main

companies (HECC, HMC and HHI) in the growth of Hyundai’s total sales declined from 93

per cent in 1973 to 51.35 per cent in 1980. This followed from the increased role of

Hyundai’s other supporting subsidiaries which occurred as a result of the systematic

organisation of monopolistic production and market strategies in the heavy and machinery

industries from the late 1970s.

Table 2 Total annual sales of Hyundai, HECC, HMC and HHI, selective years from 1968 to 1980

Unit: Hundred million won Year 1968 1973 1977 1978 1979 1980 Group Total(A) 129 520 14,799 19,049 22,428 32,620 HECC HMC HHI Total(B)

124 5

na 129

315 179

na 484

5,360 930

4,309 10,500

6,353 2,158 4,013

12,424

6,173 2,690 2,051

10,914

10,517 2,249 3,751

15,751 Ratio(%: B/A) 100.00 93.07 70.95 65.22 48.66 51.35 Total sales amount in 1968 is calculated by only those of HECC and HMC due to absence of other data. Source: Derived from Yun In-hak, 1991:67; Park Dong-sun, 1979:364; Lee Jong-seon, 1989: 19; HECC, 1982:1088-1089; HHI, 1992:1487; HMC, 1992:1084; Maeil Economic Newspaper, 1985: 802.

Vertical and horizontal integration of heavy and machinery industries The previous ‘one-set’ approach, involving vertical integration of various construction

businesses of HECC in the 1960s, was revised in relation to Hyundai’s large scale heavy and

machinery industries in order to gain the benefit of economies of scale and scope in the

1970s. Table 3 details increases in the number of Hyundai subsidiaries, and when they were

incorporated. It reveals that most companies operating in 1985 were founded in the 1970s. It

also charts developments in the integration of heavy and machinery industries in Hyundai

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around its three main companies from 1972 as a result of its ‘one-set’ approach. In the early

1970s, Hyundai subsidiaries were formed mainly to support the dominant construction

business of HECC; while by the late 1970s, new subsidiaries were being established to

support industries in which the three companies of HECC, HMC and HHI were engaged. By

1985 a total of 11 support companies had been set up to supply common materials and parts,

such as steel and paint materials for the three companies or Hyundai as a whole. For example,

Inchon Steel supplied steel materials for the production of heavy industrial structures by

HECC, shipbuilding by HHI and automobiles by HMC, at low internal prices.

Table 3 Changes in the number of subsidiary companies of Hyundai by type of business and their internal relationship, 1946-1985

Year 1946-1970 1972 1979 1985 HECC & its related HMC & its related HHI & its related HECC, HMC, HHI related Others Total

410027

310026

122584

31

8 3 6 11 5 33

The criteria are the nature of business and its relationship with the three main companies. Source: Derived from Chung Ku-hyeon, 1989:293; HHI, 1992: 166-167; Lee Jong-seon, 1989:22; HECC, 1982: 478-536, 920; Kuk, 1988:107; Cho Dong-seong, 1991:185; Kim Beoyong-ha, 1991:307.

Integration extended beyond support companies and the core companies, HECC, HMC and

HHI. Among the core companies, businesses were closely managed and tightly integrated

under the direct control of top management. Table 4 shows the extent of internal business

cooperation between HECC and other Hyundai companies with respect to the construction

projects undertaken by HECC in the 1970s. In the 1960s only one of 15 industrial plant

projects had used internally supplied materials⎯the construction of the HMC factory in 1968.

With the expansion of large scale heavy and machinery industries in the Hyundai chaebol,

this increased to 27 of 42 projects in the 1970s, or two-thirds of HECC industrial plant

contracts. These internally provided projects became the mode of operation for HECC

expansion. For example, the construction of HHI’s shipyard was the benchmark project for

the Arab Shipbuilding and Repair Yard, Bahrain in 1975.

14

Table 4 Changes in the number of industrial plant projects of HECC by type of source, 1961-1981

Unit: Million won, % Period 1961-1970 1971-1975 1976-1981 Total Number of project Total number Internal source

15 1

15 6

27 21

57 28

Contract amount Total(A) Internal source(B) B/A(%)

4,042 1,780

44.0

633,635 2,132

33.0

84,233 56,438

66.9

151,910 60,342

47.9 Source: Derived from the construction lists of HECC in HECC, 1982: 1096-1165.

Another example of internal business cooperation came from the role of HHI, which

functioned as a support company for the large scale heavy engineering works of HECC in the

Middle East with its reliable supply of heavy industrial materials. Various steel structures,

such as open sea tanker terminals and offshore jackets, were supplied to HECC at the lowest

possible cost. For example, for the Jubail Industrial Harbour project (1976-1982), HHI

supplied a total of 130,000 tonnes of various jackets and heavy steel structures. HMC also

supplied transport and parts for HECC’s construction works (HHI, 1992: 424-428, 1067;

HECC, 1982: 870, 2144-2145). During the first ten years of the HHI shipbuilding business,

35 of 233 ships constructed were orders from Hyundai subsidiary companies. In particular,

HECC purchased offshore construction project-related ships from HHI during its construction

projects in the Middle East. On the basis of inexpensive ships supplied by HHI and the

demand for shipping services from other Hyundai companies, Hyundai Merchant Commercial

Co. built up a sizeable marine transportation business (HHI, 1992: 965-969).

By utilising the ‘one-set’ approach to the large scale heavy and machinery industries of

Hyundai, the three major companies were able to secure a sizeable, often dominant, share of

domestic and international product markets. For example, in 1977, Hyundai produced 16

products which had monopoly or semi-monopoly status, including automobiles, slate, steel,

pipe and ships in the domestic market (Cho Dong-seong, 1991: 193). From 1977 to 1981,

HECC obtained over 20 per cent of the total value of projects undertaken by Korean

construction companies in overseas markets (HECC, 1982: 659, 836). The share of the

domestic motor vehicle market held by HMC increased from 19.4 per cent in 1970 to 62 per

cent over the second half of the 1970s (HMC, 1992: 116).21 While HHI held 77.4 per cent of

21 The market share of HMC is calculated by the total amount of domestic sales of passenger cars of four major Korean passenger car companies, Hyundai, Daewoo, Kia, and Ssangyoung.

