ASIA PACIFIC JOURNAL OF MANAGEMENT, VOL.

15, 185-203 (1998)

The globalization strategy of

Daewoo Motor Company
DONGHO~N OH, CH~NG Jti CHM AKD EIXENE CHOI

This paper aims to add to the existing body of literature on multinational

enterprise (MNE) by addressing the dynamic aspect of emerging market MNEs.
Emerging market MNEs can follow a non-sequential and non-linear interna-
tionalization process. The paper presents the globalization strategy of Daewoo
Motor Company as a case study.

1. INTRODUCTION

The extant research in international business and multinational enterprises (MNEs) pio-
neered by those such as Dunning (1977, 1993), Buckley and Casson (1976, 1985), and
Caves (1982) have mainly based their explanations of the behavior of MNEs originating
from developed countries or mature economies, namely, the United States and Western
Europe, on the rationalist paradigm of neoclassical economics. Works on emerging market
MNEs by Vernon (1966, 1974, 1979), Wells (1977), La11 (1983), and Tolentino (1993)
largely follow the rationalist paradigm of the earlier work on MNEs by arguing that
internationalization of Third World MNEs is a cumulative development process. The
problem in such approach in analysing today’s emerging country MNEs is that their
behavior does not always conform to the rationalist assumption because of differences in
a home market institutional environment and a highly competitive global business envi-
ronment. In other words, we can observe a new pattern of international expansion by them
due to the compelling need to quickly build up competitive advantages and internation-
alize at the same time.
Our case study on the globalisaton of Daewoo Motor Company (DMC) shows that
an emerging market MNE can compete effectively in the global market in a mature
industry (automobile) by combining its existing resources from its various business units,
and at the same time, pursuing globalization by successively penetrating foreign markets
and acquiring foreign resources. It is positioning itself in a niche market where it can
compete effectively with entrenched competitors. Contrary to the cumulative internation-
alization process advocated by earlier writers, today’s emerging market MNEs such as
DMC, Ispat International of India and Acer (Li 1997) of Taiwan simultaneously pursue
technological build up and internationalization to compete in mature markets of advanced
industrial countries.

CCC 0217.4561/981020185-19
0 1798 BY JOHN WILEY & SONS (ASIA) LTD
186 Il. OH, (3. J, CtlOl AND II. LHOI

In the following sections, we will critically examine extant theories of the MNE and
their relevance in explaining the internationalization process of emerging market MNEs
in a highly globalized and competitive environment. In doing so, we would like to add
to the existing body of knowledge by taking the view that emerging market MNEs need
to stretch and leverage their resources to compete effectively in the global market. The
case study following the discussions shows how DMC, an emerging market MNE, effec-
tively competes in a mature global market, in this case automobile, and at the same time,
quickly build-up competitive advantage by purchasing overseas facilities and investing in
greenfield production sites.

2. INTERNATIONALIZATION OF EMERGING MARKET MNES

Extant discussions on Third World MNEs provide limited explanations for the competi-
tive behavior of emerging market MNEs who compete in the global market against
established MNEs of more advanced industrial countries. In a highly dynamic and com-
petitive global environment, emerging market MNEs can no longer be confined to their
particular regional markets with their activities confined to suit regional needs. For many
of them, the cumulative development process has no longer become a viable option for
competition. Instead, they are increasingly coming under pressure to simultaneously build
a competitive advantage and expand overseas.
Discussions on internationalization have centered on the theme of exerting a firm’s
market power overseas (La11 1983). Although the sources of such market power can be
varied, they can be largely divided into two types: one originating from marketing capa-
bilities and the other from technological capabilities. Hymer (1976) and others (Kindleberger
1969; Newfarmer 1985; Cowling and Sugden 1987) argue that international production
is largely due to monopolistic or oligopolistic advantages of firms derived from having
proprietary technologies or marketing capabilities. On the other hand, Rugman (1980)
and Buckley and Casson (1976, 1985) emphasize the internal efficiency of an operating
firm’s specific advantages. Dunning (1977) integrates the two schools and argues that
internationalization is determined by the different configurations of location, ownership,
and internalization advantages.
Theories of Third World MNEs have largely followed a similar kind of reasoning.
Scholars have tried to explain why Third World MNEs, despite their lack of market
power, internationalize. The main emphasis given in various discussions on the interna-
tionalization of Third World MNEs has been on the cumulative developmental process
of technological acquisition and international expansion. Hence, Vernon (1966, 1974,
1979) and Wells (1977) use the product-life-cycle model to argue that MNEs expand
from more industrialized to less industrialized countries, leaving very little scope for
innovation for the MNEs in less industrialized countries. La11 (1983) refutes such claims
by arguing that a significant amount of localized innovation can take place in Third
World countries depending on the conditions of production factors and local market
 THE GLOBALItillON STR.4TtGY OF DAEWOO MOTOR COMPANY 187

