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Business History
Vol. 52, No. 2, April 2010, 207230

Strategic policy revisited: The origins of mass production in the motor

industry of Argentina, Korea and Spain, 194587
Jordi Catalan*
10

Facultat de Cie`ncies Econo`miques, Histo`ria i Institucions Econo`miques, Universitat de

Barcelona, Diagonal 690, Barcelona Catalonia, Spain

During the golden age, Argentina, Korea and Spain promoted the
development of their motor industries by restricting imports, licensing
investment, imposing a high level of local sourcing for parts, and supporting
their own national champions. These strategic policies took advantage of
economies of scale, achieving signicant increases in output, and creating
dynamic competitive advantage. Sudden liberalisation or the high volatility of
the macroeconomic environment could jeopardise the process of structural
change. Gradual evolution of policy-making and the cumulative learning of
capabilities by the national champions were crucial for long-term success. The
present research supports both Lists classical defence of protection for infant
industries in mediumlarge economies and more recent claims in favour of
strategic policy.
Keywords: strategic policy; automobile industry; Argentina; Korea; Spain;
Hyundai; IKA; SEAT

Introduction
This study suggests that protection for infant industries may contribute to changing
the comparative advantage of backward economies (List, 1885, chapters IV, XV,
XVII and XXVI; Chang, 2002a, chapter 2, 2002b, pp. 539559). The case under
consideration here is the automobile industry because of its capacity to create
signicant externalities and linkages for long-term structural change.
After World War II, developing economies from all over the world sought to
promote industrial growth in order to foster development. As is well known, forced
industrialisation in centrally planned economies led to dramatic long-term losses.
Inward-looking industrial policies in developing market economies also caused
signicant ineciencies, which were partially hidden by the tremendous expansion of
the world economy during the golden age, but which became all too visible after
1973 or 1982.1 However, the experience of the three medium-size countries selected
for our study indicates that the adoption of protectionist policies to support the
domestic motor industry was an acceptable strategic option to promote mass
production and structural change in the early stages of the sectors development.

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*Email: jordi.catalan@ub.edu
ISSN 0007-6791 print/ISSN 1743-7938 online
2010 Taylor & Francis
DOI: 10.1080/00076791003611863
http://www.informaworld.com

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J. Catalan

This turned out to be the case not only during the years of international expansion
but also throughout the phase of a slowdown in growth following the rst oil shock.
The three countries selected for this study are Argentina, Spain and South Korea.
Two earlier works have compared their automobile industries from a sociological
perspective, arguing that the dierent outcomes in development of the industry were
due to particular social conditions of each country (Biggart & Guillen, 1999, pp.
722747; Guillen, 2003, pp. 159182). The present paper conrms the signicance of
this comparison for establishing the potential development of the automobile
industry in emerging economies. Nevertheless, this study diers from the previous
research in three main issues. First, it takes a historical approach to economics, by
identifying some specic periods of analysis, comparing development patterns and
focusing on the long-term performance of quantitative data. Second, the paper tries
to show that policies mattered more than social structures in the nal outcome.
Third, South Korea, not Spain, emerges as the best performer within the club, given
that it was able not only to develop a competitive motor industry but also to succeed
in retaining it under national control (Amsden, 1989, pp. 139188, 1997, pp. 336
367; Green, 1992, pp. 419422; Chang, 1993, pp. 144154; Kim, 1993, pp. 358367;
Jenkins, 1995, pp. 636642; Jeong, 2004, pp. 92133; Yang, Kim, & Han, 2006, pp.
2426; Lansbury, Suh, & Kwon, 2007, pp. 2473).

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Strategic policy and the rise of mass production in the early golden age, 194562
The choice of countries is based on two criteria: the comparability of their size, and
the similarity of their political priorities. Argentina, Spain and the Republic of Korea
can be considered medium-size countries. Economies of scale in the world
automobile industry have been signicant since the eve of World War I, when
Henry Ford succeeded in combining interchangeable parts, a continuously moving
assembly line, and the supervision of the production process by engineers. These
innovations made possible mass production but required a relatively large market;
mass automobile manufacturing appeared unsuitable for countries with few
potential costumers or low per capita income. This was not the case in our selected
economies. In 1953 Spain had 28 million inhabitants, South Korea 21 million after
the partition of the peninsula and Argentina had around 17 million. However, the
Plata Republic enjoyed a substantially higher per capita income, i.e. around 5000
Geary-Khamis 1990 dollars, compared with less than 3000 in Spain and around 1000
in the Republic of Korea. If GDP is considered an indicator of potential economies
of scale, then Argentina was the best placed of the three, with about 90,000 GearyKhamis 1990 dollars. Spain, with 80,000, was a close second, but Korea, with 23,000,
lagged behind.2
The three countries adopted industrial policies to promote domestic automobile
manufacturing during the golden age. In Argentina, under General Peron, the First
Five Year Plan of 1946 considered the creation of productive capacity in the motor
industry a priority (Sourrouille, 1980, p. 26; Frenkel, 1992, pp. 97112; Belini, 2003,
pp. 114116, 2006, pp. 453459). Car imports were severely curtailed, falling from
80,193 units in 1947 to only 7051 in 1949.
In 1951 the government decided to create a public rm to undertake automobile
manufacturing with a factory in Cordoba, which had been used for aircraft
production since 1927. Industrias Aeronauticas y Mecanicas del Estado (IAME) was
declared an undertaking of national interest, which meant that it was exempt from

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paying duty on imports of machinery, parts and raw materials. By 1952 IAME
employed 8000 workers. In April 1952 the company presented its rst model,
Justicialista, a saloon car, and launched Rastrojero, an o-road vehicle, a few
months later. By 1958 the rm had produced 13,464 units, with seven models.
In 1946 the Spanish public holding Instituto Nacional de Industria (INI) bought
the Hispano-Suiza factory in Barcelona in order to produce heavy vehicles (San
Roman, 1995, pp. 149155; Garc a Ruiz, 2001, pp. 141144, 2003, pp. 1393;
Carreras & Estape-Triay, 2002, pp. 123135). A more signicant step in the
development of mass production was taken in 1948 when the public holding forced
Banco Urquijo to transfer the contract signed with FIAT for technical assistance for
car production in Spain. This led to the creation of Sociedad Espanola de
Automoviles de Turismo (SEAT), in which 51% of capital was owned by INI and
7% by the Italian company. The plant, located in the duty-free zone of the port of
Barcelona, launched its rst model (the saloon 1400) in 1953. SEAT not only
received tari and other tax exemptions but also beneted from its status as rm of
national interest (San Roman, 1995, pp. 149155; Catalan, 2000, pp. 124125; 2006,
pp. 143150; Tappi, 2008, pp. 5060). By 1958 it manufactured about 22,157 cars in
two models (1400 and 600).
In the Republic of Korea, the mechanic Choi Mu-Seong and his brothers
constructed the Shibal, the rst car manufactured in the country, in 1955 during the
rule of Rhee Syngman. They founded Shibal Automobiles (Yang et al., 2006, p. 22;
Lansbury et al., 2007, p. 32). The rm used parts of old Korean War jeeps and
modied engines.
Rhee was overthrown in April 1960. Another coup brought General Park
Chung-Hee to power in March 1962. The new government approved the First Five
Year Development Plan, which supported the creation of a modern car industry.
Under the Automobile Industry Protection Act imports of nished cars were
prohibited (Green, 1992, p. 414; Ravenhill, 2001, 5; Lee, 2005, p. 8; Jeong, 2004, p.
93; Yang et al., 2006, p. 24). The Minister of Trade and Industry was made
responsible for deciding which companies would specialise in car production and
take advantage of economies of scale. Originally Sammi Corporation was selected,
but Saenara Automobile Company was eventually appointed (Ravenhill, 2001, p.
16). Saenara (which means New Nation) signed a technical assistance agreement
with Nissan and assembled parts imported from Japan.
In short, nationalist regimes in the three countries coincided in launching
programmes and providing support for rms in order to promote domestic
automobile production. Behind this priority lay a political concern with
industrialising the country and the militarys particular interest in automobiles. A
broad range of instruments was applied: tari exemption, direct subsidies,
preferential credit and public participation in the capital of rms. However, in all
three countries imports of nished cars were severely restricted and investment was
subjected to licensing. The US rms which had operated in Argentina and Spain
since the 1920s were confronted with real diculties over importing parts, obtaining
permission for expansion plans and sending prots abroad (Wilkins & Hill, 1964, pp.
354432; Sourrouille, 1980, pp. 3747; Carreras & Estape-Triay, 2002, pp. 129135;
Belini, 2003, pp. 453459).
The most important project for the Peron administration was Industrias Kaiser
Argentina (IKA). The foreign exchange scarcity led the government to welcome
foreign capital in 1953. The problem of obtaining reliable components had been a

