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TREIZIEME RENCONTRE INTERNATIONALE DU GERPISA

THIRTEENTH GERPISA INTERNATIONAL COLLOQUIUM

“Organisation productive - relation salariale - financiarisation :

les spécificités de l'industrie automobile”

“Productive organisations - employment relationships - financiarisation :

specificities of the automotive industry”

16-17 Juin 2005 (Ministère de la Recherche, Paris, France)

IS IT NEW PARADIGM? MODULAR PRODUCTION SYSTEM IN HYUNDAI *

Myeong-Kee CHUNG ** (School of Chinese Studies & Economics,

Hannam University, Korea)

Global competition in automobile industry and changing consumer demand are resulting in a

trends greater product variety and innovation, shorter product life-cycles, low unit costs and higher product quality. It was theorized that changing market conditions had precipitated a crisis of Fordism. That had changed in fundamental ways to new forms of production system. It is characterized that achieved greater functional and numerical flexibility by computer-based automated procedures.

For the carmakers themselves, radical restructuring was called for. Two alternative paths to renewal were hypothesized. One was euphemistically referred to as taking the low road. This strategy relies on intensifying the existing Fordist order, engaging in work relocation and other union avoidance moves, and ruthlessly cutting costs (especially labor costs). The alternative was a high-road strategy in which firms use advanced human resource management practices to create high-performance work organizations (Knauss, 1998; 273).

In the late 1980s, Hyundai achieved the level of economies of scale with a yearly production capacity of around 1 million units. At the same time, the maturity of mass production exposed the limitation of the Taylorist-Fordist model of manufacturing in Hyundai. Management faced the problem: how to manufacture a rising number of cars through the maintained low wage and traditional

* This paper will be presented at the GERPISA's Thirteenth International Colloquium on

"Productive organisations - Employment relationships – Financialisation: specificities of the automobile industry", Paris, June 16~17, 2005

** Professor of Economics, School of Chinese Studies & Economics, Hannam University, Korea Email: mkchnu@hannam.ac.kr

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authoritarian and paternalistic control at work. The managerial unilaterism gave import to the crisis of the mass production model in Hyundai. In addition, Hyundai had rejected other aspects of the Fordist system, especially cooperation in the work place. At that time, workers showed strong tolerance for physical labor and accepted relatively low wages. Hyundai achieved stable growth by an authoritarian labor-management relation policy in the last three decade. However, what seems to be clear is that the traditional authoritarian and paternalistic approach will face more serious structural problems in Hyundai in the coming decade.

This paper aims to provide preliminary empirical results on the effects of introducing new production system by adopting modularization on the work organization and supply chain relations. In order to explore such trends this paper examines the experience of Hyundai motor, a Korean biggest vehicles assembler and one of its main suppliers. This paper also is an examination of the trajectory of Hyundai whether that is low road or high-road strategy.

The first part of the paper considers the adoption of modular production strategy in Hyundai and its effect on the work organization. Here I will review the concept and strategies of modular production system and analyze the conflict with labor union when a company adopts this production system. In addition, I will show how evaluate this new system on the shop floor by workers.

The second part focuses on the influence of modularity on supply chains. I ask what kinds of supply relations are required for the effective implementation of new production systems, and what kinds of strategies of assembler should have in design of product configuration they will use.

MODULAR PRODUCTION SYSTEM IN HYUNDAI

In the late 1990s, Hyundai achieved the level of economies of scale with a yearly production capacity of around 2 million units. At the same time, the maturity of mass production exposed the limitation of the Taylorist-Fordist model of manufacturing in Hyundai. Management faced the problem: how to manufacture a increasing labor productivity and engaging in other cost cutting measures, on improving quality control and, perhaps most importantly, on increasing the flexibility of production systems. The main elements of the increasing flexibility are the introduction of microprocessor-controlled robotics; other computer numerically controlled machine tools and automated process control. These new forms of automation have dramatically increased the flexibility of the manufacturing system. The automation strategy is most meaningful for the understanding of the Hyundai strategy after the crisis in the late 1990s. At the same time the company was pursuing the modular production strategy in its core operations. Now, Hyundai classifies auto parts into 13 modules and plans to gradually upgrade the level of modularization for new car models. Hyundai’s categories of modularized auto parts are as follows: cockpit, pedal, head-lining, doors, rear package tray, front suspension, rear suspension, fuel tank, muffler, tubes, cooling device, rear bumper, front bumper. As exemplified in Table 1 it is noticeable that the level of modularization is different from model. Especially suspension and cockpit module is widely adopted in the most of models.