15

the domestic ship construction market between 1976 and 1978, and its share of the

international shipbuilding industry increased from 1.7 per cent in 1973 to 3 per cent in 1974.

In 1983, HHI became the world’s largest shipbuilder (HHI, 1992: 370, 449, 547).

Due to its rapid growth, by the late 1970s, Hyundai became the leading chaebol in Korea. Its

annual average growth rate, as measured by total sales, was over 11 per cent between 1980-

1984, whereas other top chaebol, such as Samsung and Daewoo, grew at less than 9 per cent

(Kim Hyo-gun, 1986: 175).

The rapid expansion of Hyundai’s heavy and machinery industry businesses in the 1970s,

utilising the ‘one-set’ approach gave rise to large scale workforces. Regional concentration of

its production businesses also occurred, particularly in the Ulsan Industrial Estate of south-

east Korea where by 1982, 50,695 workers were employed in 18 Hyundai companies (Lee

Jong-seon, 1989: 15, 35).

Development of combined patriarchal and managerial hierarchy In response to sustained growth occurring in the large scale heavy and machinery industries

of Hyundai, formalisation of both managerial structure and activities was undertaken to

consolidate the central authority of Chung Juyung, his kin and associates. Professional

management groups, especially those in HECC, were relocated to form a second tier position

in the revised hierarchical structure to underpin the central control of top management.

The first major structural change was replacement of the existing department system by the

division system in the 1970s. Table 5 illustrates this tendency in three companies from the

mid-1970s, which accelerated in the early 1980s. The size of departments rapidly increased

from the mid-1970s in line with rapid growth of their businesses. This was parallelled in the

increased size of the managerial structure, especially the number of executives in HECC and

HHI. All in all, the changes constituted a bureaucratization of the large scale division system

from the mid-1970s.

16

Table 5 Changes in managerial structure of HECC, HMC and HHI A: Organisational structure by number of units in each class, 1968-1982 Company HECC HMC HHI Year 1968 1975 1982 1968 1974 1981 1973 1975 1982 Division Office Department Centre Section

11 0 na

2

15 0

40

10 3

50 0

98

5 0

16

5

13 0

49

3 6

40 0

241

2

10 1 na

1 1

32 1

na

9 4

63 2

na B: Number of executives by type of managerial position, 1970-1982 Company HECC HMC HHI Year 1970 1975 1982 196

8 1976 1982 1976 1978 1982

Chairman President Vice Presi. Chunmu Sangmu Leesa Leesa Daewoo

1 1 5 2 6 7

1 2 5 1 3

14

1 1

10 10 23 35 44

1 1 1 1 3 6

1 1 0 3 1 6

1 1 2 2 5 8

1 2 1 2 1

13

1 3 2 8 8

26

1 1 7 3

15 21

Total 22 26 95 13 12 19 20 48 48 The executives selected for the data were based on employment conditions. Only those who were appointed by the shareholders’ meeting. The Figure A is derived from the name lists and organisational structure in HECC, 1982: 627-628, 675, 777, 779-786; HHI, 1992: 535; HMC, 1992: 282, 407,471, 505, and the Figure B is derived from HECC, 1982: 670, 752-753, 761-764; HMC, 1992: 345, 472, 501-502, HHI, 1992: 396; Maeil Economic Newspaper, 1978: 1844; 1982: 2042.

With the development of a formal Hyundai managerial structure, important changes occurred

at the top decision-making level - the broad application of the chairman system and the

introduction of a Group Planning Office (GPO) in 1979. In 1982, except for the chairman of

HHI, all chairman positions were held by the founder, Chung Juyung to enable him to be

formally involved in every aspect of the business and management of subsidiary companies,

especially the three major companies. The GPO was introduced in association with the Group

Chairman system. The GPO grew out of the planning office which had been set up in HECC

in the 1960s to develop a management science capability in general, and in particular to

support top management in the creation, implementation and monitoring of long-term

business plans. The role of the GPO was critical to Hyundai’s ability to derive benefits from

economies of scale and scope and the systematic integration of its businesses, or what Ansoff

(1969) describes as the ‘synergy effect’.22 Figure 2 depicts the Group Planning Office in

22 This kind of internal structure was defined as an M-form industrial group by Chandler (1982).

17

Hyundai’s organisational expansion from section to department in 1979 and to the team

concept in 1982.

Figure 2 Organisation evolution of planning units, 1969, 1979, 1982 1969 (HECC) 1979 (1982) Planning Management Office Group Planning Office Organisational structure

Planning Development Section Finance Management Section Electronic Data Processing System Section

Legislation Team (unchanged) New Business Department (Team) Research Department (Team) Organisational/ Personnel Department (Org. Team and Personnel Team) Public Relations Department (Team) Finance Control Department (Team)

Duties Development of new business, personnel polices, financial control, and introduction of computer systems

Coordinating businesses, organisation, personnel, public relations matters of subsidiaries

Source: Derived from HECC, 1982: 627, 776, 786, HHI, 1992: 533.

From the GPO, Chung Juyung was able to maintain oversight and control of Hyundai’s

businesses. A typical organisational example was the Senior Executive Meeting which

ensured that subsidiary companies maximally cooperated to promote common interests in

light of the strategic expansion of the entire Hyundai business (HHI, 1992: 533). Figure 3

simplifies the formal managerial structure of Hyundai which developed from the late 1970s.

A distinctive feature of the pre-eminent managerial position of the Group Chairman and

Hyundai’s GPO was that they had no formal legal status vis-à-vis the legally independent

subsidiary companies of Hyundai. Their de facto existence as managerial control mechanisms

was a consequence of the kin ownership concentration, i.e. 40 to 50 per cent of the total

capital of subsidiary companies was held by Chung Juyung and his family.23 This

concentration of ownership allowed Chung Juyung - on a de facto if not a de jure basis - to be

involved in every aspect of the management of Hyundai subsidiaries. Thus, notwithstanding

the legally independent status of the subsidiaries, the Group Chairman and GPO systems were

developed to centrally control a large scale and complex conglomerate which utilised the

‘one-set’ approach.

23 Their total shareholdings of some companies was less than 50 per cent, but other subsidiary companies owned the rest, leaving, Chung Juyung in control.

