Hyundai Part 1: Chung Ju-yung, The Founder

[00:00:09] Morning folks and welcome to today's episode called Hyundai Part 1. Chung Ju-yung, The Founder. And initially I'd intended to do just one episode on Hyundai, focusing on the car business and its current leadership. But the story of Ju-yung, it's just too remarkable to be, I suppose, consigned to a footnote. Because

[00:00:33] this is a guy who, from nothing, built a conglomerate that at its peak in the 90s was one of the biggest companies in the world with revenues of 90 billion dollars, 200,000 employees, operating in everything from semiconductors to cars to shipbuilding to construction to retail outlets. Like you name it,

[00:00:59] they did it. And Ju-yung built it all through military rulers, through wars. This is a cracking story. Enjoy. So Chung Ju-yung was born in 1915 in a small farming village in what's now part of North Korea. And it was under Japanese colonial rule at that time. And his father was a subsistence farmer.

[00:01:23] And as the eldest son, Ju-yung was expected to stay and farm. But he had no interest in being a farmer. He ran away four times between the ages of 16 and 19. One time he secretly sold his father's prize bull and used the money to buy a train ticket to Seoul. He got work on the building sites, but each time his father came and dragged him back to the farm, except for the fourth time in 1934. And this time he got

[00:01:53] a job in Seoul as a delivery boy in a rice store. And within six months, he completely reorganized the business. So when the owner's health began to fail and because his own son was a gambling addict, the owner handed the entire business to Ju-yung on credits. This was 1938 and Ju-yung was only 22 years old. Within a year, the business, it was doing so well that he was able to pay the owner everything he

[00:02:20] owed him. But then in December 1939, it was all taken from him. Literally overnight. Because this is when Japan imposed laws that diverted all agriculture surplus towards their war effort. So with no rice to sell, Ju-yung's company had to close. No compensation. And with what savings he had, he then set up an automotive repair business. This was a growing sector. It didn't need a huge amount of

[00:02:49] money to get into it. And he'd be servicing Japanese military vehicles. So he thought it would give him some protection from the state interventions that had killed the rice business. Now garages in Seoul at that time, they usually took about 10 days to complete a standard vehicle overhaul. Ju-yung's business did it in three days and he charged a premium for the speed. His business took off. Soon he had about

[00:03:15] 70 mechanics working for him. But then in 1943, at the height of the Pacific War, the Japanese administration took his business for the second time. His operation was folded into a Japanese steel plant as part of the wartime consolidation program, leaving him again without a company. But he did walk away with 50,000 yen in savings. That's the equivalent of about $11,000 at that time, which was a significant sum in Korea for

[00:03:44] then. Now also at this time, the Japanese military, they were conscripting Korean workers into forced labor. So Ju-yung, he needed something that would not only protect his money, but also keep his core team of mechanics out of these labor drafts. So he negotiated a subcontracting deal with a Japanese mining company

[00:04:07] to handle ore transportation. And then he bought a fleet of heavy duty cargo trucks and he relocated his entire mechanical team to the mine site. However, by early 1945, Ju-yung, he could see that Japan were going to lose the war. So he sold his subcontracting rights and the truck fleet back to the parent company,

[00:04:31] getting back most of his 50,000 yen. And the timing was pretty perfect because three months later, Japan surrendered and Ju-yung was lucky to have gotten himself and his workers out when he did because the Soviets were the first to enter the province where the mine was located. And they sent all of the staff and management from the mine to those dreaded gulags in Siberia. And this is where they were forced to work 12 hour days of

[00:05:00] you know, backbreaking physical labor on starvation rations of bread and thin soup. Many died. So a lucky break. Now Ju-yung, he returned to Seoul. The South was now under US military administration and the economy was in chaos. There was huge inflation, massive infrastructure damage, Japanese capital and expertise had gone overnight.