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Table 1. - Modularization by Factory & Models

Module

Plant Model

Crash pad Front End Cooling

Module

Front

Strut

Front

Suspension

Rear

Suspension

Door

Module

1 A X O O O O X

1 B O O O O O O O

2 C O X O O O O O

3 D ∆ X ∆ X X X O

3 E O X O O O O O

4 F ∆ X ∆ O X O X

4 G O X O O O O O

5 H O X O O O O X

5 I O X ∆ O O O X

Level of Modularization: O: 100% ∆: 50% X: 0%

The modular production concept has been undertaken primarily as a reduction of number of jobs on the shop floor. Table 2 shows the reduction of jobs by adopting modular production system on the shop floor. Under the modular production system scheduled to be completed 2004 in plant 1, the company’s workforce is theoretically slated to shrink to about 200~300 production workers. Instead of reduction of workers, the company has been increased production volume and unit per hour (UHP). This production concept is no doubt required eliminated job security and gives a more opportunity to mix production on the line.

In addition, the company has adopted easily the relocation of work to lower wage setting and the increased use of low-cost part time worker or subcontractors are consistent with intensified Taylor-fordism. The utilization of part-time work or temporary work also has been expanded. The company employed around 16.6% of total product workers as outside caterers in 2001 who work at the shop floor, as employees are subcontractors of Hyundai. It is increased 31.2% in 2003. These flexible personnel policies have a twofold effect: On the one hand, compensation for physical strains that can eliminate the conflict issue of labor management relations. On the other hand, potential reduction of labor costs.1

1 The wage of part time worker or subcontractors is a about 60% of regular worker.

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Table 2. - Modular Advantage: Reducing Number of Jobs

Without Module (A) With Module (B)

Module Number of Jobs Number of Jobs

Cutting the Jobs

(A-B)

Front Strut 58.82 0 58.82

Rear Strut 64.24 0 64.24

Rear Suspension 343.24 0 343.24

Fuel Tank 68.29 53.57 14.72

Front End 216.64 74 142.64

Crash Pad 399.04 0 399.04

Total 1150.27 127.57 1,022.70

Source: Hyundai Labor Union

Taylorist principles guided the division of labor and the content of individual jobs. Production jobs on the product line are narrowly defined. Direct production workers did not perform any maintenance function. If repairs are needed or production process altered, the machines are shut down so that specialized maintenance worker could adjust them. Obviously, assembly lines are organized to take advantage of production efficiencies typically associated with lean production concept. Production tasks are integrated quality control and inventory levels are reduced, and the flow of production is synchronized. This hybrid combination of modularization and lean-style manufacturing is the distinguishing characteristic of Hyundai production system. The modular production system is basically a generalization of the work-flow principles of lean production. As such, it also envisages the elimination of sub-assembly work with modularization of components and parts. The technological developments within the plant, and changes in established work practices were very few. Basically, the entire concept of the plant was based on a conventional flow production system, which makes no space for the involvement of the worker or the trade union in its configuration or functioning.

However, all of the work performed in a given factory for particular product line is grouped together intensively due to accept the module system. As far as teamwork is concerned, it is the group leader who organizes the task rotation in his group, taking into account the skill level of his workers. The job rotation with the goal of training polyvalent workers is currently a prominent theme in work organization. However, the old plant in Hyundai has no special criteria for job rotation at the present because workers have a negative view about its being a cause of work intensification, while rotation is frequent on the shop floor. Its goal is to compensate for work-related stress and strain among the group members. By contrast, the job rotation in Asan basically realized on the shop floor according to the management plan. But when one step inside the product line to see how work has been organized on the shop floor, an indifferent picture is obtained in comparing to Taylorist-Fordist model of work organization.