18

Figure 3 Formal managerial structure of Hyundai since 1979

Group Chairman ↓ ← Group Planning Office

Senior Executive Meeting ↓

Company Level - Chairman or president ↓

Division ↓

Department ↓

Section ↓

Sub-section

With the operation of a central controlled managerial structure, two additional supporting

mechanisms were necessary: the development of a kinship structure in the Hyundai top

management class and the diffusion of HECC backed professional managers in the second tier

of top decision makers. Based on the initial development of the kinship structure in the 1960s,

in the 1970s Chung Juyung’s brothers were placed in the top management positions of the

most important subsidiaries under the central authority of himself. The organisational chart of

Hyundai for 1979 reveals that four of Chung’s brothers were appointed to president of

subsidiary positions, and that a brother-in-law was appointed as chairman of HHI (Park

Dong-sun, 1979: 360; Kim Young-ho, 1985: 269-270).

The kinship structure was expanded further with the emergence of a second generation of the

founder’s family in the early 1980s. The major companies presided over by Chung’s four

brothers as mentioned were legally separated from Hyundai, except for HMC. Nevertheless,

they functioned as satellite chaebol through an inter-connected business structure and the

exchange of senior executives. For example, Hyundai products were supplied to the satellite

chaebol; and, Mando Machinery Co., a subsidiary of the Hanra Group - one of the satellite

chaebol - supplied auto parts to HMC. From the 1980s, members of the second generation of

Chung Juyung’s family, who had been employed as middle or senior managers in the 1970s,

gradually took over central positions in the managerial structure under the direct guidance of

Chung Juyung. The changes are described in Figure 4. A strong patriarchal kinship system

was particularly effective in securing the central authority of Chung Juyung in the context of a

19

well entrenched Confucian socio-cultural tradition in which the father and the eldest son are

given authority in decision-making. Therefore, cultural values favoured the central authority

of Chung Juyung as the eldest brother and father, in managerial decision-making (Kim

Young-ho, 1985: 269-270, 290-291; Cheon Beom-seong, 1984: 436-444; HECC, 1982: 1081;

Chung Ku-hyeon, 1989: 291; Monthly Chosun, September 1980: 281-283; Chang 1988; Kim

and Kim, 1989).24

With the extension of the middle layer in the managerial structure through kinship in the

1970s and 1980s, professional managers⎯especially HECC-backed managers ⎯were placed

in the second tier of top management in Hyundai. An initial diffusion of professional

managers into top management positions in the subsidiaries during the 1960s was accelerated

in the 1970s with the rapid expansion of Hyundai as a whole. In the organisational chart in

1981, of 61 top managerial executives in 16 Hyundai subsidiaries,25 28 executives came from

those who had been hired in the late 1960s under the formal recruitment system and had

served over 10 years in HECC. With such service, they had in effect supported the kinship

structure of the central authority of top management (HECC, 1982: 1081-1082).

Figure 4 Changes in the managerial structure by kinship of Chung Juyung’s family from the 1970s to early 1980s

Family members 1975 1980 1983 Chung Juyung Group Chairman of Hyundai Chung Juyung’s sons 1st Mongphil Leesa HECC

(1975) President, Hyundai Co. (1977)

Inchon IS (1981)

2nd Mongku HECC(1973) President: Motor Service, Precision & Industries (1982) 3rd Monggun President, Kuemkang Development (1982) 4th Mongwoo Sangmu, HECC (1980) President, Korea Pavement (1982) 5th Monghun Sangmu, HECC (1980) President, HEI (1983) 6th Mongjun Leesa, HECC (1980) President, HHI (1983) 7th Mongyun Employee, HECC (1980) Vice president, Marine & Fire (1982) 8th Mongil na Chung Juyung’s brothers

24 For the principles of Confucian values and implications in managerial activities in Korea and other NICs countries, see Hofstede and Bond (1988), Chang (1988) and Kim and Kim (1989). 25 Here top managerial executives imply only those held over Sangmu position, which is equivalent position with a president in a company.

20

1st Inyung Hanra Group(construction and heavy machinery) 2nd Sunyung Hyundai Cement Group(cement, welding sticks) 3rd Seyung President of HMC 5th Sangyung Keumkang Group(construction & painting materials) Kim Youngju (brother in law) President, HHI, Engine President, Korea Flange The eldest son, Chung Mongphil, died in 1982. Inchon IS: Inchon Steel and Iron, HEI: Hyundai Electronic Industries. Source: Derived from Monthly Chosun, September 1980: 281-283; Kim Young-ho, 1985: 270, 290-291; Cheon Beom-seong, 1984: 436-444; HECC, 1982: 1081. Several factors contributed to the emergence of the HECC-backed professional executives in

Hyundai. First, HECC historically functioned as the parent company in executing Hyundai’s

growth strategy (Figure 5). With the growth in inter-related business operations between

HECC and other companies, the diffusion of HECC-backed managers to other companies was

necessary. Second, these executives were mostly those middle managers who had worked a

long time under the direct supervision of the founder in the 1960s and thus had proven their

capabilities and loyalty to him. Most importantly, their long working relationship with the

founder was crucial for the implementation of the founder’s managerial decisions. Last, the

experience of the founder in construction work led him to prefer HECC-backed managers. As

seen in Figure 4, HECC was also the place where his sons were initially trained to be senior

executives for other Hyundai companies.

Figure 5 Organisational evolution of Hyundai subsidiary companies from HECC, HMC and HHI, 1967-1980

Year 1967 1970 1975 1980s HMC Automobile Team of

Planning Dept. of HECC(1967)→

HMC(1968)

After Service Dept.(HMC) → Hyundai Motor Service(1974) HHI Shipbuilding Dept. of HECC(1970)→ HHI(1973) Engine Dept.(1976) → Hyundai Engine Co.(1978) Heavy Electric Dept. (1977)→ Hyundai Heavy Electric

Co. (1978) Chemical Div. (1981)→ Ulsan Chemical Co.(1983) Dept.: Department, Div.: Division Source: Lee Jong-seon, 1989: 22; HHI, 1992: 327; HMC, 1992: 271; Hyundai Group Public Relations Office, 1994: 118.

