Hankook Tire’s Growth is Based on Quality

An investment of about 500 million euros (£340 million) into a new tyre factory is a clear statement of the future direction of a company. Hankook’s decision to invest in Central Europe rather than the US, Korea or China shows what an important role the European market plays in Hankook’s future growth and development strategy. The new factory, which will be built in the Hungarian city of Dunaujvaros, not only provides the company with missing production capacity close to important sales markets and cheap but highly-skilled workforce, but also goes far beyond the obvious, Seung Hwa Suh, president of Hankook’s European headquarters in Germany, says in an interview with Tyres & Accessories. There are three keywords that Mr Suh frequently uses to describe Hankook’s strategy for Europe and the rest of the world: quality/innovation, service and brand awareness.

Hankook Tire’s pursuit of an ambitious growth plan is nothing new. Representatives of the Korean tyre company rarely miss an opportunity during shows, exhibitions and meetings to point out their vision – namely to become one of the global top-five tyre makers by 2012 and to have what will then be regarded as a premium brand. Today it has a reputation as a “good quality brand”. The management is aiming to complete the necessary development by hitting the following target: to “create long-term market success by providing superior product quality and industry-leading service for our customers,” says Mr Suh.

The pivotal part of Hankook’s growth strategy is quality. It is not only about the additional 10 million tyres that the company will produce in Hungary (by 2010) and sell on the European markets although this is obviously central if a company wants to grow. It is also about decreasing delivery times, getting to know a market even better as it becomes a Hankook “home market”, and to increase the level of identification between customers, the products they sell and between Hankook and the markets it serves. But one step at a time. The logistics involved in shipping tyres from Far Eastern production is one of the main barriers standing in the way of unrestricted growth in Europe.

Hankook now operates tyre production facilities in two countries with an annual capacity of about 63 million units. It has two factories in Korea (Daejeon: 23 million tyres; Geumsan: 15 million) and another two in China (Jiaxing: 15 million; Jiangsu: 10 million).

Although Hankook also has four regional distribution centres in Europe (UK, Germany, Netherlands, France). However, optimised delivery times can only be achieved when production sites are not exclusively located at the other end of the world, says the president of Hankook’s European headquarters. Delivery times will be greatly shortened when a production site is based in Europe; this equals an increase in supply and service quality, according to the company’s growth strategy. In particular in light of the strongly fluctuating seasonality of many European tyre markets, proximity to its customers is regarded as a necessary prerequisite for any major future growth.

According to Hankook’s European vice-president Byeong-Jin Lee the tyre maker currently exports over 10 million tyres into Europe in order to fulfil OE obligations with car manufacturers such as Volkswagen, Opel, Ford, etc and to meet demand from European replacement markets. Thus, Hankook will continue exporting tyres into Europe even after the new Hungarian factory is producing at full steam in 2010.

At the same time Hankook Tire will retain capacity in Korea and China for the development of other markets outside of Europe. Russia could be a potential market for stronger sales activities – Hankook just recently (May 2006) opened a new distribution subsidiary there. Or maybe Northern America. Thus the Hungarian factory does not only help improve business in Europe. At the same time it causes some relief for the four Asian factories and consequently it can even help achieve the goals of Hankook’s growth strategy in Asia or in North America. However, the tyremaker sees this as a useful side effect, Mr Suh points out, and describes an improved business on the European market as the foremost intention of building the new factory in Hungary. The 500 million euro investment is directed at Europe and the European market first of all and not at its function as a sort of pressure-relief valve for the already existing factories.

Getting to know a market from the inside is of great value, says Seung Hwa Suh, and points out that this is particularly important for the long term success of the company as a whole. Consequently, Hankook will try to work with as many Hungarian managers as possible, even at the top executive level. Furthermore, in order to increase the level of European identification with the company and of the company with the markets it serves, Hankook is going to install more regional distribution centres in Sweden, Spain, Italy, Russia and of course Hungary. At the same time Hankook’s “Masters Program” will be expanded accordingly in a bid to increase the level of identification even further. Right now there are about 1,400 independent tyre dealers across Europe that take part in this partner programme. This programme offers a large number of market support measures to specially appointed tyre dealers. These measures are, for example, local marketing support or special training for sales people and garage staff. According to the European president Mr Suh a Masters Program partner is a “professional ambassador of the Hankook brand”.

