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| Above is a bird's eye view of Korea Electric Power Corp.'s office complex in southern Seoul, which Hyundai Motor Group purchased to redevelop the site and build its own "motor town." / Korea Times file |
Hyundai's motor town plan aims to reflect growing global reach
By Vince Courtenay
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| Vince Courtenay |
Seoul, is boringly unexpressive and tedious to any eye looking for inspiration.
In response, new owners Hyundai Motor Group plan to make the property an enterprise landmark that will grab the attention of the rest of the world — while hiking brand value for its Hyundai and Kia vehicles.
A consortium of Hyundai Motor, Kia Motors and Hyundai Mobis acquired the entire property, including buildings and existing superstructure, for $10 billion, using their own cash reserves.
The sale price raised eyebrows in some quarters, and caused gasps in others, since the assessed value of the property is around $3.6 billion, but canny investors now see it as a brilliant piece of business.
The purchase was very much in the style of Hyundai Motor Chairman Chung Mong-koo's leadership, and indeed is indicative of Kia Motors' motto: "the power to surprise."
But why did Chung spent $10 billion for property valued at less than $4 billion?
Throughout history, great nations have been defined by their capitals.
This has been true of all civilizations, east and west.
A capital may be bold, ageless, expressive of art and the strength and the quality of its people; it is where government and the judiciary resides, and where the country is tacitly judged by the people of other nations.
It is difficult to think of any of the great nations without thinking of their splendid, iconic capitals.
Chung is well aware of this, so he is planning to build a base in South Korea's capital for his collective, which is now a globally-represented automotive enterprise. It is his ambition that the headquarters will define both Hyundai and Kia, and every year will add hundreds of millions of dollars in brand value to their products.
That is why he grabbed the huge property in the Gangnam district of Seoul at a bidding price so high he was absolutely certain no other bidder would come close to matching his offering price.
Some analysts expressed shock when the deal was completed, and connected a dip in Hyundai's stock value with the $10 billion bid.
This reaction was absurd to those who know Chung best.
The $10 billion investment has absolutely no impact on the business of these companies. He split the ante between Hyundai Motor, Kia Motors and Hyundai Mobis at a ratio of 50/30/20. All three affiliated companies paid for the land purchase from their own cash reserves.
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| Hyundai Motor Group Chairman Chung Mong-koo has said that his "motor town" plan has been drawn up with an eye on the future 100 years of the firm. |
It is true that the market price for both Hyundai and Kia dropped, but this is nothing new and likely reflects the outlook for the global market in general.
Wise analysts see the two companies as bellwethers of the market.
Investors buy their stock for appreciation and not for conservative dividend payouts. When Chung began putting the Hyundai Motor Group together in 2000, fully integrating operations of its member companies, the stock value of Hyundai Motor increased 122% in a single year, rising from $11 per share to $24. Since 2000, the common stock has appreciated by nearly 2,000% to more than $200 per share.
Chung travels the world with his eyes wide open.
He is aware that while Korean cars are well known in almost every nation's marketplace, the country itself remains something of a mystery. Images of Korea often show quaint pastoral scenes of yesteryear, not the bold and dynamic nation it has become — something Hyundai and Kia have played a key role in.
Chung will now establish a iconic HQ in Seoul's upscale Gangnam district, where residents relish their high-end imported cars and fashion from the world's greatest designers. He will make the base unique so it defines both his automotive empire
and Korea too.
He pictures a huge towering structure of unique design, something akin to the magnificent World Trade Center that defined America; something like the Eiffel Tower, the Houses of Parliament along the Thames, Australia's Sydney Opera House.
Consumers the world over will come to marvel at the building, thus gaining familiarity with the Hyundai and Kia brands, which will make these vehicles more desirable — creating greater brand value.
The mere name of the brand becomes its own bold advertisement — a priceless asset.
That is what Chung and his team have planned for with their new investment in Seoul's Gangnam district.
Of course, there will also be increased efficiency in maximizing planning synergies with an enriched Hyundai Group locating 30 or more of its companies in one huge complex.
There will also be advertisement for that efficiency and technological leadership
through opening a new center to the public with a grand hotel, museums, driving tracks, a convention center and other features.
The $10 billion investment may have shocked some, but it makes incredibly good business and common sense.
By putting $10 billion into a negative asset the three companies collectively save $1 billion that would have gone into government coffers under new cash penalty rules.
The new rules tax cash held on the books by up to 10 percent. This is meant to encourage companies to shell out their profits in dividends and increase internal investments. The tax-shelter benefit will remain year after year. From the viewpoint of a savvy investor, Chung is actually receiving a 10 percent bonus every year for merely switching the $10 billion from one place on the company's books to another.
For the next decade at least, it is not necessary to worry about taxation on the land or the construction in progress, as the basic land was acquired far below current market value.
On paper, it is a red ink investment and the project forms its own tax shelter.
However, land values, especially in Gangnam, are increasing by nearly 10 percent year-over-year. Within a decade, the allegedly shocking investment will be equalized by the rise in basic property values.
Yes, common stock value has declined during the 2014 fiscal period; Hyundai is not immune from the industry's global ills.
To remedy this decline, both Hyundai and Kia have switched more of their cash from idle places on the books to acquire their own stock on public markets.
This has buoyed the stock by hundreds of millions of U.S. dollars.
Considering the new cash holdings penalties that all large companies face, and these investments circumvent, the stock has been acquired at a 10 percent discount, since the amounts used in the purchase will be free from the pending tax liability.
Chung sees the new complex as a beacon that will hold the world's attention for the next hundred years. The $10 billion purchase price has already created its own sensational splash.
The attention grabbing process has begun, even before the first scoop of earth is removed from the Gangnam property.
Vince Courtenay has been the Korea correspondent for WardsAuto.com and Wards AutoWorld for many years. He is a Canadian Korean War veteran and a nonpaid consultant to Korea's Ministry of Patriots and Veterans Affairs. He was awarded Korea's Order of Civic Merit earlier this year by President Park Geun-hye.