These executives were also an agency for extending the patriarchal aspects of managerial

control with the formalisation of work and employment relations in these years. As the

professional management class was regarded as a means of enforcing the central authority of

Hyundai top management, so employment conditions were extended to effectively control the

21

mass of production workers. In this way, the central control of the founder in the formal

organisation was reinforced⎯it was combined with the kinship structure in the family

hierarchy and the diffusion of HECC-backed executives. As a result, during this period, the

founder of Hyundai was able to maintain managerial control of a large, rapidly expanding

conglomerate.

CRISIS AT HYUNDAI AND DEVELOPMENT OF COMBINED PATRIMONIAL AND MANAGERIAL HIERARCHY: EARLY 1980s-EARLY 1990s The excessive dependence of Hyundai on large scale heavy and machinery industries in the

1970s had made it vulnerable to changes in the international supply and price levels of natural

resources, for example, the second oil price hike in 1979. Further, the business crises which

periodically beset Hyundai were exacerbated by the emergence, from the mid-1980s, of a

mass, independent trade union movement. 26 These developments undermined its low cost

market approach and thus its competitiveness. Furthermore, politically and economically, the

state became less well disposed to the monopolistic capitalism of the chaebol. Therefore,

from the mid-1980s, Hyundai redirected its investment from heavy and machinery industries

to technologically-intensive, high value-added industries such as micro-electronics and

services. The three major companies, HECC, HMC and HHI, reorganised their business

strategies to accommodate these changes.

In the early 1980s, HECC suffered a sharp decline in its Middle East construction contracts

due to adverse political and economic developments in that region. Meanwhile, the increasing

cost of Korean labour weakened its competitiveness, and outdated construction technologies

limited its potential expansion into more advanced construction projects, such as nuclear

power plants. Consequently, from 1982, HECC adopted a new long-term growth strategy,

focussing on high value added projects through the development of advanced construction

technologies. To overcome its regional concentration in the Middle East, especially in Saudi

Arabia, HECC diversified to other countries in the Middle East, and in Asia, Africa, and

26 For the details of an independent trade union movement at Hyundai workplaces and its impact on Hyundai businesses, see Kwon (1997) Control and Conflict: The Historical Development of Labour Management within the Hyundai Business Group, 1946-1995, Ph. D. thesis, University of New South Wales, Sydney.

22

Central and South America (HECC, 1982: 882-883, 913-916).27 As a result, its new strategy

led HECC to win large construction projects overseas such as a hydro power plant (1988,

$US680 million, Pakistan) and thermal power plant (1992, $US16,000 million, Libya). At the

same time, to maintain its low labour costs, HECC’s Korean construction labourers were

replaced by those from Third World countries on overseas projects, who increased from 30

per cent of overseas project workforces in the early 1980s to 70 to 80 per cent from the late

1980s (Korea Economy Newspaper, 24 March 1992; Chungang Economic Newspaper, 7

June, 10 July 1990, 6 July, 18 May, 24 October 1993, 28 February 1994; Monthly

Chungkyeong Munhwa, April 1983: 346; Monthly Chungang, October, 1988: 378-381).

In the domestic market, HECC experienced steady growth through winning large and

technologically intensive projects, such as nuclear power plants, under the government’s

market protection policies. In 1992, HECC redirected its growth strategy through formulation

of a 21st Century Business Strategy by which it undertook to become the best general

construction engineering company in the world by the year 2001. As part of this, the

Construction Technology R&D Institute was established at the Group level to integrate

related technologies in the construction business. To support this, R & D investment was

increased to 3 per cent of total sales in 1993 with the aim of 8 per cent by 2001 (Maeil

Economic Newspaper, 11 October 1993; Chungang Economic Newspaper, 5 November 1993,

6 January 1994; Seoul Newspaper, 25 August 1994).

At the time of HMC’s entry into mass production in the late 1970s, the Korean automobile

industry underwent a recession due to the combination of a political crisis and the second oil

price shock. To enable it to recover, HMC was granted a monopoly over small-sized

passenger cars under the Rationalisation Policy of Heavy and Chemical Industries of the

Chun Doohwan government (1981-1989). Following recovery, HMC greatly expanded its

mass production capacities to serve the international market, from 110,000 cars in 1979, to

300,000 in 1985, and to 890,000 in 1990 and strategically developed various models in the

small class (under 1,500cc) and medium class of passenger cars (under 2,500cc) through

technological cooperation with Mitsubishi. Canada was the first overseas market for HMC

and the success in Canada enabled HMC to be a significant market entrant to the USA in

27 Changes in the number of HECC’s overseas branches, in part, showed its efforts in HECC’s regional diversification in the 1980s. These increased from 34 in 1982 to 53 in 1988, covering from Asia to North

23

1986 with its competitively priced Excel.28 However, its expansion into foreign markets has

been constrained by barriers of entry and rising production costs, caused, for example, by the

mass trade union movement at home (HMC, 1992: 491-564; Chung Ku-hyeon, 1989: 299-

301; Maeil Economic Newspaper Co., 1979, 1985, 1990).

In the domestic market, the monopoly of HMC in small sized cars was broken by Daewoo

and Kia Motor with the termination of monopolies in 1986. Domestic competition further

intensified with the recent entry of two other chaebol, Ssangyung and Samsung. Further, the

emergence of a mass, independent trade union movement at Hyundai was significant in

undermining HMC’s market share, especially when it was hit by a severe industrial strike in

1990. As a result, its market share in passenger car decreased from 72.5 per cent in 1985 to

55.9 per cent in 1989 though its total sales increased from 5,774 hundred million won in 1983

to 71,810 hundred million won in 1993 owing to the rapidly increasing size of the domestic

market and exports. In response, in 1993, HMC developed its long-term business strategy, the

so-called Global Top-10, aimed at HMC being one of the ten largest car makers in the world

by 2000, from twentieth position in 1992. To achieve this goal, HMC’s strategy was to

decentralise or localise production. Plants to produce 800,000 cars annually in Korea and

320,000 in Southeast Asia and South America had been constructed or are under construction.

HMC also regionally diversified its exports to reduce its dependence on the US

market29⎯from 65 countries in 1986 to 141 in 1994 (HMC, 1992: 592-754; Chosun Ilbo, 21

July 1993, 4 January, 6, 7, 9, 15 December, 1994; Chungang Ilbo, 18 July 1995; Dong-Ah

Ilbo, 24 November 1995; Monthly Observer, November 1991: 292-304).