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major obstacle to the expansion of IAME, the earlier national champion. In

addition, due to the acute scarcity of foreign exchange, the regime was keen to
stimulate the substitution of parts. At that time, the US businessman Henry Kaiser
was looking for alternative uses for the equipment at his Michigan and Ohio plants,
which were facing serious diculties in the US market (MacDonald, 1988, pp. 333
340; McCloud, 1995, pp. 720; Belini, 2003, pp. 477484, 2006, pp. 122130; Cipolla,
2003, pp. 2163). In August 1954 Kaiser put a proposal to the Argentinean
government for a joint venture to manufacture cars aimed at using 90% local parts.
After some bargaining, the society was created in January 1955 with a capital of 360
million pesos divided between Kaiser Motors (31%), IAME (22%) and private
Argentinean shareholders (47%).3 The plan was to produce 20,000 jeeps, 10,000
Manhattan saloon cars, 5000 vans and 5000 o-road vehicles. The factory was nally
built at Santa Isabel (Cordoba). IKA turned out to be the rst relatively large
Argentinean producer (McCloud, 1995, pp. 8895; Bisang, Burachik, & Katz, 1996,
p. 247; Cipolla, 2003, pp. 6568; Belini, 2006, pp. 122130).
IKA launched its Argentinean-manufactured jeep in 1956; considered to be the
countrys rst standardised production automobile. IKA thus took the lead as
Argentinas main automobile producer. Output climbed from 5000 units in 1956 to
23,753 in 1959 (MacDonald, 1988, p. 341). Kaiser Argentina can be considered the
national champion of the moment, with a market share of 72%.
However, the Revolucion Libertadora, which overthrew Peron, changed the
automobile policy in Argentina: restrictions on automobile imports were eased
(Sorrouille, 1980, p. 26; Torre & De Riz, 2001, p. 241; Barbero & Rocchi, 2003, p. 285).
Afterwards, Arturo Frondizis government combined the liberalisation of licences to
stimulate investment with compulsory requirements of a large proportion of local parts.
Again imports were curtailed. From late 1958 onwards Frondizi made the participation
of foreign capital in the creation of new automobile plants much easier by means of the
Foreign Investment and Industrial Promotion Act and the decree of Promotion of
Automobile Production (Sorrouille, 1980, pp. 4751; Bisang et al., 1996, pp. 249251).
Restrictions on prot repatriation by foreign companies were eliminated (MacDonald,
1988, p. 340). The idea was that free competition would select the most ecient rms
and would favour the establishment of new companies in the country. In fact, many
international car producers responded to Frondizis invitation.
The big three US car rms initially obtained permission to undertake the
production of commercial vehicles. However, after a visit by the president to the US,
plans to promote the production of passenger cars were also approved (Bisang et al.,
1996, p. 250; Cipolla, 2003, pp. 9193, 2007, pp. 104105). As a result, Ford
launched the Falcon in 1962. GM assembled the Chevrolet 469. Chrysler launched
the Valiant (ADEFA, 1.000.000 de automotores argentinos, pp. 1416).
European producers also entered into the automobile market. Fiat Concord,
which had operated in the production of tractors since 1954, gained permission to
manufacture passenger cars. Citroen undertook the assembly of the AZL and AZU
models. IAFA launched the Peugeot 403. Altogether, 23 automobile rms had the
green light for their productions plans (Barbero & Motta, 2007, p. 198).
Frondizis policy revitalised foreign investment in the car industry and also
stimulated new domestic moves to license the use of foreign technology. The most
important was SIAM Di Tella, which presented its project to manufacture a 1500 cc
saloon car under a BMC licence (Rougier & Schvarzer, 2006, pp. 2934). Di Tella
launched the 1500 in 1960 and a commercial vehicle in 1961.

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In Spain, the automobile policy of the 1950s combined preferential support for
the new national champion, SEAT, with an extremely cautious policy of licensing a
small number of rivals. Not only did car imports continue to be very seriously
restricted, but industrial policy aimed to ensure that the components of automobile
production were almost entirely local. Licences for new undertakings were given on
an individual basis and attempted to favour specialisation (Garc a Ruiz & Santos
Redondo, 2001, pp. 3159).
The project of producing the Renault 4CV in Valladolid received the go-ahead
from the government in 1951 (Sanchez, 2004, pp. 149158, 2006, p. 355; Ferna`ndez
de Sevilla, 2007, pp. 119124). Fabricacion de Automoviles Sociedad Anonima
(FASA) was given a four-year period of grace, by the end of which it had to use
100% local parts (Ferna`ndez de Sevilla, 2007, p. 123). The company would build the
factory in Valladolid. Local shareholders subscribed about 70% of the capital, and
SAER, a Regie Nationale des Usines Renault subsidiary, acquired the rest. FASA
obtained permission to manufacture a small utilitarian model, while SEAT was
preparing to launch of a more up-market car (with a 1400 cc engine).
The passenger car market in the 1950s became practically a duopoly in the hands
of SEAT and FASA. By 1956 SEAT produced more than of 10,000 vehicles, and
FASA more than 5000. The rest of passenger car manufacturers together produced
fewer than 2500 vehicles.
In 1957 SEAT launched a small utilitarian vehicle, the 600, which was a
tremendous success: it remained the rms blockbuster product until 1968 and was
produced, and exported, until 1973. FASA reacted by undertaking the manufacture of a
new, more up-market vehicle, the Dauphine. The new model, launched in 1958, again
depended on the Renault licence. The French company continued to supply licences in
the early 1960s and showed an interest in increasing its participation in the Spanish rm.
The Spanish production of automobiles jumped from fewer than 7000 vehicles in
1954 to more than 100,000 in 1962. The national champion and main producer,
SEAT, could boast that more than 90% of parts were locally made (Catalan, 2006,
p. 153). FASA remained far below that level, but had been forced to gradually
decrease the proportion of imported foreign parts.
South Korea did not have as much experience as Argentina or Spain in the
assembly or manufacture of automobiles. Before World War II, when the country
was occupied by Japan, Korea only had some repair workshops for trucks and cars
produced overseas and used in the peninsula, Manchuria or inland China. Since
World War II, these small workshops had repaired and provided parts for the army.
The experience acquired in the repair of Japanese vehicles was transferred to the
workshops later serving the American forces.
One of these workshops was owned by Chung Ju-Yung, under the name of
Hyundai Motor Service, in Seul in 1946 (Kirk, 1994, p. 124; Lee, 2005, pp. 89).4
Chung would become the future founder of the Hyundai (that is Modern)
conglomerate, but in the aftermath of the war he began by transforming cars into
charcoal-run vehicles because of fuel restrictions.
Kia Motor Corporation had been founded, under the name of Kyunsung Precision
Industry, in Seoul in 1944 (Green, 1992, p. 417). Originally it produced steel tube and
bicycle parts, and began to manufacture complete bicycles in 1951. Five years later Kia
produced its rst motor scooter, setting up a new factory at Shihung; in 1962 Kia
launched its rst truck, the K-360. Hadonghwan, founded in 1954, shared a similar
experience. Shinjin Motors, in turn, began by constructing minibuses.