needs. Dunning (1986) and Tolentino (1993) argue that Third World MNEs follow an
investment development cycle where the quality of their overseas expansion depends on
the development stage of their respective home countries. One common feature in the
above discussion is that internationalization is a cumulative process where firms expand
overseas after obtaining some form of market power based on superior technological and/
or marketing capabilities.
It is important to note that the current global business environment is increasingly
becoming less tolerant to cumulative processes in technological development and interna-
tionalization. In &act, the major trend is to establish a f&-reaching global presence in
almost all industry sectors, from financial services to automobiles and pharmaceuticals.
Hence, a common theme running through many of the recent mergers and acquisitions
is to build a large enough organization to compete effectively in the global market
(Emno~~~irt 1998b). The global environment, in other words, has become more hostile to
developing country MNEs. Thus, it is questionable whether the cumulative process is still
a viable option to many of them when they can no longer expect an environment which
tolerates uninhibited localized operations.
Also, technology is becoming widely available. Although there are areas that devel-
oped country MNEs closely guard and protect their intellectual property rights, secondary
technologies are becoming widely available to emerging market MNEs who appropriate,
adapt, and transform them to meet their requirements. Moreover, developed country
MNEs are trying to reap the highest return from their R&D investment by licensing old
technologies to firms in emerging markets (Kim 1997). Developing country MNEs can
seize such opportunities and appropriate technologies that not only suit their local market
needs, but also those of global markets by positioning themselves in niche area-s.
Hence, developing country MNEs need to adopt innovative international expansion
strategies. For instance, Ispat International, an Indian steel making firm, has become one
of the largest steel companies in the world by acquiring failing state-owned steel mills
around the world and restructuring them to improve their operations. Its core technology
lies in using the minimill process. It ha heavily invested in the underlying technology
of direct-reduce iron (DRI) which is not proprietary technology, but still hard to copy, and
became the leader in this field, thus making it possible to successfully support its minimill
operations in various locations around the world. It is the number one producer of direct
reduced iron which allows for cheaper steel production compared to the more conventional
method which uses impure scrap iron (BllsinesszLFek 1996; Economist 1998a).
Such a globalization strategy cannot be adequately explained using the Third
World MNE theory, not to mention MNE theories pertaining to developed coun-
tries. Instead, a resource based view of the firm (Wernerfelt 1984) provides a useful
insight in understanding the expansion strategies of some of the emerging market
MNEs. A resource-based view of the firm regards the firm as a bundle of tangible
and intangible resources. The genesis of such thought stems from the realization of
the limitations of neoclassical economics which regards firms as being homogeneous
188 0. OH, C. J, CHOI AND E. CHOI

entities. Instead, the resource-based view argues that firms are heterogeneous, and
therefore, compete based on their unique pool of resources. Competitive advantage,
therefore, is determined by how firms build up their core resources and extend and
leverage them to compete effectively in the global market.
The strategic implications of firm resources become more evident in a dynamic
environment when considering the international expansion strategy of MNEs from the
resource-based view perspective. It no longer becomes viable to cumulatively expand nor
try to fit resource capabilities with external market opportunities. As Hamel and Prahalad
(1993) argue, firms need to stretch and leverage their resources to obtain maximum
competitive advantage.
Taken from this perspective, it becomes plausible to consider the possibility of
emerging market MNEs to expand abroad and penetrate some of the mature markets in
advanced industrial countries. The strategic implication of the present case study lies in
the fact that a developing country MNE has entered and succeeded in penetrating a
mature automobile market. It has also simultaneously built up a strong presence in
emerging markets, thereby, positioning itself in a niche market at an early stage where
competition is likely to be most intensive in the future.

3. THE DAEWOO GROUP

Chaebuls are the dominant form of business organizations in Korea. They are Korea’s
answer to MNEs in more advanced industrial countries. Their growth have been largely
promoted by past successive governments in order to overcome lack of technological and
marketing capabilities by building large diversified conglomerates (Kang 1989). To im-
plement the export-led growth policy, the government targeted key industry segments for
the chaebolx to enter and financed the projects by providing access to preferential credits
(Song 1994). The rbuebols obliged and provided lifetime employment to workers in return
for ownership protection. The chaehols acquired key technologies from firms in developed
countries through licensing and joint ventures and at the same time invested in their own
research and development. They have been largely shielded from foreign competition in
the domestic market by government legislation which restricted certain imported goods.
After nearly three decades of development, the rhaehols have become the largest
business organizations in Korea. The top four account for nearly half of Korea’s total export
and 80% of gross domestic product. Each one is engaged in a number of industry
segments such as electronics, construction, shipbuilding, and automobiles. Between the
largest four chaebofs, they own more than six hundred subsidiaries engaged in various lines
of business (Ryu 1996). As a result, Korea has achieved a significant status in key indus-
tries in the global market (Table 1).
The domestic and international environments that have been favorable to cba&ohols
have begun to change since the mid-1980s. The changing economic and political envi-
ronment in Korea has exposed some of their weaknesses. Labour costs rose to such a level
 THE GLOBALIZATION STRATEGY OF DAEWOO MOTOR COMPANY 189

Table 1 Korean industries: 1993 production performance

Industry Global ranking Share of global production (77)

Electronics 6 5.2
Morors 6 4.3
Steel 6 4.6
Petrochemicals 5 4.0
Shipbuilding 1 39.0
Textiles 5 4.7