Among the three companies, HHI suffered most seriously from the 1979 world-wide

depression which resulted in a decline in the movement of natural resources and thus marine

transportation. Internationally, 42 Japanese shipbuilding companies were bankrupted as a

result of the second oil price hike. Consequently, shipbuilding was one of the key industries

targeted in the Chun government’s Rationalisation Policy of Heavy and Chemical Industries.

HHI was given a monopoly of the production of marine engines in excess of 6,000

America (Maeil Economic Newspaper Co. 1982, 1986, 1988). 28 With the Pony, HMC sold 79,072 cars, or 7 per cent of the Canadian small passenger car market in 1985. With its second model, the Excel, HMC sold 168,882 cars, the third largest number of sales in the small sized and imported passenger category in the USA in 1986 and in 1987. 29 In 1988, 88 per cent of its total export sales were to the USA (HMC, 1992: 751).

24

horsepower, as well as financial support. HHI also adopted a very aggressive low cost market

approach to gain orders. As a result, HHI contracted nine VLCCs (Very Large Crude

Carriers) of a total of 15 new VLCCs offered in the international market and 20 other tanker

projects in 1986, so that its international market share increased from 3 per cent in 1974 to 18

per cent in 1986 (HHI, 1992: 514-535, 686-690; Korean Shipbuilding Industries Association,

1991).

However, HHI’s shipbuilding business had inherent structural deficiencies due largely to its

low cost market practice and labour intensive mode of production. These features of its

business were contrary to industry trends. Since the late 1970s, its competitors had gradually

moved from large scale, bulk carrier ship construction to micro- and technologically intensive

product carriers. Moreover, the development of a mass trade union movement in HHI from

the mid-1980s directly undermined its low cost market advantage, which was further

aggravated by the emergence of shipbuilding in other developing countries such as China and

Brazil with low labour costs. As a result, its market position continuously declined over the

1986-1989 period from 74. 4 per cent to 31.4 per cent of the domestic market, and from 18

per cent to 10 per cent of the international market (HHI, 1992: 532-535, 544-547, 617-624,

730-735; Monthly Economic Review, September 1987: 73-86).

Therefore, it was imperative for HHI to conform to rather than defy industry trends, abandon

its outmoded production methods, and adopt a growth strategy based on the production of

high value added ships requiring a high level of marine engineering. With assistance from

government policies, labour-intensive production was intensively automated with

shipbuilding technology through various R & D institutes. These efforts helped boost the

average value of ships constructed from $US30 million in 1981 to $US60.5 million in 1990,

and production of the most technologically advanced ships, liquefied natural gas carriers

(LNG), in 1993. In addition, HHI diversified into other heavy industrial products such as

marine developments, industrial plant and industrial robots in order to reduce its dependency

on the fragile shipbuilding industry. In the process of diversification, Hyundai Steel Tower

(1987), Hyundai Industrial Robots (1987) and Hyundai Heavy Machinery and Equipment

(1988) became independent subsidiaries of HHI (HHI, 1992: 594, 659-665, 786, 961, 984-

985; Chungang Ilbo, 21 July 1995).

25

Restructuring large scale heavy and machinery oriented growth strategy In response to the structural problems resulting from its over-dependence on heavy and

machinery industries and the impact of a mass trade union movement, the previous ‘one-set’

approach (vertical integration of various heavy and machinery industries) of Hyundai was

revised by diversification into large scale technologically-intensive or higher value-added

industries, such as micro-electronics and services. Among the new companies of Hyundai

founded in the 1980s, a typical example is Hyundai Electronic Industries (HEI), founded in

1983 to produce semi-conductor and various micro-electronic products such as computers,

automotive electronic products and telecommunications systems. The semi-conductor was the

key product of HEI under the government’s new economic policies that favoured

technologically intensive industries. Based on an internal market demand, for example

automotive electronics for HMC, HEI began a strategy of becoming a leading international

electronics company. To that end, HEI succeeded in developing the 4M Dynamic Random

Access Memory (DRAM), 16M DRAM and 64M DRAM in 1989, 1991 and 1993

respectively under collective research and development projects with other semi-conductor

companies, such as Samsung and Lucky-Goldstar, with government support. These

significant developments increased HEI sales from 3 million to 2,075 thousand million won

over the 1984 to 1994 period (Hyundai Electronics Industries, 1994; Chosun Ilbo, 24 July

1994; Shin Dong-A, February 1987: 340-348).

Figure 7 shows the burgeoning structure of Hyundai in 1994. It outlines the expansion of a

wide range of business areas, from the production of resources to manufacturing, the retail

sector, mass media, banking and the knowledge-based service industries. This broad based

expansion occurred as the result of its wholesale revision of the ‘one-set’ system which was

undertaken in order to reduce the dominance of heavy and machinery industries. However, as

apparent in Figure 6, companies were still systematically incorporated within an overall ‘one-

set’ system based on large scale internal market demand.30 Other subsidiary companies were

structured around the four main companies, HECC, HMC, HHI and HEI, to support their

business activities.31

30 Another typical case for internal market demand for service industry was Seojin Travel Agency of Hyundai which became the top travel agency in 1983 through its internal usage by some 28,800 Hyundai employees (Lee Jong-nam, 1985: 128). 31 For example, Hyundai Research Institute, Keumkang Advertisement Agency and Munhwa Ilbo Newspaper Co.