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Accumulation of capabilities was of paramount importance, but both domestic

consumption and production remained extremely low. Choi Mu-Seong built a plant
with a theoretical capacity of 1500 vehicles, although it only produced a few hundred
Shibals (Kirk, 1994, p. 125; Lansbury et al., 2007, p. 32). The number of new
registered automobiles each year rarely surpassed 3000 up to 1962. Nevertheless,
from an evolutionary perspective, it has been argued that the rst stage in the
development of the automobile industry in South Korea took place between the late
1940s and the early 1960s, since the number of domestic parts suppliers rose from 13
before 1950 to 500 by 1962 (Kim, 1993, pp. 3133; Yang et al., 2006, p. 22).
A further stage of development took place since the early 1960s (Green, 1992, p.
414; Jeong, 2004, p. 93). Although it had National Motors, born in 1937, as a
precedent, Saenara Motors was founded in 1962 to benet from the conditions
created by the new protective legislation. It built a factory with a capacity for 6000
passenger cars at Bupyoung.

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Increasing local content and exploring export markets in the late golden age, 196273

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The Argentinean automobile industry had experienced substantial growth since the
early 1950s and, in the medium term, the liberal policies of Revolucion Libertadora
and Frondizi favoured a further marked increase in the productive capacity of the
countrys motor industry (Sorrouille, 1980, pp. 4776). Between 1955 and 1965
Argentinean output multiplied by 30, reaching 194,536 vehicles by the mid-1960s. In
1964 the local content requirement was set to 90%. However, the intensication of
competition signicantly squeezed the protability of existing rms, and many of the
new producers were not protable.
In 1963 Ford, General Motors, Chrysler, IAFA, Citroen, Mercedes Benz and
IASF recorded losses. The leader in sales up to 1962, IKA, experienced a fall in prot
margin (prots/sales) from 5.5% that year to only 1.0% in 1963. Automotores
Argentinos, Cisitalia, Borgward and Peugeot closed their plants. In the next two
years, IKA, FIAT and the three US companies declared prots, but Citroen,
Mercedes Benz and SIAM Di Tella went into the red. SIAM had launched four
models, although its total output remained below 14,000 units.
At the top of the pyramid, Argentinas main producers in 1965 were IKA, Ford
Motor and FIAT Concord. The leader, with an output of 56,625 vehicles, had seen
its share of automobile production suddenly fall to 29%. As Figure 1 shows,
Industrias Kaisers prot margin suered a rst major crisis in 1963, in a dicult
macroeconomic environment. In spite of prot-squeezing, the rm explored export
markets, modernised equipment, increased the production of parts and launched
new models. IKA was the rst Argentinean automobile producer to export, sending
jeeps to Paraguay in 1965 (Cipolla, 2003, p. 146). It introduced innovations such as
transfer machinery for engine manufacturing. IKA also opted for creating and
participating in subsidiaries to supply parts to other producers established in
Argentina, such as Transax (axle dierentials) or Tandil (cored castings) (McCloud,
1995, pp. 154161). It became the largest single supplier to the Argentine automobile
industry and, therefore, reinforced its key role in the accumulation of capabilities
and in the emergence of a national innovation system.
Moreover, IKA tried to oer new models to attract additional customers. This
strategy included agreements with Renault (1960) and American Motors (1961) to
license some of its products such as the R4L or the Rambler. As a consequence, in

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Figure 1. National champions prot margin (% prots/sales)
Sources: Sourroille, 1980; Chung, 2000; Catalan, 2006.

1965, the rm was producing as many as 17 models. The resulting average of 3331
units per model was too low to benet signicantly from economies of scale.
Ford opted for a rather limited product range, with six models. Total production
remained below IKA in number of units (30,424) but prot margin was superior
(8.4%) due to the lower use of domestic parts and a better average of units per
model. The Ford Falcon, produced at the new plant at Pacheco, proved relatively
successful over this period (Cipolla, 2007, pp. 108115).
FIATs activities in Argentina were originally devoted to the manufacture of
tractors and railway equipment, but in 1960 the company launched the 1100 and the
600, the rst cars at its plant in Caseros (ADEFA, 1.000.000 de automotores
argentinos, pp. 1416). Until 1965 it produced ve models, reaching an output of
28,868 units. It exported to Chile. Fiat Concords unit per model ratio of 5,798
vehicles was signicantly larger than IKAs, but prots from sales remained far
below Ford (3.8%).
In short, the sudden increase in competition had the logical eect of lowering
prots and extending the range of models available. The excessive number of both
producers and models led to bankruptcies, takeovers and mergers. In 1965 Citroen
joined Peugeot to convert IAFA in SAFRAR. IKA attempted to rescue SIAM Di
Tella by acquiring 65% of its capital (Rougier & Schvarzer, 2006, pp. 3438).
Between 1961 and 1965, 12 rms closed their plants.
The limited range of SIAM Di Tella worsened the performance of the national
champion. Though IKA was able to launch a popular model designed by Pininfarina
in 1966, the Torino (Cipolla, 2008, pp. 2352), the prot margin was squeezed to
only 1.1% in 1967 (Figure 1). Falling protability and the death of Henry Kaiser led
his heirs to sell their share in IKA and Transax to Renault and Ford respectively. As
a result, in late 1967 the mother company was renamed IKA-Renault. The company
declared huge losses the next year. The rms protability remained very low until
1973 and it collapsed soon afterwards.

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Both Fiat and Ford surpassed IKA-Renault in sales, prots and protability
(Sorrouille, 1980, pp. 6061). In 1972 sales of Fiat Concord were more than double
those of IKA-Renault and the prots of the Italian subsidiary were 10 times higher.
Nevertheless, the prot margin at Fiat Concord only 0.5% left little room for
optimism. At the end of the golden age, Ford was second to FIAT in terms of units
produced; though its sales were much more modest (one-third lower), its relative
protability was higher, reaching 2.2% in 1972.
In the late 1960s, social unrest spread within capitalist economies, after two
decades of exceptional growth and low unemployment. In Argentina, class conict
was particularly intense due to the non-cooperation strategies of political actors. A
new coup brought the army back into power in 1966, now under the name of
Revolucion Argentina. In 1969, Cordoba, the province where most of the
automobile industry was located, became the scene of direct confrontation between
leftist workers and police. During 197273 a few managers of the main motor rms
were kidnapped or even assassinated. The ERP, a Guevarist guerrilla movement,
kidnapped and killed the Fiat Concordes chief executive ocer in 1972. The
following year a Ford executive was shot at in the street. One of the directors and
two other employees of Transax were also assassinated at the end of 1973 (Cipolla,
2007, pp. 131132).
On balance, it should be said that automobile production developed signicantly
in Argentina during the late golden age, albeit more slowly than in the previous
period. The change of slope in Figure 2 shows that growth was much less intense
than during the take-o phase of the 1950s. However, a remarkable average rate of
expansion of about 7% per year was reached between 1962 and 1973, and car makers
located in Argentina began to explore neighbouring markets (Sourrouille, 1980, p.
27; Barbero & Rocchi, 2003, p. 286).
Exports were directly subsidised with the new legislation passed in 1971
(Kosaco, Tudesca, & Vispo, 1991, pp. 57). Preference was given to the industry

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Figure 2. Argentina, production and new registration of automobiles

Note: New registration has been estimated as output plus imports less exports.
Source: ADEFA, Industria automotriz argentina.