In order to get to know a market properly it is also important to have the right products for the market. In this respect a local R&D facility is pivotal. Currently, Hankook Tire has been operating its “Europe Technical Center” in Hanover, Germany, since 1997. This centre will not be relocated to Hungary, Mr Suh confirms. Although it is important to have engineers close to where the factory is, it is also important to have an R&D facility close to where the OE customers and big replacement markets are – in other words Germany.

At the moment there are 40 employees working in the European technical center. They have taken a major part in the development of Hankook’s own run-flat technology HRS. Just recently the tyre manufacturer has launched its first ever run-flat tyre, the winter tyre Icebear W300. Next year Hankook will also launch its summer tyre Ventus S1evo with run-flat capabilities. These high-technology tyres will also be produced in Hungary. Rather than relocating its German research and development facility to Hungary, Hankook will install a second, smaller R&D department together with the factory plus a test track. Both these facilities will closely cooperate in the future.

Tyre manufacturers that have expanded into Eastern or Central Europe often do so through acquisitions. The takeover of any competitor was never an option for Hankook, although it definitely would have been possible with 500 million euros. Although Mr Suh accepts this conclusion, he doesn’t see it as a disadvantage because it falls short of Hankook’s demands in terms of quality and innovation. A “superior and more competitive quality” can only be guaranteed with a production site that does not have to overcome old problems and existing inefficiencies. Consequently, everything but a greenfield factory is regarded as a waste of money and detrimental to the company’s growth strategy.

“The quality of our tyres is the most important thing,” Mr Suh repeats, and point out that this also means that there won’t be any second-rate equipment and machinery installed in Dunaujvaros. It is reasonable to expect that the degree of automation would be higher than in some of Hankook’s other factories. Compared to the Chinese factories the productivity of the new Hungarian tyre factory and its 1,500 workers (by 2010) will be up to twice as good. Compared to the Korean factories the new one will operate on a more workforce-intensive basis. When in Hungary one worker will produce 6,666 tyre per year (in 2010), in Daejeon this works out as 8,073 tyres and in Jiangsu, China 3,168 tyres.

Why Hungary and not Poland?

Answering the question of why Hankook chose Hungary as the location for its first and only tyre factory and not another alternative, managers point out that the Hungary is situated in the centre of Europe. From here tyres can be transported to almost everywhere in the optimum time. However, it is also clear that the Hungarian government offered financial incentives to the manufacturer. According to Hankook, government support equates to 20 per cent of the investment and this has been approved by the European Commission. It is also obvious that significant co-financing has played a major role in the decision process on where to base that new factory. The government in Budapest has been “very prudent”, says Hankook’s European president Mr Suh. Other Eastern European countries also offer grant financial incentives for similar investments. Consequently, it is not a question of taking advantage of competing economies, but rather an ordinary matter of course that any investor tries to benefit from subsidies.

When Hankook first published its plans to invest in Eastern Europe, other countries were on the list of potential locations for the new factory, countries like Slovakia, Poland or the Czech Republic. The well-educated workforce in Hungary was another reason for the decision to invest there rather than somewhere else. Dunaujvaros is also close to Kia’s new car factory and adjacent to Slovakia where one of Hankook’s OE customers has been producing passenger cars for several weeks (initial annual capacity is 200,000) and is also not too far away from Hyundai’s factory in Czech Republic (250,000 cars from 2008).

The city of Dunaujvaros is only 65 kilometres north of Budapest, the Hungarian capital. Next June Hankook will build its first tyre there and will have an initial capacity of 1.3 million passenger car and light truck tyres per year which will be built by about 1,000 workers. In 2008 the capacity of the factory will reach 5 million units, and in 2010 it will be 10 million. All these first phases of construction will be finished in December 2010, explains Byeong-Jin Lee, vice-president at Hankook’s European headquarters. Up till then, 70 per cent of land available on-site will be used for construction, leaving 30 per cent for any future expansion. Right now there are no plans for the time after 2010.

Having said that, Hankook has not ruled out expanding the Hungarian facility even after 2010, Mr Suh tells Tyres & Accessories, and at the same time points out a personal conviction which has proved right often enough in the past: “You improve the quality of your products – quantity will follow accordingly; we are convinced about this!”