[00:05:26] But of course, that vacuum was also an opportunity because land and assets that had been owned by the Japanese were now being sold off by the Americans at very, very good rates. So Ju-yung bought a plot of land, opened up another automotive business, this one called Hyundai Auto Service. It was a vehicle repair shop servicing US military trucks and equipment. And the name Hyundai, it means the modern age or modernity.

[00:05:55] But Ju-yung was always on the lookout for new opportunities. And as a result of the war damage, the US military, they were issuing contracts for civil works, road repair, building construction. And these contracts were worth far more than Ju-yung was making in his auto repair business. So in May 1947, he founded Hyundai civil works company with his younger brother, In-Yung. Now, In-Yung spoke fluent English.

[00:06:25] So he managed to get a job as a translator with the engineering division of the US Army. And that meant he knew about upcoming military construction tenders before they were publicly announced. He also negotiated directly with US officers. So Hyundai civil works became a preferred contractor. But then more unrest followed because on June 25th, 1950, North Korea invaded the South and

[00:06:54] Seoul fell within three days. Ju-yung, his brother and his core technical team, they fled south to Busan. And the company was able to continue operating successfully during the three years of the war because the US military needed Hyundai to build barracks, airstrips, warehouses, all that kind of stuff. And then with the end of the war in 1953, Hyundai was hired for the reconstruction. And I think the

[00:07:21] following two stories from around this time, they best demonstrate how Ju-yung operated, how he managed to you know, solidify his position as the go-to industrialist in South Korea. So the first story is from 1952. And this is when President-elect Eisenhower visited Korea in December to inspect the front lines. As part of that visit, the US military, they wanted Eisenhower to visit the newly established

[00:07:50] UN memorial cemetery in Busan. Now the problem was, the cemetery was this bleak, depressing, frozen patch of mud and fresh graves. And the US military, they wanted the cemetery to look dignified, peaceful and completely green for the incoming president and the international press corps. So the military, they reached out to Korean contractors asking them to lay green grass over

[00:08:16] the entire cemetery. But this was in the middle of a brutal Korean winter. Turf grass was brown and dried up. However, Ju-yung realized that the US military, they didn't actually care about having actual green lawn grass. They just wanted the colour green. So he asked himself what's green in Korea during the dead of

[00:08:39] winter. And the answer was winter barley. Korean farmers planted barley in the late autumn and the shoots stayed this vibrant green during winter. So the day before Eisenhower's visit, Ju-yung rented dozens of flatbed trucks, drove into the countryside, bought winter barley shoots from local farmers and he had

[00:09:02] his workers, plant them manually into the hard frozen graves by hand under headlamps throughout the night. So when Eisenhower and his entourage arrived the next morning, the cemetery was this lush, vibrant green. Now the second story that shows us why Ju-yung became what he became, it comes from 1953,

[00:09:26] when the government awarded Hyundai the contract to rebuild the Goryeong Bridge. I'm sure I'm pronouncing that wrong. So this is 195 meter crossing over the Nakdong River, the critical logistics artery for moving supplies to suppress mountain gorillas. And the build was an extremely difficult project because the river flooded constantly. And financially, the project it could have sunk the company. Because

[00:09:55] you see, Hyundai had to take the project on a fixed cost. But because of the war, there was hyperinflation. So materials and other costs related to the build, they were rising sharply during the two-year construction. And by the time they were mid-project, Ju-yung was spending $2.3 for every dollar the government was paying him. So his brother and the company's accountants, they urged him to default,

[00:10:22] you know, cut your losses, save the firm. But Ju-yung refused. And here's a quote from his autobiography. A business can bounce back even if it goes bankrupt. But once a person loses credibility, that is the absolute end of it. And there's a famous scene from this build. Ju-yung standing knee-deep in freezing mud on the riverbank during a flood, grabbing a wet blueprint and slamming it on the

[00:10:49] hood of a stalled truck, shouting at his engineers that they will finish the bridge or die on site. So he took on high interest private desks to keep the thing funded and he got the bridge finished on time. So as a result, the company, which by this stage it had been renamed Hyundai Engineering and construction, it had grown to become South Korea's number one civil engineering firm. But then in 1961

[00:11:16] everything changed again. I mean Ju-yung survived through so many tumultuous times. So for some context, because of the Korean War, the South Korean economy, it was very dependent on foreign aid. There was a lot of political unrest and many South Koreans were afraid that the communist North, which at that stage was wealthier and more industrialised in the South, that the North might prevail.