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in bilateral trade agreements. As a result, automobile exports rose from fewer than
100 completed units in 1967 to more than 10,000 in 1973. Moreover, exports of
knocked-down automobiles amounted to 75% of the value of completed units
(ADEFA, Industria automotriz argentina 1985, pp. 2526). Argentina had become
the worlds thirteenth largest exporter of automobiles. New capabilities and a new
pattern of dynamic competitive advantage were emerging.
Nevertheless, the development of the Argentinean automobile industry during
the late golden age suered from three main weaknesses. First, companies were
producing very small series of each model and were thus unable to benet from
economies of scale. This situation was due to the sudden liberalisation of the
industry during the earlier phase of growth, which resulted in an excessively large
number of rms and of models launched by each company. The nal outcome was
that rms operated with an extremely reduced prot margin.
A second negative outcome, related to the previous one, was that the national
champion experienced a dangerous erosion of its protability and its role in
Argentinean innovation was jeopardised. The takeover of SIAM Di Tella only made
things worse for protability. The sale of Kaisers Argentinean stock to Renault and
the loss of the protable Transax subsidiary jeopardised IKAs role as national
champion and decreased its capacity to innovate.
A nal source of vulnerability came from the strategies of political actors.
Political turmoil poisoned social bargaining. Company managers, as representatives
of capital, were seen as government collaborators and were often targets for violent
organisations. As the motor industry was one of the fastest growing sectors, it
suered greatly from the turmoil of the late 1960s and early 1970s.
Before 1972 Spanish industrial policy showed strong continuity with the
strategies of the 1950s. Imports remained severely restricted. Investment was subject
to strict licensing. Ninety per cent of the parts used by car manufacturers had to be
locally made.
The Ministry of Industry also promoted car exports by providing subsidies in the
late 1960s. In the case of the main producer, SEAT, sales abroad were originally
prohibited by the contract signed with the licensing partner, FIAT, in 1948. Long
negotiations between the government and the Italian rm led to an agreement signed
in 1967 which entitled SEAT to export in exchange for an increase in Turins
participation in its capital. As a consequence, the public holding INI reduced its
capital from 51% to 35%, and FIAT expanded its share from 7% to 37% (Catalan,
2006, pp. 160169). In 1970 SEAT also obtained the go-ahead to create its own R&D
centre (which remains the most important R&D department in the Spanish
automotive industry) and to use FIATs export network to sell abroad. The same
year, Madrid signed a Preferential Agreement with the EEC, which established the
gradual reduction of taris on Spanish cars. All these developments favoured a rapid
increase in SEATs sales abroad. SEATs exports climbed up to 55,167 units by 1972,
accounting for 54.5% of total Spanish passenger car exports. By 1974 SEAT had
become the leading Spanish industrial rm in terms of R&D, with an expenditure of
1707 million pesetas (Ministerio de Industria, 1976, p. 87).
Renault had more success than FIAT in increasing its degree of control of the rm
which produced its models in Spain. In 1965 Renault bought up to 49.9% of capital of
FASA. This move made the FASA-Renault factory in Valladolid, the rms most
important undertaking from outside France (Loubet, 2000, p. 221; Sanchez, 2006, pp.
364374; Ferna`ndez de Sevilla, 2007, pp. 140142). FASA-Renault also beneted

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from the export promotion policy of the late golden age and sold abroad 11,087
units in 1972, about 10.6% of total Spanish car exports.
The protectionist policy of the Golden Age can be considered a success given that
automobile production rose at a rate of 20% per year between 1962 and 1973 (Figure
3). Spain climbed to the tenth position in the world ranking of automobile
producers. The industry began to compete abroad and Spain became the 11th world
exporter of automobiles in value.
Labour conict also intensied in Spain in the late 1960s as the economy
approached full employment and clandestine unions attempted to link the
improvement of living conditions with the ght against Francos dictatorship
(Tappi, 2008, pp. 101134). As a result, labour costs increased sharply and
protability declined: between 1967 and 1971 SEATs prot margin declined from
4.2% to 2.2% (see Figure 1).
In 1972 SEATs margin of prot improved slightly, to 2.7%. The rate appears
modest, but is not far below the level of French and Italian car companies in the
original countries. By this time SEAT was producing 335,340 units per year with ve
basic models. The Spanish national champion was beneting from economies of
scale and prepared the launch of a new model, 127, the rst with front wheel drive.
The second passenger car rm, FASA-Renault, also had to deal with labour
conicts, albeit less intense. The prospects were even better than for SEAT, given
that in 1969 FASA-Renault launched a successful product for the medium to high
end of the market, the R-12, and in 1972 presented another future star product for
the lower end of the market, the R-5 (Sanchez, 2004, p. 164). Although its market
share was less than half of SEATs, its protability was slightly higher.
In South Korea Saenara did not produce more than 3000 vehicles. Its failure led
to a dramatic fall of output during the mid-1960s (Figure 4). As a result, the
government supported the takeover of Saneara by Shinjin Industrial (Chang, 1993,
p. 140; Ravenhill, 2001, p. 1). Shinjin shifted to Toyota as its technological partner.

470

475

480

485

Figure 3. Spain, production and new registration of automobiles

Source: Garc a Ruiz, 2003.

Business History

217

495-

500

505
Figure 4. South Korea, production and new registration of automobiles
Note: New registration has been estimated with motor vehicles in use.
Source: Mitchell, 2003.

510
In 1966 it launched its Corona, assembled in Bupyoung, and it also produced trucks.
Korean production surpassed 6000 units for the rst time. Shinjin enjoyed over 80%
share of the Korean market in passenger vehicles.
In 1963 the Hadonghwan Motor Workshop took over the Dongbang Motor
Company. The new rm, Hadonghwan Motor Company, focused on truck and bus
construction. In 1966 Hadonghwan exported its H7H R-66 bus to Brunei for the rst
time. The year after, Hadonghwan established a partnership with Shinjin.
Hadonghwan also began to export large buses to Vietnam.
Under pressure from the parts manufacturers, the government decided to
increase the number of nal producers of cars and announced its Automobile Plant
Permission Standards, which encouraged technological alliances with foreign
partners (Chang, 1993, p. 149; Ravenhill, 2001, p. 6; Yang et al., 2006, p. 22). In
1966 the government authorised two new companies to undertake passenger car
production: Asia Motor Company and Hyundai (Lee, 2005, p. 9). The Asia Motor
Company had been founded in 1965, specialising in the production of medium-sized
trucks for military use. Hyundai, under the lead of Chung Ju-Yung, had become one
of the most prosperous chaebols thanks to public support from the Rhee and Park
governments (Kirk, 1994, pp. 68109). The subsidiary Hyundai Motor Company,
created in 1967, would manufacture under licence from Ford, launching the Korean
Cortina a year later.
In 1969 production of automobiles reached 33,000 units, with passenger cars
accounting for 57%. At this stage, assembly still dominated, but the government was
planning to introduce compulsory local content of parts (Jeong, 2004, pp. 9394).
The rst attempt came with the Plan for the Comprehensive Promotion of the Auto
Industry.
Kia had been trying to manufacture domestically the engines of the small truck it
was producing. Such concern for local content, led the government to authorise Kia
to undertake the production of passenger cars in 1971. The government also