26

Figure 6 Growth structure of Hyundai in 1994 by type of business with foundation year

Resource & material related1978 Inchon Iron & Steel 1990 Resource Development

HECC related1947 HECC 1974 Engineering 1976 Koryo Industries 1977 Industrial Development 1977 Wood 1983 Industrial Service 1984 Elevator 1987 John Brown Engineering 1989 Construction Equipment Service

Trade and retail service1971 Keumkang Industrial 1976 Hyundai Co. 1977 Keumkang Air(Travel) 1993 Hanmu Shopping 1993 Seil Petroleum Distribution 1994 Youngjin Petroleum Distribution

HHI related 1973 HHI 1974 Mipo Dockyard 1977 Precision & Industries 1978 Heavy Electric 1986 Generator 1988 Steel Tower 1989 Construction Equipment & Machinery

Core Business Group(HECC, HMC, HHI, HEI) Common sectors1973 aluminium of Korea 1975 Pipe 1987 Aluminum

HMC related1967 HMC 1974 Car Service 1987 Kepico Petrochemical Related1988 Petrochemical 1993 Oil Refinery

Transportation related 1976 Merchant Marine 1972 Suneal Shipping 1984 Korea-Russia Shipping 1993 Donghae Shipping 1993 Distribution

HEI related1983 HEI 1985 Magnetics 1988 Robot Industry 1988 Media Service 1989 Alan Brandly 1989 Tech. System 1989 Information Technology

Banking and finance service 1970 Kwangwon Bank 1977 Securities 1978 KKBC International 1983 Marine & Fire Insurance 1993 Auto-Finance

Other supportive group1983 Keumkang Advertisement; 1986 Research Institute; 1988 Investment Management; 1990 Munhwa Ilbo Newspaper; 1993 Technology Development

Total: 54 subsidiary companies. The year of foundation of the merged company was unified as the year of its official incorporation as a Hyundai subsidiary. Source: Derived from Hyundai Group Public Relations Office, 1994: 80-81, Kong Byeong-ho, 1992: 157, 160, 162; Chungang Economic Newspaper, 10 December, 1993.

Table 6 shows that 25 Hyundai subsidiaries were founded after the mid-1980s as part of its

diversification strategy, and also involved pan-Hyundai business groups such as the Hanra

Group, Hyundai Cement Group and Keumkang Group, which had kinship-based ties with

Chung Juyung.32 The large scale ‘one-set’ approach of Hyundai was a pervasive feature of

national economic growth in the 1980s and the early 1990s, with the consequence that

Hyundai became increasingly dominant in the Korean economy.

Table 6 Number of Hyundai’s subsidiaries in 1994 by period of foundation or incorporation to Hyundai

Period Total(1994) 1946-1975 1976-1980 1981-1985 1986-1994

32 These are the chaebol controlled by brothers of Chung Juyung, and separated from Hyundai in the 1970s or early 1980s as mentioned in the previous section.

27

Number 54 11 11 7 25 The year of foundation of the merged company was unified as the year of its official incorporation to Hyundai subsidiary. Source: Derived from Hyundai Group Public Relations Office, 1994: 80-81, Kong Byeong-ho, 1992: 157, 160, 162; Chungang Economic Newspaper, 10 December, 1993.

The increased role of subsidiaries was evident in the diminishing contribution of HECC,

HMC and HHI, to the growth of Hyundai in the 1980s (Table 7). The dependence of

Hyundai’s growth on the sales of these three core companies decreased from over 70 per cent

in 1977 to 31 per cent in 1993, while total sales of Hyundai have steadily grown.

Table 7 Changes in total sales of Hyundai33 and contribution of HECC, HMC and HHI, 1977-1993

Unit: Thousand million won Year 1977 1980 1983 1985 1987 1989 1990 1993 Group(A) 1,479 3,262 6,879 13,594 14,648 17,284 31,939 39,742 HECC HMC HHI Total(B)

536 93

430 1,059

1,075 224 375

1,674

1,764 577 922

3,333

1,988 1,047 1,164 4,119

1,521 2,840 955

5,316

1,372 3,806 978

6,156

1,978 4,655 1,480 8,113

2,774 7,181 2,568

12,523 B/A(%) 70.95 51.35 49.09 30.29 36.29 35.61 25.40 31.51 Source: Derived from Hong Deok-rul, 1985: 47; Chung Ku-hyeon, 1989: 299-301; Kim Beoyong-ha, 1991: 307; Cho Dong-seong, 1991: 224 38, 255; Yun In-hak, 1991: 112; Hyundai Group Public Relations Office, 1994: 82-204; Hyundai Group Trade Union Association, 1994: 205; Maeil Economic Newspaper Co., Annual Corporation Reports, selective years; HMC, 1992: 1081-1101.

Another significant change in the 1990s was Hyundai’s globalization strategy which involved

locating or transplanting production systems overseas, for example, Southeast Asia, Europe,

and North and Central America. There were various reasons for this strategy. First, to

overcome market protection in advanced countries. This led HEI, in 1996, to establish a $US

1,300 million electronics plant in the USA. Second, to maintain low cost production. To this

end in 1996, HHI set up heavy construction machinery factories in China. Labour-intensive

industries were the prime targets for relocation to developing countries such as Vietnam,

China and India (Kong Jae-wuk, 1994: 46-47; 29 Chosun Ilbo, September, 1995; 29 Maeil

Economic Newspaper, July, 19 August 1991, 19 1 1993; Chungang Economic Newspaper, 25

May 1994)

From patriarchal and managerial hierarchy to combined patrimonial and managerial hierarchy 33 The total sales of Hyundai can be varied by the type of incorporation of subsidiary companies, for example, banking. Those amounts selected were chosen to ensure consistency. The total sales here are only for those subsidiary companies of Hyundai for which Chung Juyung and his family have owned over 50 per cent of total shares.

28

Despite extensive reorganisation of the business and managerial structure of Hyundai, the

centralised authority of Hyundai’s top management, especially the family hierarchy of the

founder, remained a key institution of control. As at 1994, 10 of 17 chairmen in Hyundai have

kinship ties. Table 8 provides details of changes in the managerial structures of HECC, HMC

and HHI for the 1982-1994 period. As seen in Table 8, since the existing system of positional

titles in Hyundai’s management hierarchy was established in the 1970s, only one top

managerial position⎯that of honorary chairman⎯has since been added, and then only as a

result of the founder’s official retirement in 1987. It also shows that the total number of

executives increased until the late 1980s and then levelled off or declined, except in HMC. It

is therefore apparent that in contrast with the phase of rapid expansion in the 1970s, the

managerial structure of Hyundai in the 1980s reflected a more stable period of growth for the

three core companies.

Table 8 Changes in management structure of HECC, HMC and HHI by size, 1982-1994 A: Number of executives by type of managerial position Company HECC HMC HHI Year 1982 1987 1994 1983 1987 1994 1982 1987 1993 Honour Chairman Group Chairman Chairman President Vice Presi. Chunmu Sangmu Leesa

Chung

0 1

10

10 24 39

Chung Bro.