[00:11:41] But on May 16th 1961, Major General Park Chung-hee seized power in a military coup. He argued that the country needed discipline, stability and rapid economic development. And for Ju-yung, the coup initially looked like a complete disaster because Park's new military government, they launched an anti-corruption campaign, they targeted businessmen who had prospered

[00:12:07] under the previous administrations. Ju-yung, along with many of the country's leading industrialists, came under investigation. But while Major Park was an authoritarian, he was also pragmatic. He realised that South Korea needed people who knew how to build roads, bridges, factories. So,

[00:12:30] Park forged partnerships with the major businesses. Companies that met government export and industrial targets, they received cheap loans, tax benefits, import licences, protection from competition. And this was the beginning of this state business alliance that would drive South Korea's economic transformation.

[00:12:55] And this state-directed synergy, it created what became known as the Chabals. These massive family-run conglomerates like Hyundai, Samsung, LG. And because Ju-yung had already built a reputation for getting things done on time, Hyundai became one of the regime's most trusted industrial partnerships.

[00:13:19] But it's important to note here that Ju-yung and Park's partnership, it wasn't a buddy-buddy one. It was often tense, it was never equal, but it was enormously effective. And it helped turn one of the poorest countries in the world into this industrial powerhouse. I mean, the projects that followed transformed both Hyundai and South Korea.

[00:13:44] Hyundai helped build the Jiangbu Expressway. Again, I know I'm butchering that. But this was a 428-kilometre road linking Seoul to Busan. The deadline was two and a half years. Ju-yung lived on site, sleeping in his jeep, personally inspecting the work at three in the morning. 77 workers died during construction. And

[00:14:08] against all expectations, in 1970, the highway was completed a year ahead of schedule. As a result, Ju-yung was awarded the country's highest civilian honour. Now, most of us will know Hyundai for their car business. This started in 1967 when Ju-yung founded Hyundai Motor Company in Ulsan. And the reason for it was he was building major expressways and he realised in his own words,

[00:14:33] if roads are the country's veins, cars are the blood running through them. Initially, Hyundai struck a deal with Ford assembling the Ford Cortina. The arrangement was a success and in 1971, Ford and Hyundai, they were in contract negotiations with the aim of, you know, expanding the relationship. Ford wanted Hyundai to continue just assembling. But engineering knowledge, the design capability, the intellectual property, they would all remain

[00:15:01] in the US. And for most business leaders, this would have been fine. But not for Ju-yung. He couldn't accept that Hyundai would remain what he called a technological colony. So he walked away from negotiations and said that Hyundai would build its own car. Now, from the outside, this plan sounded crazy. Because South

[00:15:27] Korea didn't have an automotive industry. There were very few, if any, local parts suppliers. The entire South Korean market only bought about 8,000 cars a year. And here was Ju-yung proposing to build a new factory that would produce 80,000 cars a year. To many analysts, the whole idea just seemed ludicrous. But

[00:15:51] when you realise that Ju-yung's most famous question was, have you even tried it? It's no surprise that he seemed to relish in proving the so-called experts wrong. So he recruited experienced car managers and engineers from the UK. He hired car designers from Isley. He got engine technology from Mitsubishi in Japan. He more or less forced the

[00:16:16] creation of an entire domestic supplier network by sending out Hyundai engineers into Korean companies and teaching them how to manufacture components that had previously been imported. And so what began really as a car project, it became this industrial development project for the entire country. The first car was the

[00:16:39] Hyundai Pony. It was released in 1975. It sold 11,000 in its first year. Within the second year, it was being shipped to South America, Egypt, eventually into Europe. And by 1982, they had sold over 300,000 cars. Then another industry that Ju-yung entered in the early 70s was shipbuilding, even though South Korea had no experience building large commercial ships. And again, most observers thought the idea was crazy.