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560

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570

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J. Catalan

approved the creation of a joint venture between Shinjin and General Motors, after
Toyota had decided to give up its support to the former, following Chu En-Lai
ultimatum (Chang, 1993, p. 149; Ravenhill, 2001, p. 6). General Motors Korea was
born in 1972, with each partner holding equal stakes.
As Figure 4 shows, in spite of two signicant recessions, output increased by 24%
per year between 1962 and 1972. So throughout the late Golden Age, car production
in the highly protectionist South Korean market rose signicantly. The policy of
making the market the exclusive domain of local rms, while at the same time
favouring licence agreements with foreign partners, helped the countrys motor
industry to develop critical capabilities (Kim, 1993, pp. 358367; Jeong, 2004, pp.
120127; Yang et al., 2006, p. 22). Moreover, the national content requirement made
the ratio of local to foreign parts in Korean cars to increase from 21% in 1966 to
more than 60% in 1972.
Macroeconomic turbulence and industrial restructuring in the era of stagation,
197387
The expectations created by the development of a domestic automobile industry in
Argentina during the golden age were not fullled. Argentinean car production
reached its peak in 1973 with an output of 293,742 units (Figure 2); but by 1987
production had sunk by a third, to 193,315 automobiles. Sixteenth in the list of the
worlds top automobile exporters in the early 1970s, Argentina was not longer in the
top 20 in the late 1980s.
The main reason for the Plata Republics failure in this period was the extreme
volatility in demand management (Bisang et al., 1996, pp. 256257; Katz &
Kosaco, 2000, pp. 292297; Torre & De Riz, 2001, pp. 277310; Della Paolera &
Gallo, 2003, p. 372). Although Argentina had hardly been stable during the golden
age, the extent of macroeconomic disturbance after 1974 was to distort industrial
development in an extremely perverse way. The shifts in automobile policy did not
help either.
The sharp uctuation of the rate of ination can be considered the main indicator
of the acute macroeconomic volatility of demand management in Argentina. The
Plata Republic had suered inationary shocks during the golden age, the most
important occurring in the late 1950s; however, as Figure 5 shows, variations in the
ination rate in Argentina before 1975 were not signicantly more intense than in
South Korea. In the early 1970s, Argentinas ination rate was moderate,
comparable to that of the Asian and Iberian economies.
Between 1975 and 1987 Argentina experienced inationary shocks without parallel
in either Spain or Korea. The episodes ended with the adoption of radical restrictive
policies to decelerate ination, which in turn caused real recession. The performance of
the Argentinean industry in those years tends to conrm the ndings of authors who
stress the existence of a point of no return in Argentinas long-term economic growth
around 1975 (Katz & Kosaco, 2000, pp. 307309; Barbero & Rocchi, 2003, p. 289;
Palma, 2003, pp. 139148; Rougier & Schvarzer, 2006, pp. 155290).
The return of Peronism led to nominal wage increases of 40% in 1975. The cost
of living soared, multiple exchange rates encouraged black market operations, and
general strikes led to paralysis of manufacturing activities.
The army seized power again in 1976 in another coup. The political repression
under General Jorge Videlas junta was far more brutal than in previous periods of

Business History

219

590

595

600

Figure 5. Ination (% cost of living increase)

Sources: Mitchell, 1993, 2003; Maluquer de Motes, Consumo y precios.

authoritarian rule. Ination rose to three gures; as the cost of living spiralled,
automobile production plummeted (Figure 2). In 1976 investment also fell down to a
record low (Kosaco et al., 1991, pp. 610).
The Finance Minister, Martinez de Hoz, attempted to ght the domestic and
external disequilibria by drastically reducing scal decit and decreasing taris. The
policy combined budget cuts, monetary restriction, real revaluation of the peso and
early de-regulation of the nancial system. Contraction of domestic demand together
with lower real protection for the industry pushed automobile production to its
second lowest level in 1978, when output was only 62% of ve years earlier. At this
point, General Motors decided to leave the country. Since the previous year GM,
Fiat, Chrysler, SAFRAR and Citroen had declared huge losses.
In 1979 quotas for car imports were replaced by a system of decreasing tari
protection. Restrictions on imports of parts were also eased, as the regulations on
locally made components were relaxed. As a result, imports of automobiles increased
from 458 units in 1978 to 68,361 in 1980 (ADEFA, Industria automotriz argentina
1985, p. 21).
The restrictive macroeconomic policy temporarily brought ination down to
100% per year during the biennium 197980. Automobile production also seemed to
recover, rising from 179,160 to 281,793 units from 1978 to 1980. Nevertheless, the
outlook was so gloomy that some of the automobile companies opted to leave
Argentina or to restructure their activities. Citroen and Industrias Mecanicas del
Estado (the old IAME) closed their doors. Chrysler sold its subsidiary to
Volkswagen. Peugeot and FIAT merged into Sociedad Europea de Veh culos
(SEVEL).
The tight policy seemed to lose strength under the government of General Viola
in 1981. Nevertheless, General Galtieris Finance Minister, Roberto Alemann, again
attempted sudden liberalisation, and showed himself in favour of balancing the
budget. The Falklands War fostered the public decit and pumped new money into

605

5
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635

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640

645

650

655

660

665

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675

680

685

J. Catalan

the market. Ination accelerated once more in 1982. Imports and registered cars
expanded for a while but production sank to 132,117 units. At this moment, the
absolute low point for the Argentinean motor industry, output fell to only 45% of its
1973 level. Most automobile rms ran up huge foreign debts as a result of the crisis:
Renault, Mercedes Benz and Ford belonged to the club of top debtor rms in 1982.
Foreign borrowing had been encouraged by the governments guarantee of exchange
insurance. The nationalisation of private debt in 1982 made Argentina one of the top
foreign debtors in the world.
The return to democracy under the radical presidency of Raul Alfonsin brought
neither economic growth nor domestic equilibrium to the country. Growth was
hampered by the burden of servicing foreign debt and additional volatility in the
ght against ination. Figures for automobile registration and production gures
remained far below the 1973 levels. Automobile rms continued in the red. The
survivors again tried to restructure by merging: in 1987, the leader of the market
since 1975, Ford, joined forces with Volkswagen Argentina to create Autolatina
(Schvarzer, 1995, pp. 511).
To sum up, between 1973 and 1987 the automobile industry undertook deep
restructuring guided by market forces under highly volatile macroeconomic policies
and dramatic demand shocks. Of Argentinas four main producers, IKA-Renault, Fiat,
Ford and General Motors, the last left the country (Bisang et al., 1996, pp. 257259;
Katz & Kosaco, 2000, pp. 302303). Fiat and Ford proved unable to maintain
autonomous businesses, and the old IKA fell under complete control of Renault in
1975. Although Renault Argentina maintained the production of the Torino, the only
remaining local model, in the future it would limit itself to introducing French models.
As has been argued, the overwhelming responsibility for the decline of the
automobile industry in the Plata Republic after 1973 was highly volatile macroeconomic
policy, inside an extremely polarised political system. Nevertheless, the automobile
sectors diculties were increased by the lack of an industrial policy supporting the
exploitation of economies of scale by rms. The low number of units produced of the
most successful car models illustrates this point: at Fiat Concord, the leader up to 1975,
the model of which most units were produced was the 600 365,768 units between
1960 and 1982, an average below 16,000 units per year. For SEAT the same model
(produced from 1957 to 1973) recorded averages above 46,000 units. Ford Argentinas
blockbuster model turned out to be the Falcon, with 494,208 units produced during
196291, again, around 16,000 units per year. In Spain, a comparable car, the R-12 was
produced from 1969 to 1983, with an annual average of above 30,000 units.
Without beneting from economies of scale, Argentinas exports could not
sustain competition in the world market. Table 1 shows how the expectations opened
up for Argentinean exports during the golden age were not fullled afterwards. In
addition, the share of the automobile sector in total added value of Argentinean
industry declined from 10.9% in 1970 to 6.4% in 1990.5
Democracy returned to Spain in the mid-1970s, and the country experienced
accelerating ination up to 1977. The Moncloa Pact (signed that year by the political
parties) together with restrictive demand management brought cost of living under
control (Figure 5). Centrist governments until 1982, and social democratic ones
afterwards, all gave priority to price stability. Although Spain experienced dramatic
economic depression and rising unemployment, expansionist macroeconomic
management was out of question during the decade following the signing of the
Moncloa Pact. In short, the volatility of macroeconomic management was low.

