The threat Hyundai faces now

April 4, 2013: 7:22 AM ET

Korean auto giant Hyundai is still surging, but conflict at home could curb its growth.

By Doron Levin

130318121512-santa-fe-hyundai-340xaFORTUNE -- The remarkable rise in popularity of Hyundai and sister brand Kia with U.S. car buyers has largely unfolded over the past few years against a backdrop of calm on the Korean peninsula. As tensions rise in the manufacturer's homeland, some are asking how unrest might affect Hyundai's surging global business.

The prospect of armed conflict between North and South Korea threatens manufacturing in the south, where Hyundai Motor Group is located. Japan, China, and the U.S. almost certainly would be drawn into any regional conflict that jeopardized sea lanes and air traffic. Hyundai Motor, in its bid for top-tier global status, has spread operations worldwide, constructing two U.S. vehicle assembly plants in the past decade, in Alabama and Georgia. The plants rely mostly on parts suppliers that also operate locally. About 57% of Hyundai's production capacity resides outside South Korea.

Chris Hosford, a spokesman for Hyundai Motor in the U.S., noted that Hyundai's three top-selling vehicle models in the U.S. -- Sonata, Elantra, and Santa Fe -- are built locally. Presumably, Hyundai and Kia's U.S. operations wouldn't bear the full brunt of any potential disruption in South Korea.

Through March of this year, Hyundai's three top sellers accounted for 69,977 of 96,024 vehicles sold in the U.S. Hyundai unit sales are up 2.3% for the year. Don Southerton, an expert on Korean business and culture who consults for Hyundai and other Korean companies, said "South Koreans, other than those scarred by the conflict of the early 1950s, tend to play down current tensions with the north." Of course, many Israelis, including government officials, never believed that Syria and Egypt would dare attack in 1973 -- until the day it happened.

MORE: Does Jeep have a design problem?

The 2011 tsunami that disrupted Japanese industry, including the country's major automakers, did have a profound effect on Korean planners, Southerton said. Following the disaster several big South Korean corporations, including Hyundai, decided to set up emergency offshore centers that could serve as headquarters if needed. Southerton thinks tensions could continue until South Korea finds a way to allow North Korea to back down gracefully from its aggressive stance. It's "a tactic South Korea has followed in the past to ease tension on the peninsula," he said.

The latest sign of tension came this week as North Korea blocked the entry of hundreds of South Korean workers into a joint industrial zone that had been a symbol of economic cooperation. Previously North Korea threatened a preemptive strike against the U.S., prompting a flyover of the south by U.S. military aircraft. The U.S., meanwhile, is moving missile defense systems into the region.

For some, military conflict on the Korean peninsula remains improbable, if not unthinkable. But improbable events can arrive like black swans, that is to say, unexpectedly. Last year China and Japan suddenly were at odds over sovereignty of several small islands, creating a diplomatic furor. Car buyers in China immediately began boycotting Toyota (TM) and other Japanese brands, which translated into lower earnings. The tension has since calmed, though sales of Japanese brands in China have not totally recovered.

Hyundai (along with electronics titan Samsung) might be the one of the proudest and most visible symbols of South Korean industrial might. As such, the automotive brand could be a tempting target for a North Korean regime that often seems determined to self-destruct. Fortunately, Hyundai's global scale seems to afford it some protection.

Join the Conversation
Search This Column
View all entries from this: Week, Month
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.