Kia Motor Company

A Disappearing Brand
Kia Motor Company appeared a couple of years ago in the list (created by 24/7 Wall Street dot com) of Ten brands that will disappear by 2011. These lists are created each year. I have recently analyzed Research in Motion (RIM), Limited, the company that made the Blackberry. It is supposed to disappear in 2013 see http://www.scribd.com/doc/99181402/Research-in-Motion-RIM-Limited-WillDisappear-in-2013 )

Now, thats really interesting the demise of a foreign car company! We came close to witnessing the demise of the American automobile industry, following the economic crisis in 2008 and the historic bankruptcy filing by General Motors in June 2009. So, heres what I found out about Kia Motor Company and its financial performance. The data analyzed here can be obtained from their Annual Reports http://www.kmcir.com/eng/library/annual.asp , on their website, and has been compiled as Table 1. Interestingly, Model Year 2013 vehicles are now being sold (see photo above). The financial results can be readily understood on the basis of the classical breakeven model for the profitability of a company. This should actually appear in textbooks on Finance theory. http://www.topgearrules.org/wpcontent/uploads/2012/02/2013-Kia-ceed-600x395.jpg

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 1. Summary
The key financial data for Kia Motor Company, Profits P versus units N sold and Profits P versus Revenues R, are both shown to follow the predictions of the classical breakeven analysis. It is also shown that, although the fixed costs have increased, the variable costs seem to have remained constant even as revenues have increased and the number units sold N has increased. The measure of the constancy of the variable costs is the slope of the P-N graph and the slope of the P-R graph. Finally, it is shown that the R-N graph, revenues R versus number of units sold N, has a finite positive intercept. Revenues go to zero when the units sold falls below a critical value N = N0. If we add up all the discounts that are offered to get customers to buy the product, it is almost as if the company has to give away a minimum of N0 units for free! This minimum number N0 therefore does not contribute to positive revenues generation. Thus, the intercept N0 has taken as a measure of the competitive pressures faced by the company to sell its products. It appears that more educated strategies to become more competitive can thus be evolved by careful study of these three plots considered here.

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 2. Analysis of Financial Data

Let us briefly review the breakeven analysis for profitability of a company making and selling N units of a product (such as motor vehicles in this case). Let a denote the fixed cost and b the unit variable cost. The total cost C = a + bN is the sum of the fixed cost and the variable cost. If p is the unit price, the revenues R generated by the sale of the N units is R = pN. Or, N = R/p. Hence, the profits P = R C = pN bN - a = (p b)N a. Eliminating N, we get P = hR a = [1 (b/p)]R a = y = hx + c Also, P = (p b) N a (1) (2)

Equation 1 means that the graph of profits P (or we can call it y) versus revenues R (or we can call it x) is a straight line with a slope h and intercept c which can be related to the constant (a, b, p) appearing in the breakeven analysis. Slope h = 1 (b/p) Intercept c = - a Related to unit variable cost b and unit price p Related to the fixed cost a

Equation 2 means that the graph of profits P versus number of units N is also a straight line. The slope of the line equals (p b) the difference of the unit price p and the unit variable cost b. The intercept of the graph c = a is the negative of the fixed costs. Both these linear relations will be seen to hold for financial and sales data for Kia Motors. It should be noted that the fixed cost is the cost incurred when N = 0 units are sold. What is the variable cost? The revenues R = pN being generated by the sale of the N units seems to magically disappear. Not all of it appears as profits. This difference is the variable cost --- it is a measure of the rate at which revenues will be converted into profits. The higher the variable cost b, the lower the slope h and the lower the rate of conversion of revenues into profits.

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Table 1: Key Financial Highlights for Kia Motor Company

Year Units Sold, N Revenues, x (millions) in Korean WON ( )
trillions

Profits, y KRW
trillions

Revenues, x $, billions

Profits, y $, billions

0.770 6.607 1996 0.693 6.381 1997 0.438 4.511 1998 0.770 7.931 0.136 6.296 0.108 1999 0.960 10.806 0.331 8.578 0.263 2000 1.027 12.356 0.552 9.318 0.416 2001 0.894 12.158 0.641 2002 0.859 12.840 0.753 12.301 0.737 2003 1.011 15.258 0.662 14.617 0.662 2004 1.106 15.999 0.681 2005 1.259 19.815 -0.291 2006 1.360 20.312 -0.151 2007 1.399 22.218 -0.090 2008 1.534 29.445 0.979 2009 2.130 42.290 2.641 2010 Note: The revenues and profits data are not reported consistently in US dollars. Hence, the Korean currency (WON) will be used here. The number of units sold, N, has increased consistently and, correspondingly, revenues have also increased. Nonetheless, Kia reported a loss for the three year period 2006-2008. The profits-revenues graph in Figure 1 reveals an interesting pattern. The data can be seen to fall on two (almost perfectly) parallel lines, y = hx + c = h(x x0), with a positive slope h > 0 and a negative intercept c < 0, which also means a finite positive intercept x = x0 on the revenues-axis. This essentially confirms the classical breakeven model for profitability of a company. A certain minimum number of units must be sold, which translates into a certain minimum revenues x = x0, before profits will appear. The two parallel lines here imply that once the breakeven, or cut-off, revenue level is exceeded, revenues are converted into profits at the same fixed rate of 13.6%. Also, the shift along the revenues-axis, or the higher intercept x = x0 means that the fixed costs associated
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with the production and sale of these N units has increased. The higher revenues (in excess of KRW 20 trillion) refer to the post 2006 era, which also marked the period where a loss was reported. In the pre-2006 period, the fixed costs were lower and the cut-off revenue was lower but the rate of conversion of revenues into profits was roughly constant and equal to the post-2006 period.
8.00