Business History
Table 1.

Top exporters of passenger cars and commercial vehicles ($ thousand).

1973

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

221

Germany
Canada
Japan
France
USA
Belgium
Italy
UK
Sweden
Netherlands
Spain
Australia
Argentina
Austria
Mexico
Brazil
Finland
Singapore
Lebanon
Denmark

6,483,517
3,103,489
3,494,511
2,825,848
2,613,063
1,872,860
1,378,487
1,314,852
867,996
219,683
175,271
167,368
61,555
55,459
39,659
37,043
31,416
28,659
21,527
21,516

1987
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Japan
Germany
Canada
Belgium
USA
France
Italy
Sweden
Spain
UK
Brazil
Korea
Mexico
Netherlands
Denmark
Austria
Yugoslavia
Finland
Norway
Portugal

44,288,960
37,442,083
15,669,396
10,502,252
10,131,876
9,684,875
4,947,497
4,890,615
4,116,020
3,911,305
3,059,590
2,788,923
1,120,465
716,188
543,025
510,104
489,669
385,307
242,004
232,071

690

695

700

705

Note: The source excludes central planned economies.

Source: UN, Yearbook of International Trade Statistics, New York.

On the other hand, Spanish industrial policy of this period contrasted sharply
with that during the golden age. The shift began in 1972, when the regulations
regarding the proportions of locally made parts in automobile manufacturing were
relaxed (Catalan, 2000, pp. 141144; Garc a Ruiz, 2001, pp. 147150). Henry Ford II
obtained a change of legislation from the Spanish government bringing down the
required level of local content from 90% to only 50% for new automobile rms
established in Spain. Moreover, the Dearborn rm was also granted permission to
build a new plant in the country. The factory, located near Valencia, would produce
the Fiesta model, a small front-wheel drive car, a direct competitor to the SEAT
blockbuster of the time, the 127. The Fiesta was launched in 1976. Within two
years, Ford was producing 260,939 units in Valencia (Tolliday, 2003, pp. 277287;
Perez Sancho, 2003, pp. 131143).
The shift of 1972 was consolidated in 1979, when the local content requirement
was reduced to 60% for all rms in the industry. At the same time, Madrid gave
permission to General Motors to establish a new factory near Saragossa. Again a
small utilitarian vehicle would be produced for the mediumcheap market, the Opel
Corsa. The new vehicle would be ready in 1983. By 1986 GM was manufacturing
304,090 units in Saragossa.
Last but not least, controls on automobile imports began to be relaxed. The
number of new imported passenger cars rose from 12,070 units in 1978 to 57,229
units in 1980 (ANFAC, Memoria 1980, Madrid). The process would continue during
the following years, in particular after 1986, when Spain joined the EEC.
The new industrial policy intensied competition within the domestic market and
improved the eciency of producers located in Spain. Both Ford and General
Motors made large investments in Spain to take advantage of the countrys

710

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740-

745

750

755

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765

7
770

775

780

J. Catalan

impending entrance in the Common Market. By 1987, Spain had risen to ninth in the
list of car exporters (Table 1) and improvement would continue afterwards.
The rm hit hardest by this policy was SEAT, the old national champion and a
key actor in the emerging national system of innovation, which had focused its
eorts on the popular segment. Its share of the Spanish market sank dramatically
from 51% in 1973 to only 26% in 1980. The rms losses rocketed from the moment
of the arrival of the Ford Fiesta (Figure 1). SEAT had taken over AUTHI in 1975 in
return for the promise of a government veto on GM setting up in Spain (Catalan,
2007, pp. 160170). Nevertheless, the transition governments did not respect their
predecessors commitment and GM was authorised to set up in Spain at the very
moment that SEAT was recording the heaviest losses in its history (Figure 1). As a
result, FIAT decided to leave Spain and gave SEAT back to INI in 1981. SEAT, now
owned completely by INI, tried to survive as an independent producer but suered
again from the launch of the Opel Corsa in 1983. Its output recorded only 240,005
units, only 66% of its 1974 level.
As an independent manufacturer, SEAT contacted Italdesign in 1980 (Molineri,
1999, p. 54). Giorgetto Giugiaro designed a new small/medium-sized model, the
Ibiza, which would become the rms blockbuster. Nevertheless, the launching of the
Ibiza was postponed until 1984. In the meantime, SEAT had signed a technical
cooperation agreement with Volkswagen. In 1986, when SEAT was beginning its
recovery, the Socialist government decided to transfer 51% of its capital to
Wolfsburgs rm. The policy of supporting a national champion in the automobile
industry was denitively over and the emerging national system of innovation was
seriously jeopardised.
To sum up, Spain experienced relative macroeconomic stability after 1972 and
completely overhauled its industrial policy. The protectionist policy came to an end
and eorts were made to attract the main American automobile producers to Spain
and to prepare the countrys entry into the EEC. The policy of supporting the
creation of a national champion in the industry was abandoned. These changes led
to Spains consolidation as a world exporter of cars in the medium to low end of the
market. Eciency and competitiveness improved. However, decisions over the
future of the industry would now be taken abroad and the bulk of R&D of the
Spanish car industry would depend on foreign headquarters. In addition, the
industry would experience a signicant slowdown compared with the previous
period.
The stability of macroeconomic policy in the Republic of Korea during 197387
resembles the situation in Spain more than that in Argentina. As Figure 5 indicates,
the low volatility of demand management in the country helped to create the
necessary conditions for the development of the automobile industry, which were
lacking in the Plata Republic. Moreover, in contrast to Spain, Korean industrial
policy did not experience dramatic shifts and contributed to overcoming signicant
weaknesses in the development process. Also unlike Spain, South Korea remained
very cautious in accepting new foreign investments and import liberalisation,
concentrating its eorts on encouraging domestic producers to take full advantage of
economies of scale and to decrease technological dependency.
After the soft coup known as the 1972 October Restoration, Parks nationalistic
policies were strengthened in South Korea (Amsden, 1989, p. 175; Green, 1992, p.
414; Ravenhill, 2001, p. 7; Jeong, 2004, pp. 9496). The Plan for Heavy and
Chemical Industries designed a pack of strategic activities for export promotion,

