Former General Motors Chairman Rick Wagner used to talk of "externalities," those uncontrollable factors that he routinely blamed for the humbled automaker's continuing decline. Other industry leaders preferred the term "headwinds," but they were routinely referring to such matters as rising raw materials costs, unpredictable petroleum prices or, perhaps, an economic meltdown.
What most major automakers don't have to worry about is the idea of having a shell land in the middle of their boardroom. But the news out of the Korean peninsula makes it clear this is a very serious, very real possibility for the folks who run Hyundai and Kia.
On a trip to their headquarters a little while back, I was reminded of the unusual situation Koreans live with on a daily basis. Sure, Seoul is a sprawling and fast-moving metropolis, but it is also barely an hour's drive from the border that divides North from South. Euphemistically called the "Demilitarized Zone," or DMZ, it is, in fact, one of the most heavily fortified stretches of real estate in the world.
During my visit we had the chance to take the DMZ equivalent of a Disneyland ride, a descent into a potential hell. A hundred or so feet below the surface we unloaded and stooped down to enter one of the four known tunnels that cut under the border. Built by the North but revealed by a defector, each was designed to let 10s of thousands of soldiers rapidly slip into South Korea in the event that the armistice approved 50 years ago collapsed.
It seemed set to do just that on Tuesday morning, when the ever-unpredictable Pyongyang started shelling a South Korean island just off the coast, arguably the worst provocation in decades. As an NPR report shortly after noted, the guns and rockets of the North could readily flatten Seoul in a matter of minutes should the fragile truce totally break down. And that doesn't even call into play the nuclear weapons Kim Il Sung and his minions have been stockpiling. Meanwhile, by some accounts there may be a dozen or more additional tunnels under the DMZ yet to be revealed.
It's more than a minor miracle that life in Seoul continues despite the constant threat that lingers over the city like a Sword of Damocles. Yet the South has not just survived but actually thrived under a situation that few Americans would be able to live with. (Imagine a battery of howitzers pointed at GM headquarters from over the river in Windsor, Ontario – even though many parts of Detroit already look like war zones.)
In fact, the ever-present danger may be a big factor in what has driven the Korean economic miracle. In the first years after the Panmunjun armistice was signed, Korea was one of the poorest nations on the planet, with a per capita income on a par with that of sub-Saharan Africa. Even when I first visited Seoul, in the early 1980s, it was more Third World than the globe-leading capital it is today.
Talking with a number of senior executives on my most recent trip, I bluntly asked what had driven the Koreans to become such a major force in industries like automobiles, consumer electronics and appliances. Several factors, it turns out, including perhaps most of all the desire to pay back the Japanese for decades of occupation and humiliation. While the biggest battleground may be the American automotive market, there are few things the Koreans would like more than beating back that symbol of Japanese prowess, Toyota, I was told over and over.
There's also the North, and the sense that economic success will be as much a factor in resisting the communist/dictatorial regime as a well-armed military. But, in the event of war, you can't hurl Hyundais at the enemy. And the news of yesterday morning gives a new meaning to Kia, with at least two South Korean soldiers killed in action.
For the moment, the two makers' operations will continue as normal. But you can assume that management will be taking another, closer look at how – and where – it does business. Like its Japanese rivals, Hyundai and Kia have been expanding their off-shore operations; each now operates a plant in the U.S. Considering both rising Korean wages and the need to build products closer to your market, this makes clear sense. But it also permits the two makers to have a fallback in case the military situation on the Peninsula continues to deteriorate.
The latest crisis very well could lead to even more production moving to such transplant operations in the reasonably near future. As far as externalities go, the ongoing threat of war is difficult to prepare for, but even more difficult to ignore.