South Korea Jumps into EV Race: The Case of Hyundai’s Quiet Success

The electrification of transport invariably focuses on the China market for good reason. It is by far the largest electric vehicle (EV) market, with nearly 3 million units sold in 2021. The Chinese government is clearly committed to promoting EVs, while its industry has spawned a roster of EV players with global ambitions.

To realize those ambitions, Chinese players will have to contend with one of the latest entrants into the EV race: Hyundai Motor Group. While South Korea’s EV market has been overlooked—only 100,000 EVs were sold there last year—Hyundai quietly launched the IONIQ 5 in 2022 that’s already winning accolades and creating buzz as a “Tesla Killer.”

Whether the IONIQ 5 actually kills Tesla is beside the point. The fact that Hyundai seemingly came out of nowhere to accomplish what the legion of Chinese players have yet to achieve—carving out market share in advanced economies—deserves attention (see Figure 1).

Figure 1. The Global EV Race Is On (% market share)
Source: Korea Automotive Technology Institute.

With a 75% domestic market share, Hyundai’s success will be South Korea’s success because the company IS the entire EV industry. That could make South Korea even more important in EV supply chains than it already is.

This short case study, then, examines how Hyundai catapulted from its once reluctant embrace of EVs to a potential top contender—launching three EV models simultaneously and beating incumbent automakers and startups to market.

From Reluctant Embracer To “All-In” on EVs

Hardly an early adopter of electrification, Hyundai waffled on it for a couple of reasons: 1) internally it was pursuing competing technology choices; 2) externally it was observing, like most automakers, Tesla’s market potential before dipping in its toes.

Internally, Hyundai has been a champion of hydrogen fuel cell technology, having rolled out the world’s first mass-produced fuel cell EV in 2013 with a range of 369 miles, better than the 2022 Tesla Model 3 Long Range (334 miles). The company believed that hydrogen cell would solve the “range anxiety” problem associated with EVs and it wasn’t about to just give up on hydrogen.

Hyundai had also put its eggs in several technology baskets because it was hedging against a potential failure of battery EVs to gain market acceptance (see Figure 2). At the same time, Hyundai looked to Japan’s Toyota as direct competition, as its product pipeline reflected the priority of competing in hybrids rather than pure EVs.

Figure 2. Up until 2015, Hyundai Had No Plans to Launch Pure EV Models
Note: PHEV = plug-in hybrid EV; HEV = Hybrid EV; FCEV = hydrogen fuel cell EV.
Source: Hyundai; author calculations.

By 2018, it was hard to avoid how Tesla’s success was reshaping the auto industry. In that year, Tesla more than doubled its delivery to 245,240 units and was about to break even as a company. It also had a foothold in Hyundai’s home turf, with Tesla Model 3 sales taking off in South Korea by 2019.

That was likely the wake-up call Hyundai needed to get off the fence and decisively back battery EVs. What’s more, Hyundai’s early EV model was massively outselling its FCEV model even though the latter received more than 1.5x in subsidies (see Figure 3).

Figure 3. Fuel Cell Cars Still Cost More Than EVs Even with Higher Subsidies
Note: Subsidies are for Seoul only. In general, local subsidies in 2019 ranged from 4.5 million won ($3,661) to 10 million won ($8,135) for EVs and from 10 million won to 13 million won ($10,576) for FCEVs.
Source: Hyundai; Ministry of Environment; and author calculations.

That reality likely made the decision on the company’s strategic pivot an easy one. In 2019, Hyundai announced that it would launch a dedicated EV platform, on which the IONIQ 5 would eventually be built. Its investment in electrification subsequently skyrocketed from 3.3 trillion won ($2.7 billion) in 2019 to 10.8 trillion won ($8.8 billion) in 2021. By 2022, Hyundai was “all-in” on EVs, as evidenced by its Investor Day presentation.

Vertical Integration and “Fast-Follower”

Strategy is one thing, execution is another. On the latter Hyundai apparently performed beyond expectations, beating other global automakers to market. But what seemed like an overnight feat is of course far from reality. The IONIQ 5 didn’t just appear from nothing—Hyundai had been fine-tuning electric powertrains since 2014.

