How Hyundai Turned a Corner in the U.S.


Last year was hardly a banner year for auto sales in the U.S. In fact, with a mere 11.6 million vehicles sold, it was one of the worst in recent memory. Still, depressed demand didn't stop a few car companies, including Hyundai and Kia, from setting sales records.

Hyundai's U.S. sales rose 24%, to nearly 540,000 units last year, a new record that helped the automaker claim 4.6% of the American market, its highest share yet. Kia set its own milestone, selling nearly 357,000 cars and utility vehicles, a 19% increase compared to a year earlier.

The fortunes of the two companies, which share a corporate headquarters in Seoul, South Korea, but market their products separately in the U.S., have been buoyed by their ability to build well-designed, affordable and fuel-efficient vehicles that consumers want to buy. (Hyundai Motor owns about 39% of Kia Motors. Together they form the world's fifth-largest automaker.)

A Successful Sonata

One example is Hyundai's Sonata midsize sedan (pictured). Redesigned for the 2011 model year, the Sonata largely received glowing praise from the automotive press for its sweeping styling -- Hyundai calls the design "fluidic sculpture" -- high-quality materials and construction, and good driving dynamics.

Those qualities have also helped make the Sonata a hit with consumers, too. The 2011 Sonata, which debuted in early 2010, sold nearly 200,000 copies in the U.S. last year, a 64% improvement over prior-year sales of the previous model.

On the heels of the successful Sonata, Hyundai has introduced revamped versions of the Tucson small SUV and Elantra compact sedan, which also feature the company's now-signature swooping design. Soon to follow is a refashioned Accent subcompact, which will make its North American debut at the New York International Auto Show in April.

These vehicles are very competitive within their segments, says David Sullivan, an analyst with AutoPacific, an automotive research firm. "Hyundais are no longer vehicles that you should be embarrassed to own or want to aspire to own," he says, referring to earlier Hyundai models that offered U.S. consumers little more than a low sticker price.

Setting Design Trends Rather Than Following Them

Previously relegated to rental-car fleets, Hyundais have been transformed, offering pleasing interiors and sophisticated engines that are as good as anything Japan or Germany can churn out, Sullivan says. Much has changed from the days when Hyundais were a source of jokes for Detroit's auto elite, he says. "Hyundai is looking at many of them in the rear-view mirror right now."

The company credits its sales momentum in the U.S. to its focus on two key strategies: design and fuel economy -- 86% of the vehicles Hyundai sells in the U.S. are equipped with four-cylinder engines. It's a recipe that no other carmaker has managed to pull together in quite the way Hyundai has, says John Krafcik, president and CEO of Hyundai Motor America, the company's U.S. subsidiary, based in greater Los Angeles. "I think that explains a lot of our success."

The initiative began about six years ago, when Hyundai Motor Chairman Chung Mong-koo challenged Hyundai's product-development team to lead the industry in design, rather than follow trends set by other automakers. The first product to emerge from that mandate was the Genesis coupe, which began U.S. sales in mid-2009, receiving mainly enthusiastic reviews.

The design concept, for the first time, gave Hyundai its own look and feel, says Krafcik, a veteran of the U.S. auto industry. Previously, Hyundai models were perceived as little more than knock-offs of cars manufactured by Asian competitors Toyota Motor (TM), Honda Motor (HMC) or Nissan Motors (NSANY). "We don't hear that anymore with our new designs," he says.

Demand for Elantra Far Exceeds Supply

Still, Krafcik says, unique designs don't always equal sales success. Two recent American-made examples of novel concepts that didn't meet with auto buyer approval were the 1996 Ford Taurus, which incorporated Ford Motor's (F) signature oval logo into everything from the dashboard to the rear window, and the 2001 Pontiac Aztek, one of several unappealing designs from General Motors (GM) that industry icon Bob Lutz compared at the time to "angry kitchen appliances."

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The Genesis, 2011 Sonata and Elantra are all products of Hyundai's design studio in Southern California, which it shares with Kia. The Tucson, which features the same "fluidic sculpture" styling theme, was created in the company's European design studio in Germany.

As with the Sonata, the redesigned Elantra, which hit U.S. dealerships late last year, has seen demand increase significantly. Sales were up 25% in January to nearly 9,700 units. Krafcik says Elantra sales could surpass the 200,000-unit sales record set by the Sonata if they could manufacture enough of them, but he admits the company doesn't "have anywhere near the capacity for that level of volume."

Hyundai's sole U.S. plant, in Montgomery, Ala., recently increased capacity to 330,000 cars annually. After subtracting Sonata and models destined for export markets, such as Canada, that leaves manufacturing capacity for only about 70,000 Elantras.

The company believes it can easily sell more than twice that number, Krafcik says, so it will begin supplementing U.S. made vehicles with production from Hyundai's plant in Ulsan, South Korea. With capacity to produce 1.6 million vehicles a year, it is the world's largest automotive plant.

Plans call for the company to build 400,000 cars in the U.S. this year, including the Hyundai Santa Fe SUV, production of which was shifted to Kia's West Point, Ga., plant last fall, and sell slightly less than 600,000 cars in total in the U.S.

Hyundai Loses Ground on its Home Turf

Krafcik says Hyundai has no further plans to expand production in the U.S., citing the extraordinary costs involved in building new plants -- on the order of billions of dollars. "But we'll certainly look at how we do this year, see where the demand is [and] see where the demand is going."

Asian automakers, generally, are under increased pressure to manufacture cars and trucks in the foreign markets where they sell them as a hedge against foreign-exchange volatility that can pinch profits. The strong yen, for example, has led Toyota Motor President Akio Toyoda to suggest that his company may move some production out of Japan.

While Hyundai has enjoyed sales success in the U.S. and other markets, its fortunes on its home turf in South Korea have come under threat from imports, including BMW, Volkswagen (VLKAY) and Toyota. Hyundai saw its domestic market share slip 5 percentage points last year to a decade-low of 45% even as the South Korean auto market expanded 5%, according to Reuters.

Less Respect at Home

It won't be easy for Hyundai to gain back lost market share as imported cars continue to flood into the market and sister make Kia Motors continues to gain ground, Dongbu Securities analyst Yim Eun-young told the news agency.

In an interview, the company acknowledged it faces an uphill battle. "Our strong growth is well-received overseas, but we didn't get that proper recognition from Korean consumers," Sean Kim, senior vice president and head of Hyundai's Domestic Marketing Group, told Reuters. "Our priority is regaining trust and pride from consumers by doing everything from promotion, marketing and better product offering."

The home office might want to take some cues from its U.S. subsidiary, which seems to be firing on all cylinders.

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