Heading down a dangerous road

THEY were once the butt of jokes. The quality of Hyundai cars was said to be so poor that they could only be sold with extended warranties to students in America. But having been the 13th-biggest carmaker in the world a decade ago, Hyundai Motor now ranks sixth; sales over the period increased fivefold, making the South Korean firm the second-biggest Asian carmaker after Japan's Toyota. In 2006 the firm placed third, ahead of Toyota's main brand for the second time in three years, in America's influential J.D. Power Initial Quality survey. Only Porsche and Toyota's luxury Lexus marque scored higher.

Hyundai Motor is a pillar of the South Korean economy. Along with its Kia subsidiary, it took a colossal 73% of the local car market last year. And with shipments of 1.9m vehicles in 2006, the firm accounts for 4.6% of South Korea's exports. This success is all the more remarkable considering the troubles that regularly seem to engulf the company. Hyundai Motor has endured deep financial difficulties and has been weighed down by corruption scandals and labour disputes. In some ways, it exemplifies its home country.

Now it faces new problems. On January 18th South Korean regulators fined the company 23 billion won ($24.5m) for violating competition rules, the second-largest fine of its type in the country's history (the largest was against Microsoft). Chung Mong-koo, its chairman, is on bail facing corruption charges. New disputes have broken out with workers over bonuses. Domestic sales are weak. The firm's share price has fallen by more than 25% in the past year, and the strengthening South Korean currency threatens exports. Once again, Hyundai Motor is struggling.

The company is no stranger to controversy and money troubles. The financial crisis that began in Asia in 1997 dealt a huge blow to the giant business group, or chaebol, to which Hyundai once belonged. Huge debts forced the car firm to lay off 10,000 workers, and the group was eventually bailed out in a government-brokered deal in which it was divided into several parts, each run by a different son of its founder, the late Chung Ju-yung, who was forced to resign.

The motor business went to Chung Mong-koo, who is alleged to have made illegal share transfers to enable his family to maintain management control. He was charged with embezzlement and breach of trust last April; the verdict is due in February, and prosecutors are calling for a six-year jail term. The company's recent fine followed a separate nine-month investigation by prosecutors into the imposition of restrictions and excessive sales targets on independent dealers. And the Fair Trade Commission is investigating allegations that Hyundai Motor colluded with affiliates to put pressure on component suppliers to cut prices.

Nor are the company's troubles confined to the courts. Hyundai Motor has suffered strikes in 19 of the past 20 years. Last year a three-month strike cost the company 1.6 trillion won and more than 100,000 vehicles in lost production. On January 15th further strikes crippled three car plants for eight hours following a row between management and unions over bonus payments. (Managers had cut bonuses for 2006 because production targets had not been met—thanks to strikes.)

With the won rising and demand at home slowing, the company's prospects are deteriorating. Hyundai remains undaunted. It forecasts sales growth of 9.4% for its own brand and 22% for Kia in 2007. But the strength of the won has forced it to raise prices, and Chung Mong-koo's legal troubles have delayed the opening of new plants in America and Europe.

Hyundai still has lots of political capital. Chung Mong-koo's father, as boss of the country's biggest chaebol, led South Korea's growth in a wide range of industries from ships to computer chips. He was also at the forefront of efforts to unite the two Koreas, which helped to secure the Nobel Peace Prize for Kim Dae-jung, a former president. So there have been calls for the younger Mr Chung to be let off in the “national interest”. The danger is that today's woes will distract attention from a far bigger threat to Hyundai and, indeed, to South Korea as a whole: being squeezed between the high-tech Japan on one side and low-cost China on the other.