JO YONG-HAK/Reuters
Henry Ford's epiphany came as he sifted through the wreckage of a French sports car at a Florida race track. He extracted a mangled strip of light metal he did not recognize, but instantly knew he needed: Vanadium alloy.
At that moment, Mr. Ford determined he had to build his own steelworks to produce tailor-made, lightweight metal for his revolutionary Model T, which entered production in 1908.
In-house steel mills are not a standard feature of the modern auto industry, but one big auto maker is breaking the mould with its own blast furnaces: South Korea's fast-growing Hyundai Motor Group.
The family-run group comprises units Hyundai Motor, Kia Motors and Hyundai Steel. Chung Mong-koo, the group's chairman, holds a 13 per cent stake in Hyundai Steel and Kia holds 21 per cent.
The conglomerate's motive for boosting steel production for Hyundai and Kia, which combined are the world's fifth largest maker of cars by sales, is the same as Mr. Ford's was a century ago, as it looks to forge special alloys to slash the weight of its cars.
The goal is to reduce weight by 10 per cent by 2015 and in so doing, make its vehicles more fuel-efficient and more attractive to buyers fretting about high fuel prices. Hyundai believes it will also gain a speed advantage in manufacturing by tailoring specialist steels for its own designs, breaking its dependence on traditional suppliers such as Japan's Nippon Steel and South Korea's Posco.
"Every major [automobile]manufacturer wants to have steel-making in-house, but the investment is just too huge," Cho Won-suk, Hyundai Steel's senior executive vice-president, told the Financial Times at the company's steelworks in the west coast port of Dangjin. "Nobody else out there can decide to invest that amount, but Hyundai made the decision to enhance quality."
Currently only India's Tata Group shares Hyundai's interest in both steel and cars.
Hyundai Steel has invested $8-billion (U.S.) over the past five years in three blast furnaces at Dangjin, each with a capacity of about 4 million tonnes per year. Two have come online since 2010. About a quarter of this 8 million tonnes is earmarked for Hyundai-Kia, meaning Hyundai Steel supplies 30 per cent of the auto makers' needs. It wants to raise that to 45 per cent by 2013, when the third furnace comes online.
The steel maker is now eyeing a move into the ranks of the world's top 10 producers by tonnage, targeting output of 24 million tonnes by 2013, up from last year's 20 million and just 4.8 million in 1998.
Mr. Cho said the furnaces give Hyundai greater flexibility and speed to forge its own advanced high-density steel for specific designs. Giving the YF Sonata sedan as an example, he said Hyundai Motor plans to improve fuel efficiency by making half the parts from the lighter, specialized steel by 2015, more than double the current 20 per cent.
Despite the benefits to Hyundai and Kia from the steel production push, however, the move poses challenges for the Hyundai Motor Group.
Analysts expect Hyundai Steel's net profit to sag in the near future as global market turmoil undermines the South Korean won, iron ore prices remain high and prices for construction steel fall. These concerns have pushed Hyundai Steel's share price down 40 per cent since April.
Currency issues are a particular bugbear for Hyundai Steel as it imports raw materials, but makes 72 per cent of sales in the domestic market. Last year, net profit fell to 1,014-billion won ($900-million U.S.) from 1,152-billion won in 2009. Kim Kyung-joong, analyst at Eugene Securities, predicts a further decline to 828-billion won this year.
By contrast, last week Hyundai Motor turned in another solid quarterly performance in spite of global economic uncertainty, reporting a 21-per-cent rise in net profit for the July to September quarter from a year earlier to 1,920-billion won.
Some stakeholders grumble that the Hyundai companies' risk is being distracted by the group's investments in steel and the construction business. They argue Hyundai Motor Group should focus more on cars because a steel mill is also exposed to the battered shipbuilding and construction sectors.
Fears that Hyundai Motor was bulking up excessively in a sector far from its core were kindled by the group's $4.7-billion purchase earlier this year of Hyundai Engineering and Construction.
"It is positive that Hyundai Steel has stable customers in Hyundai and Kia. The whole group can expand fast thanks to the steel-making unit, but it could also have had more room for investment in auto manufacturing if [it]had not moved into steel making," Mr. Kim says.