Business History

223

including the automobile industry. In 1973 the Long-Term Automobile Promotion

Plan invited producers to submit plans for launching an indigenous peoples car. The
priority was mass production of a Korean cheap model (with an engine under 1500
cc); mostly built using domestic-produced parts and with export potential (Amsden,
1989, p. 175; Chang, 1993, p. 149; Jenkins, 1995, p. 6; Steers, 1999, pp. 7780. Jeong,
2004, pp. 9496; Lee, 2005, p. 9; Yang et al., 2006, pp. 2325). Kia, Hyundai and
General Motors Koreas proposals were accepted but the government withdraw Asia
Motors licence for passenger car because it failed to meet the localisation
requirement. Asia Motors was to focus on jeep production.
In 1973 Kia produced the rst gasoline engine at its new Sohari plant, a factory
which was a pioneer in incorporating the conveyor system in Korea. Soon afterwards
it launched its new passenger vehicle, Brisa, which borrowed Mazda technology. It
also manufactured Peugeot and Fiat models under licence. In 1975 Kia was the rst
rm to produce more than 10,000 units in Korea and temporarily became the market
leader. In 1976, the company created its subsidiary Kia Machine Tools, which
started production of its own equipment under a technical licence from Hitachi (Lee,
2000, p. 10). Nevertheless, as its passenger vehicles were not original could not be
exported.
General Motors licensed GMK to produce new models, and made large-scale
investments to expand productive capacity. In 1976, when the rm was renamed
Saehan Motors, it was able to produce several thousands of passenger vehicles.
However, it continued launching Opel models and its proportion of local
components remained far below Kia (Jeong, 2004, pp. 138140).
Hyundai took the government policy more seriously and spent more time trying
to create a peoples car, focusing its eorts on developing its own hybrid technology.
The chaebol had been negotiating for three years with Ford to make Dearborn
accept a joint venture with minor American participation. Finally negotiations broke
down. In 1973 HMC cancelled its agreement with Ford (Hyun, 1995, p. 7). The
president of the company, Chung Se-Yung, opted to build a new indigenous vehicle
independently, creating his own R&D centre in 1974. It seems that President Park
and Se-Yungs elder brother, Ju-Yung, agreed on public funding for Hyundai
investments in exchange for a compromise of exporting of 5000 vehicles per year
(Kirk, 1994, pp. 124136). The outcome was the Pony, a new model (1200 cc)
partially conceived as reverse engineering from Ford Marina. George Turnbull,
former director at British Leyland, was hired as vice-president to work on the
product development. The prototype was redesigned by Giorgetto Giugiaro and the
engine and transmission supplied by Mitsubishi (Green, 1992, p. 416; Molineri, 1999,
pp. 4142; Chung, 2000, p. 176 ; Yang et al., 2006, p. 23). Lee Chung-Goo, who had
been heavily involved in the design of the Pony, had studied engineering and product
development at Italdesign, Giugiaros headquarters in Turin, during 197374. It
should be stressed that Pony was not a particularly modern product for the time,
because it still had rear-wheel drive at a time when front-wheel drive was taking over.
Nevertheless, the Pony, launched in December 1975, turned out to be a hybrid but
indigenous Korean model from an independent rm. The Ulshan plant had a
production capacity of above 50,000 units per year, the highest yet recorded in
Korea. Hyundai Motor became the new Korean national champion.
The success of the Pony strategy established HMC as the leader of the Korean
car market. Its output jumped from 7092 units in 1975 to 61,239 in 1980, and its
share in domestic production rose from 19.1% to 49.7% in this period. More than

785

790

795

800

805

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815

820

825

830

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835

840

845

850

855

860

865

870

875

880

J. Catalan

85% of parts were locally made (Green, 1992, p. 414; Jenkins, 1995, p. 639; Chung,
2000, p. 176; Lansbury et al., 2007, p. 33). On the other hand, HMCs hegemony
created trouble for the rest of Korean producers. As a result, Shinjins stake in
Saehan was bought by the Korean Development Bank, which sold it to Daewoo in
1978.
In 1977 the government selected the car industry as a strategic sector for export,
setting targets and oering support. HMC tried to sell the Pony in foreign markets,
beginning with Ecuador (Green, 1992, p. 414). In 1978 Hyundai exports reached
12,000 units, but the company appeared unable to expand much above this threshold
before 1984 (Chung, 2000, p. 196). Initial exports in fact took the form of dumping:
it was estimated that in 1979 the cost of producing the Pony was $3745; it was
exported for $2150; and its domestic price was $4980 (Jenkins, 1995, p. 638).
HMC also decided to create its own machine tools division, which became
independent in 1978. The following year it would build its rst special-purpose
machine. The division would become the base of a powerful capital goods industry
(Lee, 2000, p. 10).
Hyundai remained unfamiliar with front-wheel drive technology, which resulted
very convenient because of its fuel economies in the turbulent world of the 1970s. In
1978 HMC contacted Volkswagen to license the technology, which had been
successfully applied to its new Golf, but the German company asked for a share in
the ownership and management of the Korean rm in exchange (Jeong, 2004, pp.
118119). Hyundai preferred total independence and rejected Volkswagens
proposition. The results were the same with further attempts to license Renault
and Ford technologies. Finally, Mitsubishi succeeded in developing front-wheel
drive and, after hard negotiations, HMC gained access to the new technology. The
Japanese rm got a stake of 10% in the Korean motor company but it did not obtain
managerial control.
The assassination of President Park at the end of 1979 was followed by a deep
recession, bringing automobile production down by 42% in 1980 (Figure 4). A new
coup put General Chun Doo-Wan in power, though nationalist policy did not come
to an end: on the contrary, the Order of Automobile Industry Unication attempted
to strengthen specialisation within the industry by direct government pressure. The
military government attempted to support further exploitation of scale economies by
promoting mergers (Jenkins, 1995, pp. 637639; Lee, 2005, p. 100). The national
champion was to take over Saehan. Kia, then the smallest rm, was to merge with
Donga Motor (name of Hadonghwan since 1977) and specialise in trucks and buses.
However, rms tended to resist the governments plans, especially General
Motors. An agreement was reached in 1981, under the Order of Automobile
Industry Rationalisation. Finally, passenger car production would be restricted to
two companies: Hyundai and Saehan (Chang, 1993, p. 149; Chung, 2000, p. 177;
Jeong, 2004, pp. 9697; Lansbury et al., 2007, p. 33). Kia was to give up passenger
car production and focus on heavy vehicles, with the promise of future authorisation
if demand improved. General Motors would continue to have its stake in Saehan,
but the Korean partner, Daewoo, would assume managerial responsibility. The
name of the rm changed again in 1982, to Daewoo Motor Corporation (Green,
1992, p. 416; Jeong, 2004, pp. 139140; Lee, 2005, p. 10). Continued cooperation
with GM led to the launch of Opels products such as the Pontiac Le Mans.
The governments reduction in the number of rms coincided with the improved
protability of Hyundai. As can be seen in Figure 1, the prot margin, negative in