0 1 9

18 23 37

Chung Bro.

1 2 6

5

32 37

Chung

0 1 2

2 4

11

Chung Bro.

1 1 2

6

17 15

Chung Bro.

1 1 7

15 21 27

Chung

1 1 7

3

15 21

Chung Bro.

2 1 5

16 14 51

Chung Bro.

0 1 7

14 23 34

Total 85 90 85 21 43 73 49 91 81 Chung - Chung Juyung, the founder; Bro. - Chung’s third brother. B: Annual changes in the total number of executives Year 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 HECC HMC HHI

84 21 52

86 29 67

99 33 69

102 38 84

90 44 91

102 46 92

89 52 93

85 54 108

na 51 76

86 35 79

101 73 81

The executives selected for the data were based on employment conditions. Only those who were appointed by the shareholders’ meeting. Source: Derived from Maeil Economic Newspaper Co., selective years (1983-1993).

29

Since the early 1980s, however, there have been significant changes in the role of the Group

Planning Office (GPO) in providing support to top management at Hyundai. Its operations

have been extended to encompass long-term managerial policies of the diversified,

conglomerate business at the Group level. The GPO was expanded from 25 employees and a

vice-presidentship to 40 employees and a presidentship between 1982 and in 1990. In the

course of implementing the new growth strategy, its previous public relations and research

functions were transferred to the Keumkang Advertising Agency and Hyundai Research

Institute which had been established in 1983 and 1984 respectively to enhance the provision

of such professional services to the subsidiaries. The remaining functions of the GPO were

upgraded to facilitate the achievement of long-term strategic policies through human

resources and organisation development, financial control of conglomerate businesses and the

analysis of business environments. These upgraded service functions served to support the

central authority of Hyundai’s top management. For example, the GPO has been involved in a

revision and consolidation of collective personnel and labour management policies and

practices at the Group level in close liaison with the personnel and labour sections of the

subsidiaries (Monthly Observer, July 1990: 175-176; HECC, 1982: 627, 766, 786; HHI, 1992:

533; Shin Dong-A, September 1991: 257).

A significant change occurred in the character of general management and of the kinship and

HECC-backed structure of Hyundai top management in the late 1980s. Its kinship structure

had been formed by the enhancement of the managerial positions of the sons of the founder,

while his brothers had separated from Hyundai in the late 1970s and early 1980s. Figure 7

shows changes in the core managerial structure as denoted by changes in the position of the

founder’s sons in these years. As seen in Figure 7, the founder’s sons took over key decision-

making positions in the main subsidiaries of Hyundai from the early 1980s. Their positions

were strengthened with the official retirement by the founder. Chung Juyung, from the Group

chairmanship in 1987. Although Chung’s third brother became Group Chairman in 1987, this

was a short-lived arrangement, with Chung’s second son, Chung Mongku, being appointed

Group Chairman in 1996. In spite of these changes, Hyundai was still subject to indirect

control of Honorary Chairman Chung Juyung, through his kinship hierarchy and the HECC-

backed professional executives.

30

Figure 7 Changes in the managerial structure by type of kinship of Chung Juyung in Hyundai, 1982, 1993

Year 1982 1993 1996 Chung Juyung Group Chairman Honour Chairman 3rd brother Chung Seyung

President of HMC Group Chairman

Chairman of HMC Chung Juyung’s son 1st Mongphil Death 2nd Mongku President Chairman: Motor Service, Iron &

Steel, Precision, Heavy Equipment, Industrial Development

Group Chairman (1996)

3rd Monggun President Chairman: Kuemkang Development, Hanmu Shopping

4th Mongwoo Death Lee Jinho(Son in law) Chairman: Aluminium(1994) 5th Monghun President:

HEI(1983) Chairman: HEI, Merchant, Elevator, Alanbradly, Information Tech.(1994)

6th Mongjun President: HHI(1983)

Advisor: HHI, Research Institute

7th Mongyun Vice President President: Marine & Fire 8th Mongil Vice President:

KKBC International

Chung Juyung’s brothers 1st Inyung Hanra Group 2nd Sunyung Hyundai Cement Group 5th Sangyung Keumkang, Koreyo Chemical Group Kim Youngju(Brother in law)

Chairman, Korea Flange ]

Source: Derived from Kim Young-ho, 1985: 270, 290-291; Cheon Beom-seong, 1984: 436-444; HECC, 1982: 1081; Hyundai Group Public Relations Office, 1994: 80-81, 1; Maeil Economic Newspaper, 7, 9 September 1993; Chosun Ilbo, 17 January 1996.

Table 9 shows the characteristics of the top management structure in Hyundai in 1994. As

seen in Table 9, kinship and HECC were still sources of the top managerial positions in

Hyundai. In spite of a transition from the first generation to the second generation of the

founder’s kin in top management positions, HECC-backed professional executives still held

top managerial positions. However, there seems to have been a decrease in the number of

HECC-backed executive positions since the late 1980s. As seen in Table 9, only 3 per cent of

kinship-based or 43 per cent of HECC-based executives held presidencies. Non-HECC

executives, especially those executives from related companies, were gradually taking over

top executive positions. This implies that there had been a gradual evolution in the second

level of top management away from dominance by HECC-backed executives to those

executives in each of the subsidiaries being promoted to top management positions.

31

Table 9 Character of top managerial structure of Hyundai by number of top executive positions, 1994

Type Type A Total(%) Type B Kinship backed Non-kinship backed HECC

backed Non-HECC backed

Chairman 10(58.8) 7(41.2) 17(100.0) 13(76.4) 4(23.6) President 3( 6.8) 41(93.2) 44(100.0) 19(43.1) 25(56.9) Based on 45 subsidiary companies of Hyundai in 1994. Source: Derived from Hyundai Group Public Relations Office, 1994: 80-81; HECC, 1982: 1081-1082.