Profits, y [KRW, trillions]

6.00

y = hx + c = h(x x0) = 0.1363x - 0.9977 = 0.136 (x 7.31)

4.00

2.00

0.00

-2.00

y = hx + c = h(x x0) = 0.1361x - 3.112 = 0.136 (x 22.88)

-4.00 0.0 10.0 20.0 30.0 40.0 50.0 60.0

Revenues, x [KRW, trillions]

Figure 1: Profits-revenues graph for Kia Motor Company, confirming the classical breakeven analysis for profitability of a company making and selling N units of a product. The linear law y = hx + c with h > 0 and c < 0 has been referred to as the Type I behavior, as discussed in more detail in other articles (see bibliography). Both profits y and the profit margins y/x increase as the revenues x increase when a company is operating in the Type I mode. Next, since the number of units N sold by Kia is also available, it is of interest to consider also the P-N graph, profits versus number of units N. This is illustrated in Figure 2. Again, the data separates itself into different groups, which implies that
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the fixed costs of producing and selling the units was different in different time periods. The three data points, for the years 2006-2008 seem to fall on a line that is roughly parallel but also lie just below the horizontal axis, i.e., the cut-off units N = N0 needed to produce a profit. Likewise, the data points that lie above the line and are closely clustered are for 2002. In other words, it appears, that costs have been rising at Kia Motors even as revenues have increased, and profits have increased with increasing units sold N.. Now, the company is being labeled a disappearing brand. However, the rising fixed cost, as reflected in the higher intercepts made in both graphs prepared here, is a natural part of the growth of a company. What is remarkable here is that Kia has been able to maintain the unit variable cost b (which is reflected in the slope of both the graphs), the difference (p b) and the ratio b/p fairly constants as the number of units sold N has increased.
4.0

Profits, y [KRW, trillions]

3.0 2.0 1.0 0.0 -1.0 -2.0 0.00

y = P = 1.974 N 1.564 = 1.974 (N 0.792)

0.50

1.00

1.50

2.00

2.50

3.00

Number of units sold, N [ millions]

Figure 2: The P-N graph, profits versus number of units N sold for Kia Motor Company. Once again we see a linear trend with a cut-off, or breakeven, number of units N that must be sold before the company has produce a profit.
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Finally, it is of interest to consider the graph of revenues generated (or value of sales in KRW or appropriate monetary units) versus the number of units N that are sold. Since R = pN or p = R/N in the breakeven model, the slope of the straight line superimposed on to this R-N graph this is the average value of the unit price, p. As expected revenues increase as the number of units sold N increases. However, the graph reveals an interesting pattern.
60.000

Revenues, x [KRW, trillions]

50.000 40.000 30.000 20.000 10.000 0.000

R = pN = 19.855N Joining 2010 to (0, 0)

R = 26.24N 13.60 = 26.24 (N N0) Joining 1999-2010

N0
-10.000 -20.000 0.0 0.5 1.0

R = pN = 8.579N Joining 1999 to (0, 0)

1.5

2.0

2.5

3.0

Number of units sold, N [ millions]

Figure 3: The R-N graph, revenues R versus units sold N, for Kia Motors. The general upward trend is described by a straight line (such as the solid blue line) which makes a finite positive intercept N = N0 on the units sold N-axis. This joins the (N, R) pairs for 1999 and 2010. The two rays, dashed red lines, join the 1999 and 2010 (N, R) data points to the origin. These rays have the equation R = pN and the slope equals the unit price p, which has been increasing each year. The two dashed lines (in red) superimposed on to the data pass through the origin (0, 0) and join the two extreme (x, y) pairs in the data set yielding the lowest and the highest slopes, respectively. All of observed data points fall between these two
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rays emanating from the origin. The slope p = R/N of these two rays varies from a high value of 19.855 to a low value of 8.579. The numerical value is the average unit price p, expressed in Korean currency (WON). The average unit price p has more than doubled between 1999 and 2010. However, the majority of the data points do NOT fall along the rays, or upward sloping straight lines, that passes through the origin (0, 0). Instead, the general upward trend seems to be described by a straight line (such as the solid blue line) which makes a finite positive intercept N = N0 on the N-axis. When N = N0 revenues go to zero!
70

