International Business

Mr. Verhoeff
Case nine
 
 

Matthew  Schulz   10060332  

Eric  Tandrian   10060340  
DeSean  Jackson   10060367  
Florian  Merkel   10047654  
 
Summary  

The  Korean  automobile  manufacturers  Kia  and  Hyundai  are  struggling  in  making  profits  

because  the  Korean  currency,  the  Won  continually  increases  against  the  Dollar.  This  means  

that,  when  transferred,  each  car  sold  in  the  US  means  less  profit  for  the  Korean  companies.  

In  order  to  prevent  this  phenomenon,  both  Kia  and  Hyundai  are  expanding  into  the  US,  

assembling  both  cars  and  engines  stateside.  

Question  1  

Explain  how  the  rise  in  the  value  of  the  Korean  currency,  the  won,  against  the  dollar  impacts  

upon  the  competitiveness  of  Hyundai  and  Kia’s  exports  to  the  United  States?  

The  rise  in  the  Korean  currency  is  critical  because  both  Kia  and  Hyundai  sell  their  cars  at  a  

very  low  profit  margin.  Both  manufacturers  chose  a  policy  of  quantity  over  quality  in  order  

to  gain  their  profits.  Since  the  cars  were  manufactured  in  Korea  and  then  shipped  to  the  US,  

the  exchange  rate  had  an  impact  on  the  profit.  The  higher  the  value  of  the  dollar  is,  the  

more  profits  can  be  recorded  in  Won.  When  the  value  of  the  Won  rises  (or  the  value  of  the  

dollar  falls,  which  is  essentially  the  same)  the  Korean  companies  have  less  profit  to  record  

in  their  books.  In  order  to  prevent  losses,  the  car  manufacturers  might  have  to  increase  the  

sales  price  on  the  US  market.  It  makes  sense  for  these  companies  to  expand  and  open  

factories  in  the  United  States.  Car  manufacturers  following  a  more  quality  based,  high  profit  

margin  policies  have  more  flexibility  regarding  foreign  currency  fluctuations.    

2  
Question  2  

Hyundai  and  Kia  are  both  expanding  their  presence  in  the  United  States.  How  does  this  hedge  

against  adverse  currency  movements?  What  other  reasons  might  these  companies  have  for  

investing  in  the  United  States?  What  are  the  drawbacks  of  such  a  strategy?  

Expanding  their  presence  in  the  United  States  hedges  against  adverse  currency  movements  

because,  for  the  most  part,  the  dollar  has  remained  fairly  stable  (although  it  has  fallen  

recently).  A  stable  currency  makes  it  easy  to  set  prices,  etc.  because  the  currency  is  

predictable.  Additionally,  setting  up  factories  in  the  market  in  which  the  products  are  sold  

eliminates  the  need  for  currency  conversion.  All  expenses  that  the  factory  encounters  are  

paid  in  dollars,  making  fluctuation  of  the  dollar  irrelevant.  

Investing  in  the  United  States  is  beneficial  because  there  is  a  large  market  to  sell  to,  

especially  in  the  car  market.  Cars  are  so  important  to  the  everyday  life  of  Americans  and  

are  a  necessity;  the  same  cannot  be  said  for  Europe,  and  other  countries  with  developed  

transit  systems.    

A  drawback  of  this  strategy,  as  stated  in  the  case,  is  that  the  dollar  is  falling  in  comparison  

to  the  won,  making  it  difficult  for  these  companies  to  provide  the  low  prices  that  they  have  

in  the  past.  It  is  also  a  gamble  as  there  is  uncertainty  as  to  how  your  brand  will  be  accepted  

in  a  foreign  market  that  already  has  well  established  companies  for  consumers  to  choose  

from.  

3  
Question  3  

If  Hyundai  expects  the  value  of  the  won  to  strengthen  appreciably  against  the  U.S.  Dollar  over  

the  next  decade,  should  it  still  expand  its  presence  in  the  United  States?  

Hyundai  and  Kia  use  a  sales  strategy  that  enables  them  to  sell  many  cars  at  low  prices.  Our  

textbooks  even  state  that  in  some  cases  they  make  as  low  as  3%  per  vehicle.  This  means  

they  rely  on  volume  and  low  production  cost.  When  the  won  started  to  strengthen  against  

the  dollar  in  2006,  Hyundai  and  Kia  started  to  realize  that  although  the  won  was  getting  

stronger,  It  hurt  their  sales.  When  U.S.  sales  were  translated  back  to  the  won,  they  were  not  

making  as  much  profit  as  they  were  before.    

Hyundai  and  Kia  have  two  main  options.  The  first  one  is  to  change  their  sales  strategy  and  

raise  the  prices  per  vehicle.  This  may  cut  sales  down  a  little  bit  but  they  will  be  making  

more  then  3%  per  car.  Hyundai  and  Kia  might  also  cut  back  on  importing  to  the  United  

States  until  the  dollar  gets  stronger.  This  however,  is  very  risky  and  will  cut  back  on  

production  cost  but  also  revenue.  The  best  option  for  them  would  be  to  simply  increase  

prices  per  vehicle  and  change  their  sales  strategy.  

Question  4  

In  2008  the  Korean  won  depreciated  28  percent  against  the  United  States  dollar.  Does  this  

imply  that  Hyundai  and  Kia  were  wrong  to  invest  in  the  United  States?  How  does  this  explain  

the  relative  strength  of  car  sales  from  Hyundai  and  Kia  in  the  U.S.  market  during  early  2009?  

4  
Even  though  the  won  depreciated  28  percent  against  the  United  States  dollar  this  does  not  

necessarily  imply  that  Hyundai  and  Kia  were  wrong  to  invest  in  the  United  States.  Although  

in  2008,  Hyundai  and  Kia’s  profits  went  down  30  percent  in  2008;  their  sales  were  still  

fairly  well  when  considering  the  recession  and  global  auto  industry.  In  terms  of  car  sales  

from  Hyundai  and  Kia  were  relatively  strong  in  the  U.S.  market  during  early  2009.  The  

sales  of  their  small  cars  in  the  United  States  increased.  This  should  prove  something  since  

Hyundai  and  Kia  only  obtained  4.3  percent  of  the  U.S.  car  market  in  2006.  At  this  rate  it  

seems  as  if  Hyundai  and  Kia  are  on  track  to  reach  their  goal  to  obtain  8.6  of  the  U.S.  car  

market  by  2010.  If  this  is  the  case  than  once  again  Hyundai  and  Kia  were  not  wrong  to  

invest  in  the  United  States.  

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