Case Discussion Questions

1. Explain how the rise in the value of the Korean currency, the won, against the dollar affects
the competitiveness of Hyundai and Kia exports to the United States.

The rise of the Korean won against the US dollar has harmed the competitiveness of Korean
goods sold to the US. As a result of the increase, the cost of producing automobiles in Korea
would remain (almost) unchanged, but US citizens will have to pay more dollars for each one
utilized in manufacture. As a result, the amount of US dollars required to cover a car's
production costs will rise, forcing Hyundai and Kia to either raise the price of a car, severely
reducing demand (because the absolute value of the price elasticity of demand for cars is usually
quite high), or keep the price of a car constant.

2. Hyundai and Kia are both expanding their presence in the United States. How does this hedge
against ad verse currency movements? What other reasons might these companies have for
investing in the United States? What are the drawbacks of such a strategy?

If the won strengthens, Hyundai and Kia will not need to convert the wons used in production
into dollars, and thus will not require more dollars to cover production costs; as a result, the
percentage of the car's price required to cover production costs will remain unchanged if the
cars are manufactured in the United States. Other reasons for expanding into the US and
establishing factories there could include lower transportation costs, better knowledge of the US
market by local experts and thus the ability to better adapt the product or react faster to
changing trends and market demands, the possibility of lower production costs in the US, and so
on. The drawbacks of opening plants in Korea may include the fact that if the Korean won
becomes weaker, it might be more profitable to export cars from Korea; the need to invest
much time and money; the need to comply with the local legal peculiarities, etc.

3. If Hyundai expects the value of the won to strengthen appreciably against the U.S. dollar over
the next decade, should it still expand its presence in the United States?

If the won is predicted to increase against the dollar, Hyundai should evaluate how much it will
strengthen and how much money they will make from the expansion. If the won rises
marginally, the expansion should be lucrative; however, if it climbs much, the profit from selling
a car will eventually yield too few wons after being translated from dollars to wons. If 1,000
wons = 0.8 USD, for example, $100 will provide 125,000 wons; on the other hand, if the won
rises and 1,000 wons = 1.2 USD, $100 will yield 83,333 wons. As a result, covering the costs of
constructing a new factory in the United States may take too long. On the other side, if Hyundai
desires cheap prices, exporting automobiles to the United States may become unprofitable; as a
result, Hyundai may be obliged to adjust its pricing policy, create factories in the United States,
or even withdraw from the American market. So, if they want to keep their pricing approach,
expanding could be beneficial.
4. In 2008 the Korean won depreciated 28 percent against the U.S. dollar. Does this imply that
Hyundai and Kia were wrong to invest in the United States? How does this explain the relative
strength of car sales from Hyundai and Kia in the U.S. market during early 2009?

It doesn't mean the expansion was incorrect. If we use the same example as before, where
1,000 wons = 0.8 USD and $100 produces 125,000 wons, and 1,000 wons = 0.58 USD, we will
obtain 172,414 wons for $100. Furthermore, Hyundai and Kia will save money on transportation
and maybe resources, and will be better equipped to respond to market trends and changes in
the United States. Hyundai and Kia sales in the United States increased in 2009 (Hill 410); there
are a few reasons behind this. For example, the companies were able to lower the selling price
of cars because they needed fewer dollars to compensate for wons used in production and
transportation in Korea; or they could sell the cars for a lower price because they needed fewer
dollars to compensate for the new factory built in the United States.