‘Glocalization’ leads Volvo’s drive in Asia

Changwon plant has become example for group’s factory operations Sweden-based firm to focus on BRIC markets Korea’s construction equipment market expected to shrink 10% in 2012

By Kim Jae-kyoung

Over the past few years, a lot of major Korean companies, including Samsung, Hyundai and LG, have globalized successfully, emerging as a major force on the world scene. Their products have been exported everywhere and you can easily find Korean products overseas.

Now they are trying to go one step further to become truly multinational firms through “glocalization.” The term is a combination of the words “globalization” and “localization” used to describe a strategy to sell products and services globally but manage each operation based on the local market’s practices and culture.

Glocalization sounds easy but it is difficult to implement it as global standards often conflict with local culture and practices. Against this backdrop, companies are seeking ways to customize content to appeal to individuals in different locations.

There are several successful glocalization cases, such as Yahoo and Coca Cola, that Korean conglomerates can model themselves on but they may also take their cue from Volvo Group Korea, which turned the troubled construction equipment affiliate of Samsung Heavy Industries into a profitable entity.

Volvo Group, the world’s fourth largest construction equipment maker, acquired the unit for $500 million in 1998, which then suffered from chronic deficits. Now Volvo Construction Equipment Korea, it is the main production base of the Korean arm of the Sweden-headquartered group.

Volvo Construction Equipment develops, manufactures and markets equipment for building and related industries. Its products include a comprehensive range of wheel loaders, hydraulic wheeled and crawler excavators, articulated haulers, road machinery and a wide range of compact equipment.

Volvo Group Korea and Volvo Construction Equipment Korea President and CEO Suk Wi-soo cited its Changwon plant’s unique production system as a major success factor. He indicated that his dual approach in management has led to creating a Korean-style system, which was a key driver for robust growth. As CEO, he heads Volvo Group Korea.

“The key success factor for Volvo Group Korea’s rapid growth is that we tried to seek localization while following the group’s globalization efforts,” Suk said in a recent interview with Business Focus at his office in Seoul.

“By complying with principles and rules, we try to follow global standards when doing business outside of Korea but in managing local operations, we respect Korea’s culture and practices.”

Suk, a graduate of Korea University, began his career at Samsung Heavy Industries before joining Volvo Group Korea in 1998. His management principles are based on core values of the parent company _ safety, environment and quality, better known as the “Volvo Way,” but he also respects Korea’s business practices and culture, which have helped local employees embrace Volvo with little protest.

Korea’s unique production system

The Changwon system is seen as a successful example of “glocalization.” It is an example not only for Volvo’s other production factories abroad but also for Korean firms’ overseas operations seeking localization.

The system in Changwon, designed to reduce production periods, minimize inventories and boost quality, has been adopted in the group’s factories in other countries, including Germany.

“Since 2004, Volvo’s excavator production lines across the globe have tried to model themselves after our system. It has become the core factory of the group,” Suk said.

The epitome of the so-called Changwon production model is its“Sold One, Make One” system, better known as “Lean Six Sigma” that was created by combining Japan’s Toyota system with GE’s Six Sigma.

“The biggest strength of the Changwon plant is its high productivity. In terms of man-hours, the number of work hours needed to produce one excavator, the factory is two times more productive than its counterparts in Europe,” Suk said.

He explains that at the plant, individuals work and rest together with no one person relaxing individually during work hours, which makes it possible to minimize losses. He also noted that accidents there are 10 times less than in the United States and Europe.

“At first, the Changwon system was underestimated due to communication problems. However, after our track records have proved the strength of the system, the group selected the factory as a model plant and makes field trips here to learn our model.”

R&D center

The 61-year-old chief executive of the Volvo’s Korean outfit, which encompasses Volvo Construction Equipment and Volvo Truck here, cites research and development (R&D) as another competitive edge.

“Volvo’s production lines across the world, including the China plant, only have capabilities to produce excavators. In contrast, the Changwon factory is equipped with design technology and R&D capabilities as well, which enable us to adapt better to market changes,” he said.

Currently, around 250 engineers there concentrate solely on developing excavators. In 2006, the Korean operation established the Virtual Product Development Center through a 15 billion won investment.

Suk became the first Korean to head the local operation of the multinational firm in Nov. 2009, as he has been credited with ramping up the global status and competitiveness of the Changwon plant.

Capitalizing on advanced technology and R&D ability, Suk has increased the factory’s production capacity to 25,000 units per year in 2011 from the previous 17,000 by investing a total of 75 billion won last year.

“We plan to increase our capacity to 30,000 units by 2016, which will be the largest annual production in the world among single production lines. We also aim to raise the portion of exports to 95 percent from the current 85 percent,” he said.

Market outlook

Suk, who also serves as president of Asia operations by overseeing the company's business in Korea, China and India, said Volvo will continue to focus on Asian markets to seize opportunities in rapidly-growing markets.

In his view, the power of global economy is shifting to the East after the United States and eurozone have been suffering in the wake of the global financial crisis.

“We are making continuous efforts to get the upper hand in promising BRIC markets, including China, by setting up more production lines and research facilities since we believe that Asian markets will play a pivotal role in the growth of the world economy.”

The veteran CEO forecast that the global construction equipment market will remain sluggish this year, citing the debt crisis in the eurozone and a slowdown in the Chinese economy.

“In Europe, the market is expected to move sideways, while the U.S. market is likely to make some headway. Asia is likely to suffer a mild setback due to China’s tightening policies,” he said. “Our goal is to increase our market share by 10 percentage points even in the sluggish market.”

He expects that the Korea’s construction equipment market will shrink by five to 10 percent in 2012, while the U.S. will see 10 to 20 percent growth. He forecast the Chinese market will contract by 20 to 30 percent in the first half of the year but will bounce back in the second half.

Although he is very confident about Korea’s operation, he is at the same time very cautious about rapidly-changing market environments. He is seeking to have the Changwon plant maintain its competitive edge over other emerging market factories, at least for the next five years, by strengthening its productivity and research capabilities.

“In the coming three to five years, it is likely that emerging markets will catch up with our plant by capitalizing on rich natural and human resources. To maintain our competitiveness, we have to secure ‘plus alpha’ capabilities.”