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Flexible production systems require flexible work practices and worker commitment to quality control and maintenance. Hence the organizational hierarchy may shift from inflexible to flexible, which generally contributes to cooperation and horizontal communication. The most fundamental issue is an introduction of a new form of work and production organization that is closely related to human resource management. There is considerable pressure to change the traditional work organization. The capacity to mobilize workers in order to increase productivity is closely linked to a career system and individualized personnel assessment. For this reason, management intend introduction of a qualification system that would stimulate promotion of an employee's status. This means that the work organization is divided by position and job classification. This system could solve the bottleneck of promotion of workers.2 This system also is characterized by the integration of the differential status system between white-collar workers and blue-collar workers. This differential status system is one of the dissatisfactions among blue-collar workers now facing personnel management. However, this reform plan is too hard realized because wage reform is pre-required. Modularization has resulted adjustment of working hours. Plant management has tried to shorten the cycle-time of production processes as a means of increasing the UPH (unit per hour) of production lines, because modularization has led to reduce the number of jobs. A further question that troubled that the trade union related to the operation of the modular system within the factory.

From the worker’s point of view, modularization has led to deterioration in working conditions. This not only increases the intensity of the work but also shorten cycle time. Table 3 shows the incidence of work intensity and time pressure at four plants. As is clear from the figure, the Asan plant showed the worst working conditions, while plant 3, one of the oldest manufacturing facilities had the best result. The Asan plant is the modernist factory and highest level of modularization among the Hyundai plants. The time pressure reflects the low degree of autonomy such as traditional assembly line. Furthermore, although the task enlargement has been increased, modularization has had an effect on the enlarged job rotation and the decreased job opportunity.

2 In fact, the promotion of employees in the company is very important for their working life. Koreans also

have a strong sense of status or position. The span of promotion from general worker to "Chochang" was limited.

According to this new system, a general worker can be entitled "Chochang" without specific responsibility. A

"Chochang" will be rotated among the members of the same qualification range. The new organizational innovation

can boost voluntaristic behavior in the production process. Obviously, the improved quality and elimination of waste

requires the voluntarism of employees.

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Table 3. - Work Conditions by Plant

Plant Work Intensity Time Pressure

Plant 1 in Ulsan 46.99(664) 41.62(663)

Plant 2 in Ulsan 45.83(456) 39.50(457)

Plant 3 in Ulsan 39.86(488) 25.67(487)

Plant Asan 49.52(414) 43.68(412)

100 50 0

very strong strong adequateness

( ) : number of interview

Source: Hyundai Labor Union

The transformation of production at the company has also led to major changes in labor- management relations. Most noticeable is the shift from arm’s-length accommodation to adversarialism. The union has provided some protection for workers against arbitrary management decisions. While the parties still speak of collective bargaining in term of wages, working conditions and basic managerial strategy such as established transplant. For example, the union has proposed of bargaining demand for UPH co-determination at collective bargaining in 1999. The management basically accepts this proposal. Moreover, union, which experienced extensive downsizing in the crisis period of 1997~1998, have put particular stress on the employment guarantee of their union members. In fact, the union implemented contractual clauses to enforce employment security for their members and, to some extent, constrain management’s action (i.e.: layoff and outsourcing) for the adjustment of employment size through collective bargaining of 2003. After long negotiation, Hyundai’s settlement with its union in August 2003 appears to be setting a trend. Hyundai has more or less kept labor relations’ stable from 1999 on, under the condition of its achievement of remarkable business performance.