Source: Fmancial Times, September 16, 1996, p. 26

that chat& could no longer rely on cheap domestic wages to compete in the international
market. The government’s role began to change from promoter of industries to regulator
and rule-setter because of the increasing complexity of the economy and society (Cho
1992). At the same time, Korean firms were coming under increased pressure from
competitors in Southeast Asia and China.
The cbaebols responded by restructuring their businesses and expanding overseas.
They have divested unprofitable or unrelated businesses to their core activities. They have
also tried to establish themselves as producers of quality goods by improving their inter-
national image. Not only did they increase their investment in research and development,
but they have also made foreign acquisitions in order to gain access to better technology
and markets. Samsung acquired AST Research in the United States and LG, a share of
Zenith to acquire HDTV technology. Hyundai bought a non-memory chip maker in
California (Fmtzm 1994).
Along with Samsung, Hyundai, and LG, the Daewoo Group ranks amongst the
largest four rbaebols in Korea with a combined sales of US$60 billion and two hundred
thousand employees, half of them overseas (Ecanomi.rt 1997). Chairman Kim Woo-Choong
and a handful of his friends started Daewoo in 1967 with an initial capital of US$B,OOO
as a small trading company mainly exporting textiles and apparels. From its initial
turnover of US$600,000 in the first year, it has grown to become a highly diversified
conglomerate ranking within the top fifty of Fortune 500 in terms of turnover. Some of
its major business interests include shipbuilding, financial services, consumer electronics,
heavy equipment, construction, and car manufacturing. There are three qualities about the
Group that distinguish it from the others: strong leadership exerted by the founding and
current chairman Kim Woo-Choong, the ability to make successful turnarounds by
acquiring firms in financial distress, and aggressive overseas expansion, particularly in
emerging markets.
Amongst others, the relentless drive for success and the ambition of the founding
chairman were the key factors behind the rapid growth of the Group. He is the embodi-
ment of the Group’s motto, Creativity, Challenge, and Sacrifice and stresses the impor-
tance of managerial awareness and leading by setting examples for others to follow. When
190 U. OH, C. J. CHOI AND E. CHOI

Daewoo’s shipbuilding unit was in dire financial distress in the mid-1980s, he went to
live in the shipyard to direct operational changes. His current and perhaps last ambition
is to make Daewoo a leading company in the automobile industry. For this purpose, he
has relinquished much of the managerial responsibilities to his colleagues and decided to
flllly concentrate on the automobile project.
Daewoo’s success in businesses such as shipbuilding, consumer electronics, and
automobiles was ba$ed upon high risk-taking policies and unusual approaches to solving
problems. Two incidents exemplify a typical Daewoo style of management: the turnaround
of its shipbuilding business, and its strategy in the consumer electronics business.
By 1993, South Korea surpassed Japan by becoming the world’s largest shipbuilder.
The once notorious Okpo shipyard is largely responsible for this phenomenal success. Two
decades ago the South Korean government forced the Daewoo Group to take over the
highly unprofitable shipyard. South Korea had been exposed to various economic crises
such as double digit inflation induced by two oil shocks and the assassination of President
Park Chung Hee in 1979 which led to further economic destabilization of the country.
In the absence of orders for new ships to be built, Kim Woo-Choong pursued an unusual
path towards re-establishing a full order book for his newly acquired company; he clinched
a deal with a Norwegian customer to build a chemical tanker at no cost. Moreover, he
granted the customer the right to refuse to take delivery of the vessel if the quality was
unsati&ctory. The deal created a showcase for the technological excellence of the Okpo
shipyard. Daewoo’s strategy attracted further customers, and by 1982, the shipyard had
an order book for twelve vessels worth a total of US$570 million (E'ronovzist 1994).
But, the profit margin did not improve due to the ongoing recession in the shipping
industry. More drastic measures were called for, because by the late 198Os, the Daewoo
Shipbuilding & H eavy Machinery (DSHM), as it was then called, was close to total
collapse due to liquidity problems of one of its major customers. Moreover, the crisis
started to threaten Daewoo’s other subsidiaries. Worried about the reputation of the
company, the chairman worked out a rescue plan with the government which promised
to mediate the financing of restructuring if the plan was viable. The risks were huge for
both sides. If the restructuring plan failed! the shipyard would have become a huge chunk
of concrete without much use for anything else.
The turnaround exhibits some of the typical South Korean management patterns
such as unquestioned authority of the top management and the loyalty of its employees
that (Lee 1989) have been the fimdamental success factors of the Okpo turnaround. The
change is largely based on generic techniques such as employee empowerment, downsizing,
and delayering antique, bureaucratic structures. However, the Korean &a&n/ also realized
the value attached to more traditional influences such as Confucian ideas based on self-
discipline, family spirit and harmony.
The government backed restructuring plan was accompanied with a new approach
to management, one which rested on consensus and co-operation. The chairman’s decision
to live at the shipyard for eighteen months underpinned his will to bring about change
 THE GLOBALIZATION STRNEGY OF UAEW’OO MOTOR COMPANY 191

in the managerial practices of the company by sending a message to the workforce that
even the most senior executives were committed to saving the company.
The path away from conflict and coercion towards co-operation and consensus was
achieved using three means. Firstly, Daewoo initiated intensive training in small groups
aimed at increasing team play and interaction, therefore making the participants aware of
their technological potential and skills. Secondly, Daewoo set up family training classes,
based on the premises that an ideal family setting is essential for a harmonic work
environment and the performance of an individual. Lastly, Daewoo arranged visits to the
most efficient Japanese plants with the objective for workers to assess their skills compared
to those of their Japanese counterparts, and come up with the necessary improvements.
In addition to its ‘soft reengineering’ efforts, the DSHM also radically changed the
way its production processes were organized: the bottleneck of the shipyard, the giant dry-
dock, which has to be flooded for each finished ship to float out, was replaced by new,
less intensive dry-dock production processes. The major change is a paradigm shift in the
way ships have traditionally been built. Instead of building major parts of the ship inside
the dry-dock, major components are now being pre-assembled in specialist high-precision
assembly areas. This new innovative ‘top down’ shipbuilding systems allowed DSHM to
build ships much cheaper and in shorter periods of time.
The cost effectiveness coupled with significantly decreased lead times has won
DSHM the largest number of new orders of any shipyard in the world (EL-onomirt
1994).
Moreover, Daewoo has successfully spread its expertise across a range of products, particu-
larly in the areas of more efficient supertankers, requiring special safety measures (i.e.,
double hulls to prevent oil spills).
The heavy backlog of orders coupled with the average age of most ships, which have
been built before the shipping recession, continue to sustain DSHM’s profitability for at
least another decade. In the meantime the effects of new safety regulations and further
technological advances has widened the DSHM’s technological lead with its competitors.
In the consumer electronics business, Daewoo Electronics Corporation successfully
transformed itself from labour intensive to capital intensive, high-technology, state-of-the-
art consumer electronics firm. During the process, the firm has managed to establish a new
market for its low priced and very simple to operate consumer electronics goods through-
out the world. The company betted on the idea that offering high-technology but com-
plicated consumer electronic products would not attract new customers and keep existing
ones. According to the Daewoo philosophy, which is largely driven by Asia’s constant
innovative processes, b&c products such as TVs and VCRs can experience improvements
by adding better sound and graphics quality to it.
The legacy of Daewoo’s poor management, weak marketing and inferior quality as
been overcome after only two years. The back to basics strategy, based on creating value
for customers by concentrating on core competencies, began to pay off. As a result Daewoo
Electronics is in the midst of a stunning turnaround by increasing its market share at
home and diversifying into developing markets abroad.
192 0. OH, C. J. CHOI ANT2 E. CL101