[00:17:09] Hyundai had never built a shipyard or a ship, but, and I love Ju-yung's reply to this skepticism, this is a quote from him. Don't you know that the person who thinks a job is possible is the one who's going to get it done? Within two years, not only had Ju-yung built the largest shipyard in the world in Olsen, and it still is the largest shipyard in the world. But at the same time that he was building the shipyard,

[00:17:37] he also built two huge oil tankers. This achievement, it stunned the international shipping industry. And that single bet, it helped lay the foundations for what became Hyundai Heavy Industries. Today, it remains the largest shipbuilding company in the world. Like, this is such an achievement. Everything he's doing is such an achievement. And I think people like Ju-yung, like Elon Musk,

[00:18:07] first of all, they have a huge vision and a huge ambition, much, much bigger than most people. In fact, the ambition and vision is so big that most people think that what they're trying to do is crazy stroke impossible. And then they have this single-minded conviction in their abilities. And this is what sets them apart. And I love this. This is another quote from Ju-yung. Conviction creates indomitable efforts. This is the key to miracles.

[00:18:37] So then, in 1983, Ju-yung set up Hyundai Electronic Industries, moving the group into microchips over strong, strong objections from his own executives. And at its height, it became the number one chipmaker in the world. So by this stage, Hyundai was involved in construction, cars, shipbuilding, electronics,

[00:18:59] engineering, infrastructure, and dozens of other businesses and industries that touched every corner of the Korean economy. And you wonder, how did Jung-yung manage all this? Well, he'd be up at 3.30 every morning, reading newspapers and making calls. By 5.30am, his sons were seated in silence at a long

[00:19:23] wooden dining table, waiting to deliver summaries of the various businesses that they managed. Ju-yung would grill them on business operations, lecture them on discipline, and demand almost absolute perfection. He maintained absolute control over his family and his executives, managers whom his targets were shouted at, and sometimes physically struck, as in slapped by Ju-yung. Labor unions were banned.

[00:19:53] And to quote Ju-yung, I will not allow unions until dirt gets into my eyes. Then in 1986, Hyundai entered the US car business with the XL. This was positioned as an affordable budget alternative to domestic and Japanese compact cars. It sold 168,000 units in its first year. That was a record for any foreign car brand's US launch. And Fortune magazine named it as one of the

[00:20:22] best products of the year. However, while Hyundai was prospering, South Korea had been through huge social change and upheaval, beginning with the assassination of Major Park in 1979. Now, the military regime continued under a new leader, but what followed was years of escalating social unrest that ultimately led to what was called the Democratic Revolution in 1987. And this forced South Korea's

[00:20:52] generals to accept democratic reform and direct presidential elections. Now, as a result of these reforms, workers began asking, if Korea was becoming a democracy, why were its factories still run like dictatorships? And they were. Local governance, they were basically subordinate to the Shabals. In Hyundai's factories, security guards enforced compulsory morning exercises, uniform codes,

[00:21:21] on-the-spot haircuts for anyone with hair longer than company standard. So in Hyundai's factories in Ulsan, where they had a massive presence, workers began forming independent unions. Tens of thousands of them walked off the job as Hyundai became the centre of some of the most bitter labour disputes in modern

[00:21:44] Korean history. Long strikes shut down the shipyards and factories, riot police were deployed, there was violent confrontations, hundreds of arrests and fatalities. And so, faced with this unrest, Hyundai management was forced to negotiate and gradually recognise independent unions. And with all of the changes that were happening, Ju Young could see that democratically elected

[00:22:10] governments, they would start to impose less favourable taxes and new regulations on the Shabals. And that power and that favouritism that he enjoyed up to now, that was going to be eroded. So, unsurprisingly, he tried to take control. In 1992, he established the United People's Party and entered the presidential race. But this would turn out to be one of his worst decisions. Because during the