MODULARIZATION AND RESHAPING OF THE SUPPLY CHAINS

As noted above, the introduction of a modular production method into Hyundai is expected to further promote the integration of their auto parts suppliers. This integration is also required for the reshuffled supply chains. Thousands of small-scale parts makers are extremely concerned about their fate in the aftermath of the "restructuring". This change could, perhaps, more than halve some 1,500 first suppliers, which supply parts directly to the final assembler involved in the restructuring. This figure would increase greatly when secondary and tertiary subcontractors are taken into account. Hyundai is set to screen their suppliers first and then choose contract winners through bidding. Hyundai will assess the 466 current primary suppliers to Hyundai science 1999. From those suppliers

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two or more qualified makers will be identified for each group of component parts. Parts contractors will be determined later through bids from qualified firms. The capability of supplying integrated parts in modules will be taken into account in the screening stage. Finally, the Hyundai group plans to decrease its auto parts suppliers by 133 until 2004 and put those excluded vendors into the second-tier level, which provide parts to first-tier suppliers. At the same time, Hyundai have urged mergers of vendors, which aim at the enhancement of their R&D capability to develop auto parts.

Table 4. - Modularization by Models in Ulsan Plant

Model A Model B Model C Model D Model E Model F

Total No. of Auto Parts (A) 640 934 633 666 820 805

No. of Modularized Parts (B) 65 85 128 165 167 244

Rate of Modularization (B/A) 10.2% 9.1% 20.2% 24.8% 20.4% 30.3%

Reduced Man-Hour 0.33 0.53 0.64 0.83 0.84 1.22

Source: Internal Company document

The modular production system had significant impact on the structure of domestic supplier system. The increased module purchasing policy of parts will most likely lead to the integration of the affiliated-firm into the overall design and manufacturing process. As noted above, the introduction of a modular production method into Hyundai is expected to further promote the integration of their auto parts suppliers. As exemplified in <Table 4>, it is noticeable that the modularization of auto parts supplied by outside vendors has grown from the level of 10% for the car model (A) and (B) to over 30% for the most recent car model (F).

The most striking outcome of the new supplier strategies based on modules and sequential delivers was the establishment of supplier-park in close proximity to assembly plant in Ulsan & Asan, Hyundai MOBIS was build a new car module plant in Ulsan in 2003. The new plant, covering 62,700 square meters, will be designed to produce 600,000 units of driver-seat modules and chassis modules a year. In addition, this supplier is build a new plant in Asan, which will supply to 900,000 driver-seat modules, frond end modules and chassis modules a year for Asan assembly plant. In the area of Asan plant 69 supplier units were located and 40 suppliers were in Ulsan (Korea Auto Industries Coop. Association).

The assembler completely controls supplier’s location. The module outsourcing requires that specialized supplier should be produced nearby in the surrounding. Therefore, the large supplier groups to establish themselves in the supplier-park in the near of assembly plant. This supplier has the capacity to become responsible for entire modules. Furthermore it worked as a catalyst for the establishment of a new supplier hierarchy with small number of module/system integrators at the top follows by many of the traditional suppliers in the second tier. The map in figure 1 presents the geographical distribution of first-tier supplier in Korea. We can see a clear concentration to the Ulsan

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(31.8% of total suppliers) & Asan region (41.1% of total suppliers). As result of modified existing suppliers’ delivery routines under synchronized production process based on outsourcing of module, geographical proximity is an important strategic role.

The adopted modularization had stimulated synchronized delivery method. For example, material and parts delivered to assembly plant of Asan in two ways. One is a synchronized sequential delivery method, which is applied to function components such as engine, transmission, instruments panel, radiator, brake drum etc. The other is scheduled batch delivery method, which is usually adopted the other parts (Je Wheon Che, 1999: 8). Asan Hyundai makes plan to material delivery to suppliers 7 days before its production starts and orders to suppliers 3 days before its production starts. Consequently company can not holding inventories and cope with the fluctuation of production volume during the interval between material delivery plan and production order to supplier. They reached 95% of scheduled batch delivery plan and synchronized production process.