Daewoo Electronics, in contrast to high-price electronics giants like Sony, Philips,

and Matsushita, focuses on maintaining a niche in the low end market of consumer
electronics goods. Daewoo believes that it can create more value for customers by keeping
products simple while emphasising product quality.
Its aggressive management style and strong leadership have been behind the rapid
overseas expansion. Its decision-making style reflects the corporate governance and man-
agement style. Daewoo is still under the founding chairman Kim Woo-Choong’s influ-
ence. Its decision-making process is highly centralized. Despite the recent report on
decentralizing the decision-making process, Kim still makes all the major investment
decisions. Such management style is reflected in the recent foreign investment activities
where multimillion dollar contracts are made within an hour with a hand shake. The
chairman pursues the grand strategy and the details of investment projects are hammered
out by his professional managers.
Daewoo’s strategy is to establish a strong foothold in major emerging markets. It
is the largest investor in Vietnam with a planned investment of US$l.2 billion. It has also
acquired various automobile plants or automobile related facilities in Eastern Europe.
Although Daewoo has targeted the low end market for consumer electronics goods, the
company plans to invest heavily in overseas markets to gain market share. The fierce
competition in the Asian market from Japanese transplants and local competitors has led
Daewoo to set up overseas production sites in countries such as Uzbekistan, Burma,
Vietnam, Poland, Hungary, the Czech Republic and other emerging markets. There are
two strategic implications to Daewoo’s investments in emerging markets. First, Daewoo
can sustain a competitive cost advantage by relocating the various production sites to new
emerging markets. Second, these outsourcing undertakings, at the same time, create new
markets for Daewoo’s low cost products. Thus, the company is not only benefiting from
short run low wages, but also from the potential consumer market growth these countries
offer. Daewoo is also trying to overcome its low brand recognition by setting up white
goods production facilities in emerging markets as well. To date, Daewoo’s sales in elec-
tronics relied heavily on OEM contracts. Such a strategy has become vulnerable as Korea
has started to move away from being a low-wage country. The labour movements of the
late 1980s has pushed up wages in Korea so much that it is no longer financially viable
for Korean firms to rely solely on low costs as their competitive advantage.

4. THE GLOBALALIZATION STRATEGY OF

DAEWOO MOTOR COMPANY

Although the Korean government had an ambitious plan to build a domestic automobile
industry since the early 196Os, the real spurt for growth came in the beginning of the
1970s when it designated the automobile sector as a strategic export industry and injected
a total of 23 billion won (current exchange tate is approximately LJS$l .OO= 1,300 won)
from 1972 to 1976 to build a domestic supplier network. Until then, the Korean domes-
 THE GLOBALlZATION STRATEGY OF DAEWOO MOTOR COMPANY 191

tic automobile industry consisted of a handful of local assemblers such as Hyundai and
Saehan who relied heavily on foreign manufacturers.
The Daewoo Motor Company (DMC) was established in 1976 when the Daewoo
Group acquired Saehan Motor, a local partner of GM’s. The link with GM was maintained
when Daewoo acquired Saehan. Although DMC was interested in exporting its cars, GM
resisted until 1984 when the two sides agreed to sell DMC’s Le Mans through the GM
dealership network in the US under the Pontiac Le Mans brand. DMC, however, was not
entirely happy with the arrangement because of the stringent restrictions of the joint
venture agreements. For instance, it was prohibited from independently seeking overseas
markets and selling in the U.S. under its own brand name. GiM, on the other hand, was
also unhappy, because DMC continued to be a loss maker due to its weak position in
Korea despite healthy U.S. sales. Unable to expand its export market, DMC lost US$200
million on sales of US$2.2 b’ll’1 ion in 1992 due to a small domestic market share, heavy
license fee payments, and inefficient internal management.
Meanwhile, the Korean automobile market showed strong growth from the mid-
1980s until the early 1990s. The total production volume by local manufacturers rose
nearly twofold from 1988 to 1993 to more than 2 million units.’ The domestic sales
volume grew almost three times during the same period to nearly 640,000 units with the
strongest growth coming from cars and jeeps. Export sales showed steady growth during
the same period. DMC trailed behind Hyundai and Kia, the other two Korean car makers
with 18%) market share in 1995 (Financial Timer 1996).
In October 1992, unable to minimize the differences between the two, GM and
DMC decided to break up the joint venture with the Daewoo Group acquiring GM’s 50%
stake for US$170 million. The two companies, however, still collaborate with DMC
supplying components to GM, although they have increasingly become competitors par-
ticularly in Eastern Europe. The break up marked a turning point for DMC. It has enabled
it to independently pursue overseas markets without any restrictions. Moreover, DMC was
able to sell its cars under its own brand name, thereby enhancing its image as a global
player. Such frontier spirit is an integral part of the Daewoo Group’s culture. DMC soon
embarked on an international expansion plan. It aimed to enter mature car markets of the
West as well as establish production sites in emerging markets. Production plants were
set up or acquired in countries such as Uzbekistan, Romania, and China. At the same
time, careful market research was being conducted in mature markets such as the U.K.
and the U.S.
On 30th January, 1997, Kim Tae-gu, Chairman of the Daewoo Motor Company
(DMC) of South Korea announced at a press conference at the Daewoo Worthing Tech-
nical Centre in Worthing, U.K. that his company will aim to produce 2.5 million cars
per year by the year 2000. He unveiled the company’s other ambitious plans such as the