Business History

225

1980, went into the black. In the meantime, the national champion had been working
on the creation of new capabilities, the improvement of its blockbuster model, the
production of its own capital goods, the development of new cars and the conquest
of foreign markets. HMC nurtured technological learning by setting highly
ambitious goals. The number of people engaged in R&D increased from 197 in
1975 to 1422 in 1985, indicating the consolidation of a key feature of the national
innovation system within South Korea. In 1982 Pony-II was launched, to be
followed by Stellar, Excel (the rst front-wheel drive car) and Presto. The company
was aiming at the American market and had established Hyundai Auto Canada in
1983. Production rose from 78,071 units in 1982 to 545,100 in 1987. The rms share
of the domestic market remained above 50% (Chung, 2000, p. 196). Exports
rocketed after 1984, surpassing the threshold of 400,000 units by 1987. Its main
market was North America. We should add that the rm was not very protable,
because of this radical expansion (in fact, the prot margin was very similar to SEAT
gures in the early 1970s, as Figure 1 shows). However, its margin (above 2%) can be
considered satisfactory, if we bear in mind the reduced protability of the
international automobile industry.
Kia obtained permission to return to the production of passenger cars from 1987
onwards. A partial reduction of controls on commercial vehicles imports was
introduced, but the liberalisation of passenger cars imports was again postponed
until the end of the decade.
In 1987 the Korean passenger car industry had been consolidated as a highly
oligopolistic market with three producers: Hyundai (56% of output), Daewoo (31%)
and Kia (12%). All three had foreign technological partners, but domestic hands
kept signicant control. This was especially the case with the national champion,
HMC, although Mitsubishi had increased its stake to 15% in 1985 (Chung, 2000, p.
178; Jeong, 2004, pp. 118119).
In short, even though Korea experienced both political turmoil (with the
assassination of President Park) and economic recession (with a fall in real per
capita GDP in 1980) during the period under consideration, no government
attempted to suddenly withdraw its protectionist policy in support of an
indigenous motor industry. This strategic option, together with a wise management of demand, helped to make South Korea a leading car producer and
exporter. In addition, Hyundai took the lead as national champion, which
gradually overcame its initially high technological dependence. As Figure 6 shows,
during the 197387 period the Republic of Korea caught up with the other two
countries under consideration. The basis for convergence began to be created
throughout the golden age, when the main agents of transformation came on the
scene, but, after the rst oil shock, public support for a national car and the
strategic regulation of competition invigorated the domestic industry. When the
Argentinean industry collapsed and Spains slowed down, South Korea caught up
and succeeded in creating its own models and capital goods in a key industry,
thus strengthening its capabilities in the long term.6

885

890

895

900

905

910

915

920

925
Conclusions
The automobile industry in the three countries experienced signicant growth during
the period under consideration. Strategic policies, more than social structures,
turned out to be crucial in the early stages of development of mass production. This

930

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J. Catalan

935

940

945

Figure 6. Production of automobiles, number of units

Sources: See Figures 2 to 4.

950

955

960

965

970

975

article corroborates Friedrich Lists defence of protection to infant industries in

countries with a medium to large domestic market. In short, severe import
restriction, investment licensing, local content and support for national champions
turned out to be critical for the long-term success of the motor industry.
Foreign licensing stimulated technology transfer, it was conducive to growth and
it could favour acquisition of capabilities. Initially it was the main instrument of
technological transfer in the three countries under consideration. Successful rms
during the ourishing phases of the industry depended on foreign partners: IKA on
Kaiser; SEAT on FIAT and HMC on Mitsubishi.
Because of large economies of scale in the industry, too many rms producing
reduced series could jeopardise structural change, as illustrated by the failures of
IKA in the 1960s and SEAT in the 1970s. As a result, Argentina and Spain seriously
eroded their capabilities to promote creative imitation and domestic R&D in the
automobile industry, and their potential for developing a solid national system of
innovation.
Support for a national champion could help to overcome technological dependence
provided that the market preserved some degree of competition. The nationalist
priorities of accelerating structural change and supporting the creation of indigenous
technology might contribute to the desired results, but for them to completely succeed it
was important that domestic rms should not be fully controlled by foreign interests,
and that the number of rms should be limited. This was the case in Korea with HMC
throughout the 1970s and 1980s: The Korean government could even force rivals to
temporarily withdraw from passenger car production.
The high volatility of macroeconomic demand management was extremely
harmful for the development of the industry. Even though the Argentinean
automobile industry had faced signicant diseconomies of scale before 1973, it rose
steadily in the ranking of world producers and exporters throughout the golden

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227

age. The complete collapse of the industry after this date derived mainly from the
macroeconomic instability of the country caused by dramatic policy shocks under
Isabel Perons presidency, the military juntas, and during the transition to
democracy.
Industrial policy also experienced sudden shifts in Argentina during the late
1950s and 1970s, and Spain, during the early 1970s, which abruptly reduced
protection or encouraged the settlement of foreign rivals regardless of the previous
patterns of specialisation. As a result, both countries fostered overproduction and
put at a disadvantage the companies with the greatest potential to develop
autonomous R&D. In contrast, the Republic of Korea always moved extremely
cautiously and subordinated liberalisation to national interests. South Koreas
industrial policy, far from being immobile, evolved steadily in spite of changes in
political regime and economic recessions.
In a nutshell, the experience of Argentina, Spain and South Korea conrms that
the success of mass production in the automobile industry depended on the longterm adoption of policies which openly departed from laissez-faire. The Republic of
Korea had a remarkable success in developing the motor industry and strengthening
its competitive advantage up to 1987. Spain also succeeded in expanding its industry
but policy discontinuity during the 1970s and 1980s made it less able to build new
capabilities and promote local R&D in the long run. The Argentinean industry, in
spite of a promising beginning during the early golden age, sank completely after
1973 because of the tremendous volatility of its macroeconomic management and the
adoption of too liberal an industrial policy.

985-

990

995

1000

Notes
1.

2.
3.
4.
5.

6.

The period analysed is 194587 because it can be considered a long-term cycle of

expansion and crisis and therefore it can be used to evaluate the long-run costs and
the dynamic eciency of the policies adopted during the golden age. The year 1987 is
taken as the closing date because it marked a nadir in Latin Americas depression.
Data on population and GDP come from Maddison (1995, appendices A & D).
The precise breakdown is matter of controversy (MacDonald, 1988, p. 338 and n. 29;
McCloud, 1995, p. 50).
Chung Ju-Yung founded the Hyundai Engineering and Construction Company in 1947.
The reverse was the case during the following decade, when industrial policy gave priority
to the development of the automobile industry. As a result, the share of industry increased
again to 9.9% of Argentinean industrial added value in 1999. In addition, the gap of
relative productivity in relation to the US fell sharply during the decade after 1989 (Katz
& Stumpo, 2001, p. 142).
Biggart and Guillen regard Spain as a more successful case than South Korea because of
its better performance in the export of parts (Biggart & Guillen, 1999, pp. 722747;
Guillen, 2003, pp. 159182). In my view, however, nal producer brands under indigenous
control contribute more signicantly to the development of a national system of
innovation for three reasons. First, as discussed in the text, R&D performed in the
country of origin by nal producers tends to be higher. Second, consolidated brands, in
consumption markets of dierentiated products, constitute a guarantee against sales
volatility and are more typical of nal producers than parts manufacturers. Last but not
least, from the economic point of view, the most signicant issue is the amount of added
value generated by the whole automobile industry within the country. In the long term the
added value generated by the automobile industry in Korea has been higher than in Spain:
according to IYIS, the share of the Korean industry of motor vehicles, trailers and semitrailers (ISIC 34) accounted for 4.2% of the world total added value of the industry in
2004, compared with a gure of only 1.9% corresponding to Spain (UNIDO, 2006, p. 63).

1005

1010

1015

1020

1025

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AM

J. Catalan

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