Synchronized sequential delivery is conducted in three different methods. One is called MIP (Manufacture in Plant) sequencing, where components are produced in plant and then sequentially fed to assembly line according to the sequence of vehicles. The second way is sub-assembly sequencing. This is conducted by supplier, who assemble units of component in the near of assembly line and delivery by JIT. The last method is direct sequential delivery, where components are sequentially provided directly to assembly line from suppliers. Supplier get the information from Hyundai through the VAN network system, which indicates delivery volumes needed every day. For example cockpit module supplier get an order for assemble products in every day. The information is the assembling sequences finally determined just after vehicle came out PBS (Pained Body Storage) (see Figure 2). As vehicles leaves the PBS, the sequential order is electronically transmitted modular suppler. For example, Hyundai Mobis has 60 to 90 minutes (depending on the products) to assemble and deliver the sequenced module to plant. Some parts are assembled based on Hyundai’s 2 hours schedule and delivered to assembler in lot. Therefore, Hyundia Mobis establishes module production plan based on assembler one-day production plan (Jong-Yeol Kang, 2001: 315~316). The supplier for Hyundai Mobis also takes delivery information and time schedule through LAN. This supplier delivers parts to Hyundai Mobis every two hours.

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Duckyang company - the cockpit module supplier – take a production order by Hyundai and has 16 minutes to assemble. They supply 6 units each truck to assembler. It takes 25 minute and need 20 minute for loading and unloading. It means that this company has 130 minute for 6 cockpit module product and delivery to assembler and is keeping just 10~20 unit inventories of finished module to sequence deliveries. If they have problem to parts supply from subcontractors, they have high risk to sequential delivery on Hyundai assembly line. Otherwise this module supplier is to guarantee an efficient management of second-tier supply flow.

It is to promise prompt modules supply, they are vigorously taking a JIP (Just-In-Place) supply chain system. In each module, the firm (or firms) responsible for supply of parts, sub-assemblies and systems step into the production operation to actually assemble the car. At each step in the assembly process, these companies organize the delivery and supply of components and coordinate the final assembly and installation of these in the vehicles and chassis. Recently considerable attention has been paid to the role of the supply chain in management of production and the dynamic processes associated with sub-contracting. In the Module system, a revolutionary change took place in the notion of supply chain as the component suppliers were brought inside the factory as assemblers.

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One interesting aspect of the restructuring process is the changes in the contracting patterns and the overall subcontracting relationships. This restructuring in the automotive industry is having a twofold effect. On the one hand, the restructuring, through commonalization of parts and single sourcing will reduce the number of suppliers and achieve significant economies of scale and improved productivity or quality. Otherwise, M&A is often pressed to exit the business of small-suppliers, because their facilities often partially duplicate those of other subcontractors. Excess plant capacity and surplus workers have led many suppliers to increase their degree of vertical integration. On the other hand, affiliated firms and large and medium sized firms have been pressured due to increased specialization, to improve their technical abilities because they will need them when competing with suppliers on whom they are so dependent. They will also be regrouped under the "Big One (Hyundai-Kia Group)" system that stimulates M&A between internal parts suppliers based on the specialization and internal parts suppliers based on the specialization and commonalization of particular parts

To survive such a complete reshuffle in subcontracting systems, the supplier who wants to remain independent in the future has three options. The first is to form a partnership and joint venture; for example, Hyundai Mobis and Bosch are getting together to produce an airbag an ABS brake system and various other units. Hyundai Mobis, an auto parts-making unit of the Hyundai Motor Group and biggest chassis & cockpit module supplier in the nation, is supplying and developing Strut Assemblies, Corner Module, Front Chassis Module, Rear Chassis Module, and other various types of module. Also Hyundai Mobis take over Hyundai’s former first tier supplier in order to setup a integrated module supplier. This means that the supplier will increase its position as key supplier of high-tech components to the OEMs and also to the big module integrators. It is possible that attention may be shifting to the emergence of large-suppliers.

The second option is that Korean parts suppliers – who now have low-level technology and are supported with technology and resources by the automakers – try to develop management skills and produce (with automakers) value-added parts through high-tech synergistic effects. Therefore, the buyer-supplier relationship could be changed into a more meaningful partnership based on product and technology development.