Revenues, x [KRW, trillions]

60 50 40 30 20 10

N0
-10 -20 0.0 0.5 1.0 1.5

Best-fit line R = 23.44N 9.53 = 23.44 (N N0) Always passes through (xm , ym)

2.0

2.5

3.0

Number of units sold, N [ millions]

Figure 4: Linear regression analysis yields the above best-fit line through the revenues-unit sold N data. The best-fit line, y = 23.44 N 9.53 = 23.44 (N -0.41) always passes through the point (xm , ym ) where xm and ym are the average or the mean values of x and y (units N and revenues R, respectively). The line in

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Figure 3 is chosen to yield the highest slope consistent with the observed trends and joins the points with the lowest and highest values of p = R/N. A linear regression analysis would yield a statistically significant estimate of the slope of this line, see Figure 4. Some additional points regarding the significance of the best-fit line have been discussed in the article on Google, Ref. [12] in the bibliography list. For simplicity, the slope is determined here, in Figure 3, by simply joining the two extreme points in the data set: (0.770, 6.607) and (2.123, 42.290) for 1999 and 2010, respectively. Note that two slightly different values, 6.607 and 7.931 (which is given in Table 1), were obtained for the revenues for 1999 from two different annual reports. The extreme points yield the lowest and the highest values of the unit price p = R/N. Thus, R = 25.26 N 1360 = 25.26 (N 0.518). The cut-off N = N0 = 0.518 million, or 518,000 units. Measureable revenues are produced only after this cut-off number of units are sold. What does this mean? With some reflection, it becomes obvious that this might just be the consequence of the price wars or discounts that must be offered to consumers to entice them to buy cars. If we add up all the discounts that are offered, it is almost as if the company has to give away N0 units for free! This minimum number N0 therefore does not contribute to positive revenues generation. The intercept N0 can be taken as a numerical measure of the competitive pressures faced by the company to sell its products. (Similar plots can be prepared on a monthly basis, to assess the effects of the discounts and price wars. Such information of the units N sold to generate revenues is NOT generally available outside the automotive industry.) In summary, with the profits P, revenues R and units sold N data and the analysis of the P-R, P-N, and R-N graphs, it is possible to develop estimates of the numerical values of all the three constants (a, b, p) in the breakeven analysis. Perhaps, with such an analysis, we can develop a more educated business strategy to keep Kia from becoming a brand that actually disappears. It is still around in 2012. May be it can be around a bit longer! Cheers!

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24/7 Wall St. has created a new list of brands that will disappear, which includes Readers Digest, Kia Motors, Dollar Thrifty (NYSE: DTG), Zale (NYSE: ZLC), Blockbuster (NYSE: BBI), T-Mobile, BP plc (NYSE: BP), RadioShack (NYSE: RSH), Merrill Lynch, and Moodys (NYSE: MCO).

24/7 Wall St. Ten Brands That Will Disappear in 2011

Posted: June 15, 2010 at 6:49 am Kia Motors Corporation is one of the two car brands of Hyundai of South Korea. It has always been a marginal brand. Its stable mate, Hyundai USA, has a reputation for high quality cars like the Sonata and Genesis. Kia sells low rent cars and SUV nameplates like the Sorento and Rio. As GM and Ford have already discovered, it is expensive to maintain multiple brands and storied car names, including Pontiac, Saturn, and Mercury, are disappearing. Most Kia cars sell for $14,000 to $25,000. Hyundai has several cars in the same price range (LINK). Hyundais Sonata has quickly become one of the best-selling cars in America, and its Genesis flagship model competes with mid-sized BMWs and Mercedes. The parent company will take a page from several other global car companies and dump its weakest brand. Read more: 24/7 Wall St. Ten Brands That Will Disappear in 2011 - 24/7 Wall St. http://247wallst.com/2010/06/15/247-wall-st-ten-brands-that-will-disappear-in2011/#ixzz1zqKeVGWe