But the Korean chaebol’s operating model (corporate conglomerate with Korean characteristics) was also responsible for catalyzing Hyundai’s “fast-follower” approach to EVs. That operating model rested on the company’s relatively vertically integrated supply chain network, its own modular EV platform, and an export-oriented focus at the outset.

Vertical Integration

Much like Tesla, Hyundai’s vertical integration accelerated its EV development process by enabling coordinated investments. As is common for chaebols, Hyundai has sprawling subsidiaries under its wings, including a steel company, a logistics and distribution company, a powertrain and advanced driver assistance systems vendor, and a mobility software company.

In addition, Hyundai has a network of chaebols that it can tap into, all of whom are important in the EV supply chain. SK Innovation, for instance, is one of the main battery suppliers for the IONIQ 5. The automaker has also formed a joint venture with LG Energy Solution to build a 10 GWh battery plant in Indonesia that will supply Hyundai’s EV plant in Indonesia. Hyundai and Samsung may also collaborate to deal with the auto chip shortage.

Scalability

Any global automaker wants scalability, yet Hyundai was one of the first legacy automakers to develop its own dedicated EV platform to realize scale (see Figure 4).

Hyundai can now design several models quickly on it, which is what enabled it to roll out three EV models at the same time and to plan the launch of 31 EV models by 2030. While a dedicated platform is standard for EV startups, they don’t yet have the scale that a legacy automaker can leverage. Finally, with only three young brands under its portfolio, the Korean automaker is less constrained by the need to create unique value propositions for each brand.

Figure 4. Hyundai’s Dedicated EV Platform Allows Rapid Scaling

Source: J.D. Power.

Built for Export

Because of South Korea’s relatively small domestic market, its government and companies have always focused on foreign markets to achieve economies of scale (see Figure 5). Hyundai is no exception. That was reflected in how it recruited foreign talent from the likes of BMW and Volkswagen to design products aimed at advanced markets.

Figure 5. Korea’s EV Market Miniscule Compared to China, America, and Europe
Source: International Energy Agency.

A strategy that aims to export directly to advanced markets where incumbents are already selling top-of-the-line EVs imposes a certain discipline on the company to strive for excellence. That’s because Hyundai would need to roll out an EV that will immediately appeal to wealthier consumers and is competitive with the Teslas and VWs of the world because an “also-run” won’t cut it amidst cut-throat EV competition.

Hyundai Charges Ahead?

The IONIQ 5, then, hasn’t disappointed so far. Not only has the EV model been showered with praise, it is already outselling Tesla in the South Korean market in its first year (see Figure 6). This likely doesn’t bode well for Chinese EV players that have long been eyeing advanced markets.

For instance, since Hyundai has brand familiarity in the US market, the IONIQ 5 could become the “Prius” of its class—that is, the single dominant foreign EV brand in Western markets, potentially shutting out Chinese competition.

Figure 6. IONIQ 5 Outsold Tesla in South Korea in 2021
Source: Ministry of Land, Infrastructure and Transport.

This initial success is crucial for Hyundai in several ways. For one, its EV revenue stream can be re-invested back in R&D and funding the development of other technologies. Second, more IONIQ 5s on the roads means more driver data for Hyundai to develop autonomous driving features, improve driver experience, and strengthen the domestic supply chain for EV components.

But Hyundai’s success as an EV manufacturer is certainly not guaranteed. Like other automakers, it is also struggling with auto parts shortages and the pressure for on-time deliveries. In the longer term, when the EV becomes a computer on wheels, Hyundai’s competitiveness in software, an area it currently lacks, will be increasingly crucial.

Even with its “all-in” on EVs, Hyundai hasn’t abandoned its cherished hydrogen fuel cells. As a first-mover on FCEVs, and given that battery material prices are surging, Hyundai’s initial bet on hydrogen may have been somewhat prescient. That will be the subject of the next installment in this series on the East Asian EV industry.