September 19, 2014
By: Denis-Andrei Mesinschi, Esq.
First it was the Hyundai XG350 that made people scoff at Hyundai's gaul at delving into the low-end luxury market. To pundits, auto journalists, and the public alike the maker of the Pony was nothing more -- could be nothing more -- than a low-end producer of cheap import cars. How dare they think they could move up-market? That was in 2001.
Then it was the Genisis. Hyundai's competent and, dare I say, "beautiful" step higher up just seven (7) years later. The two cars couldn't be any more different: the XG350, while lightyears ahead of the Pony, was on par with a lowly Buick in terms of luxury and quality ... the Genisis surprised everyone with interiors far better than those coming out of Detroit or Japan and so close to the Germans.
Hyundai has never been a brand lacking ambition or hubris. Its also not cash-poor nor afraid of being a big flashy. Which is why its of little surprise that Hyundai would perhaps go shopping with its new-found success -- and boy did it go shopping!
Autoblog.com and Businessinsider.com report that Hyundai recently dropped 10.55 TRILLION WON ($10.14 Billion USD) for real estate in Seoul's uber-posh Gangnam district beating out Samsung Electric which was also bidding on the property. The property, purchased from Korea Electric Power is a plot of approximately 19.6 acres and, given Hyundai's development plans, amounts to just a land purchase and is, according to Businessinsider.com the highest price paid for a single piece of property in Korea.
Hyundai purportedly plans to build a new headquarters complex, hotel, and even a themed amusement park. So the shopping spree isn't quite over as the total cost of the project could easily double what it paid for the land itself.
Investors reacted sharply and Autoblog.com reports that the stock-value drop in both Hyundai and sister company Kia Motors amounted to about $8Billion US on the news. News outlets have also been, fairly universally, down on the move most outlets making special note of the fact that the property's 'assessed' value was merely a fraction of the ultimate purchase price. This focus, however, is misplaced as appraisal value means almost nothing in a real estate transaction where there are other interested parties. Indeed, we could only make any real judgements on the wisdom of the price (in terms of whether it was a "good", or "bad", deal for Hyundai) if we knew what Samsung Electric's bid was.
Even if Hyundai grossly overpaid for the property factoring in Samsung's competitive bids, all the panic-selling of Hyundai and Kia stock is foolish. Both Hyundai and Kia are known for being run with a greater sense of spirit rather than cool, calculated, business logic. In fact, this approach - the tendency to shoot first and aim later - has been a great factor in their success (and has also been a reason why the two companies are universally known to be some of the most difficult OEMs to work for, and with).
So what is the purchase really about? Having spent some time working within the Hyundai/Kia Corporate Culture, I suggest this has nothing to do with business in the direct-sense. It has more to do with the self-image of Hyundai and its global network. If you think of this purchase less as a strictly business decision, and start thinking of it as Hyundai buying itself a really nice Armani suit when it's only ever been able to shop at Moore's or TheMen'sWarehouse then you're closer to understanding the impetus. When you're sporting a really nice suit, you feel better about yourself, even if -- to the outside world - its just a suit. Viewed in this perspective -- in the light of the purchase and the planned project being more about boosting Hyundai/Kia's self-esteem then it makes more sense.
What wall street types routinely forget is that the car business is only tangentially about 'business' -- there is, and has always been, an industry driven by passion and ego. The high-points in the history of the automobile have always been punctuated by individuals with massive egos or unwavering passion (and only occasionally did those high points also have some sort of strong business case for them). Every once in a while every great automotive house decides to tie up its accountants and lock them in a broom closet and do something really crazy to either show off to the world or stroke its own ego. Rarely do the projects themselves make any financial sense -- but the afterglow of these projects can follow for years and benefit the companies as a whole. Some recent examples?
- VW Group's phenomenal Veyron the development and production costs of which are still not fully clear and for which VW Group reportedly still loses money for each unit sold;
- Toyota's LF-A -- a ridiculously over-priced and over-engineered vehicle at a completely unjustifiably price and for which the brand's decade-long gestation period vastly outweighed anything recouped in selling the very few models;
- Mercedes-Mclaren's SLR which, when one factors in both development cost and the cost of the divorce from Mclaren lost Daimler millions;
- All the various Formula 1, Lemans, Indy and Cart teams sponsored by manufacturers likewise make little to no sense in a strict dollars-and-cents standpoint.
In these examples there is the root of my one major criticism on the facts that are out there -- while there are plenty of other examples in autodom of chest-thumping ego-stroking most of the most memorable (and which provided long-term benefits to the brand) were related to a vehicle -- a halo car or a racing series.
Hyundai's move is just about portraying an image of corporate greatness not of automotive excellence -- and that's where I feel it missed an opportunity. If Hyundai wanted to get the attention of Gangnam's residents, rather than building an amusement park and office, how about building a car that makes those people want to buy it instead of the Lamborghini their neighbor just bought?