’ Source: Korean Auro Industries Co-operative Association (1988) Statistical Data on Korean Automotwe
Industry, Seoul; Korea Development Bank (1994) Industv m Korea: 1994, Seoul.
 194 D. OH, C. J, CHOI Ah-D F. CHOI

development of XS project to produce a new engine with improved exhaust and fuel
efficiency by 20% and to become one of the ten largest auto makers in the world with
a cumulative investment of US$5 billion from 1997-2002. It is planning to enter the
U.S. market during this period. It also has other ambitious plans to expand into countries
such as Russia and China. If all goes as planned, DMC will become as large as Chrysler
in terms of production volume. The announcement came at an important phase in the
company’s globalization process where it needs to integrate its geographically dispersed
operations. In its dash towards globalization in the automobile industry, it has made a
series of daring moves with a great deal of potential as well as risks to transform itself from
an obscure local player to a formidable global competitor.
DMC’s success in the international market depends on two factors. First, it has to
gain a foothold in major automobile markets such as the U.S. and Western Europe. To
do so, it will have to incur significant investment in marketing, R&D, and design. Second,
it has to seek opportunities in emerging markets such as China, Southeast Asian countries,
Eastern Europe, and Latin America.
Despite the rising intensity of competition and declining profitability within the
automobile industry, DMC has recently embarked on a bold campaign to become one of
the largest automobile producers, simultaneously targeting two very different markets:
mature and emerging. By establishing a foothold in the US. and Western Europe, DMC
aims to make itself known to sophisticated buyers and enhance its prestige. The company
believes that once the consumers in mature markets get a chance to drive its cars, they
will find out that its cars are as safe and efficient as those of established makers.
DIMC, in this sense, expects that the appropriation and improvement of second
generation designs and technology, already tested and proven to be reliable, can provide
cost advantages. On the other hand, by entering the emerging markets in the early stages
of market development, it not only aims to establish a strong brand image to obtain first
mover advantage, but also to acquire existing production facilities as well as to build new
ones to supply cheap but high quality components to its assembly operations in various
locations throughout the world.

GLOBAL COAIPETITION IN THE AUTOAIOBILE INDUSTRY

The world auto industry is becoming more crowded by the emergence of new competitors
from emerging markets. At the same time, the auto market in the West is becoming
increasingly saturated and highly competitive. According to a recent survey of the world
auto industry by the Korea Automobile Industry Association, five of the Korean automo-
bile companies ranked within the top thirty in terms of production volume. These include
Hyundai (13), Kia (17), Daewoo Motor Company (23), Daewoo Heavy Industries (29),
and Asia Motors. General Motors (GM) ranked number one followed by Ford, Toyota,
Volkswagen, and Nissan. The other companies included in the top ten are Peugeot,
Renault, Fiat, and Chrysler. In the case of Daewoo, if the figures for all of its vehicle
 TIIE GLOBALIZATIOK STRATEGY OF DAEWOO hfOTOR COMPAKY 195

production units are combined (Daewoo Motor Company, Daewoo Heavy Industries, and
FSO of Poland), its ranking will be close to that of Kia’s. Despite the growing number
of competitors in the industry, however, the market in the West is expected to grow no
more than 3% or so a year for the rest of the decade. Moreover, some of the European car
makers, unable to compete, pulled out from the U.S. market entirely.
Two important developments in the automobile market could potentially have
significant impact on the industry. First, the bargaining power of cat buying has shifted
from manufacturer to consumers. Selling cats has largely become an issue of brand. New-
comers like Daewoo, hence, need to focus on brand building through better customer
service on top of lower sticker price on comparable models. Second, on the other hand,
new opportunities are expanding in emerging markets. The cat market in the seven
nations of Central Europe, for instance, is expected to grow at a pace of 10% a year for
the next several years. China is considered as a potential gold mine for many auto makers,
although gaining entry into that market is very difficult.