CONCLUSION: FAMILY PROPRIETARY AND MANAGERIAL CAPITALISM IN THE KOREAN CHAEBOL So far, the paper has sought to identify and explain three developmental stages of Hyundai

from its inception in the 1940s to that of a large scale conglomerate in the early 1990s. Three

interrelated factors in the transformation of Hyundai have been explored. First, government

support for the chaebol, as part of rapid industrialisation strategies, underpinned and

facilitated the expansion and diversification of Hyundai businesses. Secondly, Hyundai’s

‘one-set’ growth strategy, by which it achieved vertical and horizontal integration of its

businesses in the construction industry (1950s-1960s), heavy and machinery industries

(1970s-early 1980s), and the electronics and service industries (1980s onwards). The ‘one-

set’ strategy was implemented to diversify and expand into various businesses and to

reinforce market competitive advantages obtained from economies of scale and scope.

Thirdly, to maintain the central authority of the family top management, the governing

structure of its businesses was modified over time from informal patriarchal control by the

founder, to a combined hierarchy of patriarchal and managerial control by the founder and his

subordinates, to a transitional character which combined, on succession of the second

generation, the patrimonial and its subordinated managerial hierarchy. These three aspects of

Hyundai’s transformation are simplified in Figure 8, which highlights the main characteristics

distinguishing each developmental stage of Hyundai.

32

Figure 8 Developmental patterns of Hyundai since its inception in 1946 Period 1946-1960s 1970s-Early 1980s 1980s-1990s Political economy

Liberation & war economy Initial industrialisation

Rapid industrialisation in heavy & chemical industries

Transition to less regulated market economy

Growth pattern

Family to industrial economy ‘One-set’ system in construction industry

Monopoly capitalism ‘One-set’ system in heavy & machinery industries

Transition ‘One-set’ system in diverse industries

Growth Structure

Single company Section/department system

Conglomerate structure Division system

Transitional character Small business groups

Managerial pattern

Formalisation of patriarchal control

Development of patriarchal & managerial hierarchy

Development of patrimonial & managerial hierarchy

Given that Hyundai has emerged as Korea’s leading business group or chaebol, it is not

unreasonable to make the assumption given the paucity of detailed case studies, that Hyundai

constitutes the quintessential chaebol, whose historical development provides a more or less

generalisable model of Korean capitalist transformation. Such evidence as is available,

suggests that other chaebol have indeed followed a somewhat similar path of capital

transformation. Most of such research argues that development of large scale monopoly

capitalism in Korea through the chaebol, is largely attributable to the rapid industrialisation

policies of the state, especially since the 1960s34. The main characteristics of the

diversification strategy of the chaebol were, to a greater or lesser degree, similar to the one-

set systems of Hyundai in various businesses. For example, the diversified businesses of

Samsung or Daewoo range from textiles, to domestic electronics, to the automobile and

shipbuilding industries. Furthermore, the central governing system of Hyundai through the

Group Planning Office which supports the strategic decisions of the family top management,

is typically seen in the other chaebol.35 In relation to changes in the dimensions of family

ownership, in 1990 among 49 top chaebol in Korea, the second generation of 21 chaebol

succeeded the managerial control of the founder, while 42 chaebol were still controlled by the

founder’s family members (Monthly Chosun, February 1990).

These points suggest that any account of the historical transformation of the chaebol, besides

addressing the requisite political economy aspects of their development, needs to contain a

detailed microeconomic or firm-level account of their machinations, ie. the visible hand of

management in operation. This includes the dynamic growth strategy and structure of the

34 For the supportive arguments, see Kang, 1990; Kuk, 1988; Amsden, 1989; Jones et al., 1980. 35 Further details of the GPO systems in the Korean chaebol, see Park Hee, 1992.

33

chaebol in conjunction with the state’s economic policies, the dominant role and function of

the founder and his family members, and the increasing importance of the cadre of

professional managers.

The historical developments of Korean capitalism⎯or, at least, those of Hyundai⎯constitute

a unique, distinctive process vis-a-vis western capitalism in which the family business was

transformed into managerial enterprise, and Japanese capitalism, where the family-controlled

zaibatsu gave way to collective capitalism. On the whole, the growth strategy that Hyundai

employed to diversify and expand is somewhat similar to those in many American, European

and Japanese industrial enterprises, as it aimed to achieve economies of scale and scope for

competitive market advantages. In association with development of its large scale and

conglomerate businesses, Hyundai devised the central governing system, GPO, which

enabled top management to centrally control various businesses to obtain the potential

synergy effects, in a manner similar to that of comparable American firms (Chandler, 1982).

Apart from these similarities, there are unique, distinctive features of Korean capitalism. As

mentioned, the role of the state was a significant contributor to the transformation of Korean

capitalism, whereas the role of the state was relatively less critical in the post-World War II

era in more highly developed market economies, especially, the United States and Europe.

With respect to the managerial structure of the chaebol, the founders’ family members are

still able to maintain central control of conglomerate business activities, whereas by

comparison, managerial capitalism is well entrenched in large industrial enterprises in the

United States and Europe. These two modes of capitalist transformation are also significantly

different from Japanese conglomerates which are controlled through the core enterprise.

However, because of the brief history of capitalism and industrialisation of Korea, it is open

to conjecture whether Korean capitalism will continue to be dominated by the chaebol, owned

and controlled by the founder’s family members, or whether there will be a degree of

convergence with the model of managerial capitalism predominant in western countries.

Based on the Hyundai case study, some comments are warranted as to the future directions

and nature of Korean capitalism. Korean firms will proactively act to globalise their

businesses through foreign direct investment. An example of this is Daewoo’s

internationalisation strategy. Globalisation is an imperative for the Korean chaebol, to

34

overcome increasing domestic production costs, intensifying global competition and the

market protection of OECD economies.

Further, the large scale conglomerate structure of the chaebol is likely to be decentralised and

reconfigured to some indeterminate extent as the patrimonial mode of monopoly capitalism

becomes increasingly unwieldy and politically unsustainable. Decentralisation will see a

number of reconfigured smaller business groups being managed by the founder’s sons. Even

so, the sons’ business groups will likely function as satellite groups cooperatively within a

looser version of the ‘one-set’ system to promote their co-joint growth. An example of this

kind of cooperation can be drawn from those companies of Chung’s brothers which formally

separated from the Hyundai chaebol in the late 1970s and early 1980s. Finally, professional

managers will play an expanding role in governance of the chaebol, in an increasingly

competitive, globalised business environment, though still subject to contingent managerial

oversight and the dominance of family ownership.

35

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