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 Appendix 1: Bibliography
Related Internet articles posted at this website Since the Facebook IPO on May 18, 2012
1. http://www.scribd.com/doc/95906902/Simple-Mathematical-Laws-GovernCorporate-Financial-Behavior-A-Brief-Compilation-of-Profits-RevenuesData Current article with all others above cited for completeness, Published June 4, 2012 with several revisions incorporating more examples. 2. http://www.scribd.com/doc/94647467/Three-Types-of-Companies-FromQuantum-Physics-to-Economics Basic discussion of three types of companies, Published May 24, 2012. Examples of Google, Facebook, ExxonMobil, Best Buy, Ford, Universal Insurance Holdings 3. http://www.scribd.com/doc/96228131/The-Perfect-Apple-How-it-can-bedestroyed Detailed discussion of Apple Inc. data. Published June 7, 2012. 4. http://www.scribd.com/doc/95140101/Ford-Motor-Company-Data-RevealsMount-Profit Ford Motor Company graph illustrating pronounced maximum point, Published May 29, 2012. 5. http://www.scribd.com/doc/95329905/Planck-s-Blackbody-Radiation-LawRederived-for-more-General-Case Generalization of Plancks law, Published May 30, 2012. 6. http://www.scribd.com/doc/94325593/The-Future-of-Facebook-I Facebook and Google data are compared here. Published May 21, 2012. 7. http://www.scribd.com/doc/94103265/The-FaceBook-Future Published May 19, 2012 (the day after IPO launch on Friday May 18, 2012). 8. http://www.scribd.com/doc/95728457/What-is-Entropy Discussion of the meaning of entropy (using example given by Boltzmann in 1877, later also used by Planck to develop quantum physics in 1900). The example here shows the concepts of entropy S and energy U (and the derivative T = dU/dS) can be extended beyond physics with energy = money, or any property of interest. Published June 3, 2012. 9. The Future of Southwest Airlines, Completed June 14, 2012 (to be published).
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10.The Air Tran Story: An Important Link to the Future of Southwest Airlines, Completed June 27, 2012 (to be published). 11.Annies Inc. A Single-Product Company Analyzed using a New Methodology, http://www.scribd.com/doc/98652561/Annie-s-Inc-A-SingleProduct-Company-Analyzed-Using-a-New-Methodology Published June 29, 2012 12.Google Inc. A Lovable One-Trick Pony Another Single-product Company Analyzed using the New Methodology. http://www.scribd.com/doc/98825141/Google-A-Lovable-One-Trick-PonyAnother-Single-Product-Company-Analyzed-Using-the-New-Methodology, Published July 1, 2012. 13.GT Advanced Technologies, Inc. Analysis of Recent Financial Data, Completed on July 4, 2012. (To be published). 14.Disappearing Brands: Research in Motion Limited. An Interesting type of Maximum Point on the Profits-Revenues Graph http://www.scribd.com/doc/99181402/Research-in-Motion-RIM-Limited-WillDisappear-in-2013 Published July 5, 2012. 15.Kia Motor Company: A Disappearing Brand http://www.scribd.com/doc/99333764/Kia-Motor-Company-A-DisppearingBrand, Published July 6, 2012.

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About the author V. Laxmanan, Sc. D.

The author obtained his Bachelors degree (B. E.) in Mechanical Engineering from the University of Poona and his Masters degree (M. E.), also in Mechanical Engineering, from the Indian Institute of Science, Bangalore, followed by a Masters (S. M.) and Doctoral (Sc. D.) degrees in Materials Engineering from the Massachusetts Institute of Technology, Cambridge, MA, USA. He then spent his entire professional career at leading US research institutions (MIT, Allied Chemical Corporate R & D, now part of Honeywell, NASA, Case Western Reserve University (CWRU), and General Motors Research and Development Center in Warren, MI). He holds four patents in materials processing, has co-authored two books and published several scientific papers in leading peer-reviewed international journals. His expertise includes developing simple mathematical models to explain the behavior of complex systems. While at NASA and CWRU, he was responsible for developing material processing experiments to be performed aboard the space shuttle and developed a simple mathematical model to explain the growth Christmas-tree, or snowflake, like structures (called dendrites) widely observed in many types of liquid-to-solid phase transformations (e.g., freezing of all commercial metals and alloys, freezing of water, and, yes, production of snowflakes!). This led to a simple model to explain the growth of dendritic structures in both the ground-based experiments and in the space shuttle experiments. More recently, he has been interested in the analysis of the large volumes of data from financial and economic systems and has developed what may be called the Quantum Business Model (QBM). This extends (to financial and economic systems) the mathematical arguments used by Max Planck to develop quantum physics using the analogy Energy = Money, i.e., energy in physics is like money in economics. Einstein applied Plancks ideas to describe the photoelectric effect (by treating light as being composed of particles called photons, each with the fixed quantum of energy conceived by Planck). The mathematical law deduced by
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Planck, referred to here as the generalized power-exponential law, might actually have many applications far beyond blackbody radiation studies where it was first conceived. Einsteins photoelectric law is a simple linear law, as we see here, and was deduced from Plancks non-linear law for describing blackbody radiation. It appears that financial and economic systems can be modeled using a similar approach. Finance, business, economics and management sciences now essentially seem to operate like astronomy and physics before the advent of Kepler and Newton.

Cover page of AirTran 2000 Annual Report

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