DAEWOO IN THE U.K. AlAliKET

The automobile market in Western Europe has a high concentration of competitors

and is quickly reaching market saturation point. Even the signs of recovery from a
recession in 1995 was of little help. The U.K. market for new passenger cars is
expected to grow no more than 1% for the test of the decade. Moreover, some
European car makers had to tetreat from the U.S. market to concentrate their lim-
ited tesources in their home territories.
Despite adverse circumstances, DMC was to make a big debut in the U.K. market.
After an extensive survey of the U.K. cat market involving 200,000 cat buyers, the
company reached the following conclusions. First, the customers disliked dealers and were
worried about hidden costs, frequent breakdowns, and repair costs. Second, the customers
did not want to be stuck without a car. Third, the existing car buying process which
involves ‘intimate’ involvement of salespersons did not please the car buyers.
Realising that there may be a market opportunity in the distribution channel for
DMC, Kim decided to launch a full assault on the U.K. car market with innovative
advertising, direct sales to customers by shunning existing dealer networks, and compre-
hensive service packages that no other competitors could match. After extensive market
analysis, DMC concluded that it could successfully penetrate the market if they could
achieve the following objectives:
. Value for money with standard quality cars;
l Intensive advertising and public relations;
l Nation-wide service outlets;
l Comprehensive localization (employees and culture).
To achieve these objectives and to capture the attention of potential customers,
DMC set out the following operational strategy:
 196 0. OH, (7. J, CHOI AND L. CHOI

l Direct dealing - Build a wholly-owned distribution network with no middlemen; pass

on dealer margins to customers; totally manage and control the customer interface;
l Hassle free - Use free phone service to provide information on retail locations, price,
and non-commissioned customer advisers who do not haggle or pressurise customers
for a sale;
l Peace of mind - Provide a comprehensive warranty scheme including a three-year
warranty; three-year free parts and labour; three-year comprehensive AA coverage; six-
year anti-corrosion warranty; 30-day money back guarantee; and fully inclusive fixed
price;
l Courtesy - Collect the car for servicing and provide a courtesy car, free; provide pleasant
staff and comfortable showrooms.
In 1994, Daewoo Cars U.K. Ltd. was established in Rickmansworth, Hertfordshire
as a subsidiary of Daewoo Corp., the Group’s trading arm. The location was chosen for
its easy access to motorways, rail networks, and proximity to Heathrow Airport. Another
reason was to stay close to Nissan headquarters which is also situated not far from Daewoo
U.K. The company initially aimed to invest &150 million and hire 2,000 employees. Its
initial sales target was 20,000 units by the end of 1997.
The staff for the subsidiary were hired away from competitors such as Rover as well
as from non-automotive sectors such as trading. What was most important, however, was
to nurture and sustain a creative and hyperactive spirit. The chances of success in the U.K.
market depended on the ability to do things that no other car companies have ever done.
Kim, the group chairman, simplified the decision-making process by instructing the
managing director of the subsidiary to report directly to him with no other management
layers inbetween. He himself moved his residence to Vienna to stay in touch with DMC’s
European operations and traveled frequently to London. In the U.K. subsidiary, the only
expatriate is the managing director himself. The rest of the managers and staff were locally
hired. They were often the ones who were frustrated by their former employers’ stifling,
bureaucratic culture. Daewoo provided them with an opportunity to be creative, passion-
ate, and devoted.
In 1995, Daewoo made headlines in the U.K. automobile market with its innova-
tive and aggressive marketing. At the forefront of its campaign was the catchy slogan,
‘The biggest car company you’ve never heard of’. Whilst emphasizing value for money,
it initially focused on the consumer market segment with two four cylinder models, Nexia
and Espero with added benefits such as:
l Free delivery;
l Free number plates;
l 12-month road license;
l Full tank of fuel;
l Three-year/bO,OOO mile comprehensive warranty;
l Three-year free servicing including parts and labor;
l Three-year comprehensive AA cover;
 THE GLQBALIZATION STRATEGY OF DAEWOO MOTOR COMPANY 197

l 30-day peace of mind (exchange or refund);

l Mobile phone;
l Security registration;
l Delivery and collection of cars for servicing;
l Provision of replacement cars during servicing.
In the first year, DMC exceeded its initial sales target by selling over 13,000 units
(Table 2). It has equalled or performed better than some of the smaller Japanese competi-
tors such as Mitsubishi and Suzuki, although it lagged far behind market leaders such as
GM-Vauxhall and Rover. But, the result was one of the most successful new models entry
in the history of British motoring.
Daewoo’s marketing activity has been focused on bypassing the middleman as
shown in see Figure 1, thus lowering and standardizing the price. It directly operates the
showrooms, Daewoo Motor Shows, and distribution centres, Daewoo Car Centres. Daewoo
Motor Shows are situated in large out-of-town retail parks such as Savacentres of Sainsbury
along with other superstores. Here, customers can look and touch cars, test drive them,
and try the interactive multimedia screens which provide detailed information on the
products and services. Currently there are six such facilities throughout the U.K. with
twenty more to be established within 19961999. Daewoo Car Centtes are service and
distribution facilities for new and used cars. There are 30 such centers operating in the
U.K. In addition, Daewoo allied with Halfords and established Daewoo Support centres
to provide after sales services and routine services, sell parts, handle sales enquiries, and
carry out other maintenance services. There were 136 such centres by the end of 1995.

Table 2 Registrations of new cars in the U.K. by selected manufacturers

Manufacturer Year co dare (December)

1995 9E 1994 %
Audi 25,555 1.31 22,978 1.20
BMW 55,034 2.83 45,574 2.38
Daewoo 13,169 0.68 0 0.00
GM-Vauxhall 294,131 15.12 310.619 16.25
Honda 45,772 2.35 38,187 2.00
Hyundai 13,948 0.72 12,247 0.64
Mercedes Benz 32,694 1.68 29,186 1.53
Mitsubishi 10,823 0.56 9,227 0.48
Nissan 91,972 4.73 91,955 4.81
PeugeotiTalbot 143,321 7.37 146,5 5 1 7.67
Renault 120,485 6.19 112,663 5.90
Rover Group 240,007 12.34 245,240 12.81
Suzuki 13,817 0.71 10,380 0.54
Toyota 54,384 2.80 5 1,939 2.72
VW 81,656 4.20 74,548 3.90
Volvo 39,654 2.04 41,599 2.18

Source: Society for Motor Manufacturers and Traders Limited (1996), unpublished document.
 198 1). OH, C. J. CHOI AND E. CHOI

DAEWOO SUPPORT
CENTRES (I IALFORDS)

Fig. 1 The marketing structure of Daewoo U.K.