[00:22:40] presidential campaign, Ju Young authorised a wiretapping operation. It was aimed at exposing officials who were allegedly helping the ruling party candidates. Now the tapes seemed to prove his point. But the problem was that instead of focusing on the misconduct revealed in the recordings, voters focused on the methods Ju Young used to obtain the recordings. Because the wiretapping, it was viewed as a return to

[00:23:08] the dark arts of South Korea's authoritarian era. So as a result, Ju Young only finished third. And the new president launched a tax probe against Ju Young, resulting in a $108 million fine. And he was also convicted of embezzling $80 million from Hyundai to fund the campaign. He was sentenced to three years in prison. But he was 77 at this stage. And he didn't go to jail. He was eventually granted a special

[00:23:37] presidential pardon a few years later. Now by this stage, Hyundai had become this sprawling conglomers with over 80 companies. And while it was hugely successful, as I said, reaching revenues of about $90 billion at its peak, it also had a huge amount of debt, about $50 billion. This is because banks lent freely, because everyone assumed the state would step in if things went wrong. And nobody

[00:24:03] really thought things would go wrong. For years, that assumption seemed reasonable. South Korea's economy, it kept growing. Credit was plentiful. And Hyundai's expansion, it seemed unstoppable. But financial systems depend on one thing, confidence. And in 1997, Thailand broke that confidence. So for context, for years, Thailand had borrowed heavily. Investors were increasingly questioning whether

[00:24:32] its economic boom was built on solid foundations. And when the Thai government was forced to abandon its fixed exchange rate and devalue its currency, the BAT, panic started to spread across Asia. Investors suddenly started asking the same question about every country in the region. What if the same thing happens there? Money that had flowed into the Asian economy now stopped. Companies that had

[00:25:01] borrowed heavily suddenly found themselves in trouble. And South Korea, it was especially exposed because its largest conglomerates, they had built their empires on debt. And so when the credit dried up, the entire system seized up and the economy went into a deep, deep recession. The country ultimately needed an emergency bailout from the IMF. As a result of all this, the government forced huge restructuring of

[00:25:28] the Shabals. Hyundai, it was required to separate many of its businesses into independent corporate entities and reduce this web of cross-ownership that had tied them together. The government also ordered Shabals to abandon the strategy of competing in every conceivable industry. Instead, each group was instructed to focus on a small number of core businesses. And for Hyundai,

[00:25:54] that meant selling off dozens of its operations from finance to logistics to retail to petrochemicals and other sectors. But perhaps the most controversial reform, and it was tied into what I just mentioned there, was a series of compulsory business swaps between the Shabals. So the most damaging for Hyundai involved semiconductors because under government pressure, Hyundai was forced to buy LG's

[00:26:22] semiconductor business. And as a result, Hyundai took on a huge amount of debt to complete the deal because they paid a price that many analysts considered above what LG's semiconductor business was worth. And the merger, it was supposed to strengthen Korea's semiconductor industry. But when chip prices collapsed and the market turned downward because of all the debt it had, Hyundai Electronics

[00:26:47] entered bankruptcy proceedings in 2001. Now, for the car operations though, the Asian crisis, it brought about an opportunity because Kia was South Korea's second largest automaker. But as a result of the crisis, it collapsed into receivership in late 1997 and Hyundai Motor was bidding against Ford and it won, paying about a billion dollars for a 51% stake in it. And also, before the deal closed,

[00:27:13] the state-owned Korea Development Bank, rode off roughly 6.5 billion of Kia's debts. So when Hyundai acquired the company, it had really a clean balance sheet and the combined entity had more than 70% of the domestic market. Now, while all the financial crisis was happening, Ju Young, who was 82 at this

[00:27:35] stage, he was focused on something different, something more personal. You'll remember I said that as a teenager, he fled North Korea by secretly selling his father's prize bull and using the money to buy a train ticket to Seoul. Apparently, the guilt of what he did stayed with him. So, in 1998, while Korea was in the throes of a famine,