Table 5. - Investment by International supplier (Million US $)

~95 96 97 98 99 2000 2001 2002 Total

No. of

Company

125 6 7 12 16 14 7 21 207

Total

Investment

1,183 87 124 166 503 73 20 119 2,280

Source: Ministry of commerce, industry and energy (2003)

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The last option is that Korean supplier has acquired by international big supplier Module outsourcing is required large integrator that led to the internationalization of ownership among domestic suppliers. Until 2002, 207 international suppliers has invested in part and component industry sector (see Table 5). It is very clear in this process that foreign supplier-multinational has increased market share and exercise his influence over Korean assemblers. In 2002 international suppliers had accounted for 33% of the components production by value. It was under 20% in the periods of 1990s (Automotive News Korea, Dec. 10, 2002). In opposition to foreign supplier-multinational, Hyundai will be plan to develop Hyundai Mobis as a global top ten auto-parts manufacturer by 2010. Contrasted by large supplier, the suppliers have a relatively simple production process stand at the crossroad of survive.

Module system and synchronized production on Hyundai has strong pressures for changes of supply chain. The supplier has polarization as a three types:

Big mutli-technology supplier like Hyundai Mobis ,

Medium-sized suppliers of modules in the pre-modularization and

Small-size suppliers of components.

The first type is dominated by affiliated-firms and international suppliers like Hyundai Mobis & Bosch. Assembler has attempted to set up affiliated subsidiaries in order to secure a stable and adequate supply of parts. Otherwise, assembler has alleviated R&D responsibility on the parts and components. The majority of these firms is relatively big in size and has high technological capability and usually manufacture the core parts are complicated and capital-intensive. The portion of the parts supplied by these parts manufacturing companies is over 40% of all parts that are supplied to assembler. The module outsourcing has requires also close collaboration between large module supplier and assembler. The new bilateral relation by product design and development cooperative approach with assembler’s requests is required. In such cases we can find cooperation and co-existing relations. Within this new process configuration, the system supplier as like Hyundai Mobis has been managing an increasingly complex supply network. All production activities are closely linked with Hyundai’s production flows.

The Second type is a sub-module supplier who was mostly Tier 1 suppliers. Most of these suppliers are small scale and lack R&D capability that inevitably leads to lower participation by suppliers in the design process and a longer time for new parts development. Some of them are submit into large system supplier or take over by international supplier. For instance Duckyang Company take over by Visteon in 1999. This tendency has still in initial phase.

The last type is mostly common parts supplier who has direct business transaction with assembler. This pattern of closed transactions can provide monopoly rents to the automobile manufacturing companies by weakening the parts manufacturers' bargaining power and setting monopoly prices. This hierarchical subcontracting network is advantageous to the assembler, who has

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the power to drive down cost.

Hyundai has also changed the component purchasing process during recent years. Based on process for the modules, Hyundai has itself taken on this task, selecting suppliers, buying the components and passing them to the module in a consignment system. The advantage of this is the fact that Hyundai has more strength to negotiate with suppliers, forcing them to push the prices down. On the other hand it has increased Hyundai knowledge of the modules’ cost structure.

CONCLUSION

The main objective of this paper has been to examine module production strategy in Hyundai. The conclusion of the case study is that, contrary to the neo-Fordism theorem, the module production strategy of Hyundai may in fact be the intensified Talyor-Fordist model in combined JIT recognized. The introduction of module production process in assembler line is not engaged substantially change of work organization and process. This new production concept relies to and important degree on task enlargement combined with worker immobility. Hence, most of direct worker on assembly line find it led to more strengthen work. The effective use of new technologies and adapted lean production system also is not the increased use of participation. This production strategy that allow Hyundai to become effective competitors based on the intensified Fordist model against high-performance manufactures. It is characterized by “flexible mass production.”

It also is merely a changed supply configuration. The large system supplier is the high degree of modularity and customization required by assembler, combined with very short lead times. The coordination of the system supplier with assembler in the introduction of new product design is often closed .The second one is more necessary strict control of quality and production process of second-tier supplier. In fact this trend by modularization is still transition.

The new production strategy raises the tighter process control is clearly the primary strategy for increasing output. Worker empowerment is not irrelevant. It is also still not clear to what is a picture about relation between first-tier supplier and assembler. The conclusion of the case study is that the new production strategy of Hyundai may in fact be substantially more effective than previously recognized. However, this is clearly difference to create high-road strategy.

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