In April, 1995, to overcome its brand obscurity, Daewoo offered a free phone service
to inform consumers about its cars and sales outlets. As a result of such efforts, Daewoo
has received a total of 190,269 calls in the first four months, a number far greater than
its initial projection of 3,360 calls. By April 1996, total calls reached 289,793. Of these,
there were 163,636 requests for literature. By this time, Daewoo sold 18,000 cars. Using
the free phone service was important for Daewoo to understand the market, because it did
not have the traditional information channel where middlemen such as dealers would
inform the car company of market trends and consumer buying behaviour. To bring home
the message, Daewoo made its TV advertisements as simple as possible so that the viewers
could easily remember the toll free number.

ENTRY INTO EllIERGING AMRKETS

Traditionally, in Daewoo’s other lines of business, the Group has pursued opportunities in
emerging markets and developing countries. This was based on the calculation that it will
prosper along with the growth of these countries once their economic development takes
off. Daewoo, along with other Korean conglomerates, had an advantage in entering these
markets compared to competitors from mature markets, because they themselves are from
an emerging market, hence, understand their business systems and practices. Thus, in
regions such as Eastern Europe where mature market multinationals have shunned invest-
ing due to political, economic, and institutional volatility, Korean conglomerates have
invested heavily during the past several years.
Poland is the largest economy and has the largest car market in Central Europe. In
1994 alone, 370,000 passenger cars were sold. Amongst these, 200,000 units were locally
made with the rest imported. About 49% of Polish households own a car. Fiat is the
largest car maker in the country with 51% market share. Its plant at Bielsko Biala in the
south makes Punto and Bravo models.
 THE tiLOBALIZATION STRATEGY OF DAEW’OO MOTOR COMPX0 199

DMC has become the second largest car maker in Poland overnight by acquiring
FS Osobowych (FSO). FSO and the Polish government were seeking a foreign acquirer for
the troubled, outdated company. They initially wooed GM whose European subsidiary,
Opel, already had a small joint venture with the company assembling Astra for the local
market. GM, however, insisted on laying off two-thirds of the workers as a condition for
acquiring the company. Besides, it was interested only in a part of the firm rather than
the whole. FSO officials and the Polish government could not approve of such a deal.
Despite five years of negotiations, both sides could not reach an agreement.
On the contrary, when the FSO officials approached Kim Woo-Choong in Vienna,
a deal was struck in less than fifteen minutes. He not only pledged that he will not lay
off any of the 2 1,000 workers for three years, but also promised a further investment of
US$I. 1 billion to bolster the production level to 220,000 units by the year 2001. When
the deal was finalised, the ownership of the company was split amongst DlMC (70%), FSO
employees (15%#), and the Polish government (15%). The difference in the approach to
negotiation, in his own words, were ‘that Daewoo sees opportunities by thinking in terms
of growth whereas many Western firms tend to take a static view’ (Fort~dfze 1996).
When the announcement was made, the world was struck by the bold move
of DMC. Many wondered whether Kim, known for his Midas touch, would be able
to pull this one off. Moreover, U.S. auto makers were determined not to repeat the
mistakes they had made with the Japanese twenty years ago. GM took LIP the
challenge by building a greenfield site for USJ304 million producing 100,000 cars
a year to come on stream in 1998.
Despite the scepticism from many auto industry observers, DMC has a few advan-
tages that can be vital in rejuvenating its recent acquisitions. The Daewoo Group’s pri-
mary strategy for growth in Korea has been to acquire financially distressed companies and
turn them around. In particular, it is well experienced in boosting employee morale. For
instance,in Poland, Daewoo acquired FSL, a former stated owned truck company. There
were no computerized inventory control systems, and moulding was still done by hand.
The first investment DMC made in the factory was to spruce up dingy locker rmms and
canteens. Additionally, hundreds of Polish workers were sent to DMC factories in Korea
for training. The company is trying to instil confidence in them that they too can build
world-class cars.
In the process of DMC’s global expansion, Kim Woo-Choong has played a crucial
role in devising the overall strategy and game plan. He is highly motivated and a canny
strategist who runs his business autocratically. He is a skilful negotiator and a master of
the politics of trade and investment. For instance, he managed to obtain tax concessions
and duty-free privileges in Romania for bringing in components from Korea to assemble
cars. He also successfully persuaded the Uzbekistan government to put half of the capital
to form a US$658 million joint venture. The president of Uzbekistan even appeared in
a Daewoo car billboard advertisement.
200 D. OH, C. J, CHOI AND E. CHOI

