Hyundai hits a bump
by Alex Taylor III, FORTUNE Magazine

(FORTUNE Magazine) - For the past three years South Korea's Hyundai Motor has been the fastest-growing automaker on the planet and is poised to pass DaimlerChrysler to become the world's fifth largest. Industry observers have wondered whether anything could slow the company's explosive growth.

Now a real threat has emerged: Hyundai itself. Both the chairman of Hyundai Motor, Chung Mong-koo, 68, and his son, Kia Motors president Chung Eui-sun, 36, are under investigation for their role in a couple of messy corporate scandals. At the end of April, the chairman was arrested on charges of embezzlement for his role in creating a $106 million slush fund and misappropriating another $318 million in company money. Prosecutors are mulling charges for some ten other Hyundai executives, including the chairman's son.

Kia, a Hyundai affiliate, was forced in April to postpone a groundbreaking ceremony in Georgia for its first American plant because prosecutors barred the younger Chung from leaving the country. The event has been put off indefinitely, but a Kia spokesman says that construction of the $1.2 billion plant will go forward. More significant would be the departure of the elder Chung from the company, at least until his legal problems are resolved. "The ramifications are beyond description," a Hyundai spokesman said.

The scandals have reawakened concerns about the stability of Hyundai's U.S. management, where officials come and go with alarming speed. Last October, Kia's U.S. CEO, Peter Butterfield, was escorted from a dinner at a dealer meeting and fired in a nearby room. Hyundai U.S. president Bob Cosmai abruptly left the company in January.

Hyundai's stock price has fallen sharply, and analysts expect first-quarter profits to decline 7%. Bruce Klingner, an analyst at Eurasia Group, which specializes in political risk analysis, expects "some turbulence in corporate operations, including postponement of globalization plans." But he adds that Hyundai's status as South Korea's second-largest conglomerate may protect it against long-term disruption because of fears that it would derail the country's economy. Top of page