[00:27:59] Ju Young led a convoy of trucks carrying 500 cattle across the demilitarized zone into North Korea. A few months later, he returned with another 501 cattle and the event was broadcast around the world. Now, this wasn't simply an act of charity or a means of relieving guilt. Hyundai had spent months

[00:28:22] negotiating with both governments because Ju Young believed that economic cooperation could help reduce the tensions between North and South Korea. And that symbolic cattle drive opened the door. For a time, it appeared to work. Hyundai secured exclusive rights to develop tourism and other projects in North Korea. And Ju-yung placed his fifth son and heir apparent, Jung Mong Hung,

[00:28:49] in charge of this project. Now, just on a side note, there's a whole story around the succession battle during this time because Ju Young's health was declining and several of his sons, they were positioning themselves to take over. And I'm going to cover the big split in my second episode on Hyundai, which will mainly focus on Ju Young's rebellious eldest son, Chung Mong Koo, who took over the automobile business. But that's for the next episode. Getting back to the North Korean venture,

[00:29:19] being run by his heir apparent, Chung Mong Hun, the whole project, it never really worked. I mean, as you'd expect, North Korea wasn't behaving like a normal business partner. They wanted massive payments just for the privilege of letting Hyundai build there. Hyundai ended up committing close to a billion dollars. They didn't get close to the tourist numbers they needed to make the project viable. So,

[00:29:45] the losses just kept mounting. And Hyundai kept the whole thing alive by secretly siphoning off profits from its other businesses. Because of course, by this stage, it wasn't really about the money. It was tied to inter-Korean diplomacy and it was tied to Ju Young's legacy. And then scandal broke. In 2002, investigators revealed that just before an historic summit in 2000 between the South Korean

[00:30:15] president and North Korea's Kim Jong Il, Hyundai had secretly wired $400 million to North Korea. And the allegation was simple. This wasn't aid. It was a payment to get Kim Jong Il to show up. Hyundai denied it was a bribe. But the company was suddenly at the center of a huge political scandal.

[00:30:38] And Mong Hung, the heir apparent, he was facing prison time. On August 4th, 2003, he walked into his 12th floor office in Seoul, wrote a note to his wife and jumped from the window. He was 54. Fortunately, I suppose, for Ju Young, he wasn't alive to mourn his son's suicide. He died two years earlier on March 21st,

[00:31:03] 2001 from pneumonia at the age of 85. In terms of Ju-yung, the man, I don't have much to go on. Other than he was an extremely hard taskmaster, both to his sons and his employees. Yet, at the same time, by all reports, he never held himself aloof. He liked playing volleyball with his men. He regularly sat in on training sessions for new hires. But as I said, there's not much we know about the man.

[00:31:32] And that's because, I assume, he was business 24-7, 365 days a year. And everything he did was focused on his business. And so you can only look at his achievements and the companies he created. Like, it included the world's biggest shipbuilder, the world's largest shipyard, the third largest car maker in the world, one of the world's leading engineering and construction firms. And the

[00:31:59] company has also evolved over the last few years to become a leader in AI and humanoid robotics. It's also the undisputed world leader in hydrogen energy. And while he might not have been involved in those businesses, he laid the foundation for Hyundai to move into those businesses. But I think even more importantly, while there are definitely issues around the Chabals and their relationship with various South Korean leaders, like ultimately, Joo Young,

[00:32:27] he played a leading role in lifting South Korea from this poverty-stricken mess to the world's 15th largest economy. Like, he is one of those unique business people. I mentioned it earlier, those with this huge vision, huge ambition, and huge drive that very, very few people have. And that's

[00:32:51] why he makes for such a remarkable story. And that brings us to listeners' emails. And this one comes from Derek, who'd love me to cover Goldman Sachs. That's a big one, Derek. I'll probably do a three-parter on that. Thanks so much for the suggestion and for listening. And remember, if you have any comments, any corrections, any corrections, or any story that you'd like me to cover, email me at info at gbspod.com. All the best, folks.