The chairman’s creative mind was already full of operational strategies for FSO even
before the ink had dried on the agreement. He was not intimidated by antiquated factories
that most of the established auto makers shunned from owning. Instead of phasing out
the FSO’s outdated Polonez model, he ordered it to be completely revamped and increased
the production volume fivefold to 120,000 cars annually to sell in Third World countries.
GM, on the other hand, was not able to acquire FSO despite five years of negotiations,
because it did not see much value in owning it as a whole.
DMC has presence in other emerging markets such as the Czech Republic, Roma-
nia, and India. It also has smaller operations in the Philippines, Vietnam, Indonesia, and
Iran. It plans to make further investments in Libya, Pakistan, Tatarstan, Russia, Latin
America, and China.
DMC’s investment in emerging markets is starting to pay off. DMC is importing
competitively priced components manufactured in its overseas subsidiaries to Korea and
other assembly sites. As a consequence (although it has lost a total of US$460.5 million
from 1992 to 1995), its losses have shrunk from US$190 million in 1991 to about US$12
million in 1995 thanks to rising exports.
As a result of its acquisitions and construction of new plants, DMC now boasts an
annual production capacity of over 1.6 million units with one million units produced in
Korea (Duewoo Fart Book, 1996). In particular, as shown in Table 3, its foreign operations
are concentrated in emerging markets. It also has R&D units dispersed around the world
with each unit specializing in a one or two fields. For instance, Daewoo Motor Technical
Center in Korea focuses on the development of fine ceramic engines, automotive naviga-
tion systems, and electric vehicles. Its Worthing Technical Centre in Britain specialises in
bodies and chassis. Daewoo Motor Engineering in Germany works on the development
of power trains. From 1996 to 1997, DMC was able to introduce three new models in

Table 3 The overseas operations of Daewoo Motor Company (1996)

Products Canacitv/Year

Rodae Automobile S.A. Romania Cielo 100,000

DCM-Daewoo Motor Ltd. India Cielo 60,000
Vietnam-Daewoo Motor Co. Vietnam Espero, Cielo 5,000
PT. Starsauto Dinamika Indonesia Espero, Cielo 50,000
Tram Daewoo Automotive Mfg. Co. Philippines Espero, Cielo 10,000
Daewoo Motor Poland Corp. Poland Truck 20,000
Daewoo-FSO Motor Corp. Poland Espero, Tic1 125,000
Kerman Motor Co. Iran Cielo 50,000
AVIA as. Czech Rep. Truck 25,000
UZ-Daewoo Auto Company Uzbekistan Cielo, Tico, Damas 200,000
Guilin-Daewoo Bus Co., Ltd. China Bus 5,000

Total 650,000

Source: Dawoo Fact Book (1996)

 TflE GLOBALIZATION STRATEGY OF DAEWOO MOTOR COMPANY 201

Korea, Leganza, Nuhira, and Lanes. These models have been designed using the R&D
research units linked with one another with information technology facilities so that
designers and researchers in different locations could work on the development projects
with minimum loss of time.

5. CONCLUDING REMARKS

This paper attempts to examine and analyze the theoretical significance of the glohaliza-
tion strategy of Daewoo Motor Company, an emerging market MNE. Many of the extant
MNE theories such as Dunning (1977, 1993), Buckley and Casson (1976, 1985), and
Caves (1982) were based on mature market MNEs originating from developed countries,
namely, the United States and Western Europe. Their two main assumptions are linear,
sequential internationalization and market failure in transacting firm specific advantages.
Theories on Third World MNEs (Vernon 1966, 1974, 1979; Wells 1977; La11 1983; and
Tolentino 1993) have largely followed such reasoning and explained that their activities
are locally adapted versions of established MNEs with limited scope of activity and
localised innovation. We proposed that these theories have limited applications when
studying emerging market MNEs under the current global business environment because
of the increasing competitive pressure.
What has been lacking in the literature is an explanation on the way emerging
market MNEs compete in mature markets. In a highly competitive global market, it no
longer becomes viable for emerging market MNEs to cumulatively internationalize by
expanding in local markets and developing technological capabilities. Instead, they need
to quickly build up competitive advantage through resource stretching and leveraging
(Hamel and Prahalad 1993). Our case study shows how an emerging market MNE in
mature industry can effectively compete in a mature market and at the same time, quickly
build up competitive advantage by purchasing overseas facilities and investing in greenfield
production sites. DMC has successfully penetrated the U.K. car market which was already
saturated with a large number of competitors vying for customers by using innovative
marketing techniques and second generation technology to provide cars with reliable
quality. At the same time, it quickly built up production capacity by expanding into
emerging markets, sometimes with the local government as an investment partner.
Two important theoretical implications with regard to emerging market MNEs can
he drawn from the case study. First, the foreign expansion strategy of DMC reflects the
new pattern of global competition where emerging market MNEs compete in mature
markets of more industrialized countries. Such expansion, however, is not confined to
DMC as others such as Ispat and Acer have shown. In fact, more emerging market MNEs
will attempt to penetrate mature markets as global competition becomes more intensified.
Hence, a new theoretical insight is needed to add to the existing body of knowledge,
Second, emerging market MNEs can acquire resources and build competitive advantage
202 0. OH, C. J, CHOl AND IT. C-HOI

whilst at the same time expanding overseas. In particular, rather than adopting the
cumulative approach of internationalizing after acquiring competitive advantage, emerg-
ing market MNEs need to internationalize whilst gaining competitive advantage through
learning-by-doing. Therefore, they acquire competitive advantage as they gain experience
in the international market. Such a strategy can often follow a punctuated equilibrium
path where a revolutionar)l change is followed by a period of consolidation and stability
(Pananon and Zeithaml 1977). Hence, the internationalization process of emerging mar-
ket MNEs can be non-sequential or non-linear as their prior learning experience enables
them to accelerate the development process.

ACKNOWLEDGEMENTS

We thank Daewoo U.K. Ltd. for making this research possible and Klueber Lubri-
cation Korea for generous financial support. We also thank Soohee Lee and other
participants at the APJM Conference at the National University of Singapore as well
as anonymous referees for their suggestions and comments. All omissions and errors
are, ot course, our own.

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