Hyundai on the Comeback Trail

The narrow, winding shore road doesn’t provide much opportunity to put a car through its paces. So when a brief gap opens up in traffic, the driver pulls into the passing lane, stomps on the accelerator, and watches the speedometer rapidly shoot to 100. The stylish XG sedan might seem just as comfortable on an autobahn as it does the coastal road running north out of Ulsan, Korea, a surprise considering the car is built by Hyundai, an automaker not known for performance. Yet the XG is not only fast, but unexpectedly luxurious, with supple leather seats and enough hand-crafted wood to make a Jaguar owner jealous.

The "entry-luxury" XG is the latest in a fast-growing line-up of products Hyundai is rushing to market. There’s a true luxury sedan, the Equis, as well as the automaker’s first sport-utility vehicle, the Santa Fe, which made its bow during the North American International Auto Show in Detroit last January. The Santa Fe could be the most important Hyundai product to reach the U.S. since the brand’s debut 15 years ago.

Expansion and regrouping

Depending on your viewpoint, this rapid expansion is either canny or quixotic. A decade ago, Korean automakers, as a group, had visions of becoming the "next Japan." And when Hyundai burst onto the U.S. scene, in 1984, that dream seemed within reach, the carmaker posting the most successful launch of any new brand in American history. But the bubble burst after hitting a 1988 peak of 264,282, and since then, sales have spiraled downward, settling in just above the 100,000 mark.

Hyundai’s initial success was based on its rock-bottom prices, but that strategy backfired in the wake of endemic quality problems that left the automaker lagging at the bottom of the J.D. Power quality and customer satisfaction charts.

What once seemed a good value suddenly seemed just cheap, acknowledged Finbarr O'Neill, President and CEO of Hyundai Motor America, during a recent visit to South Korea.

"It is a long and deliberate process to raise a brand back and reestablish itself," he stressed, following a gala reception for foreign journalists, and in Hyundai’s case, it will involve changing both perception and reality.

When he assumed the CEO spot last fall, O’Neill began focusing on "taking the risk out of owning a Hyundai" in the eyes of potential buyers—making them feel that owning a Hyundai was a safe and sound investment. The process began with the launch of Hyundai’s new warranty program, the longest and most comprehensive in the business.

Quality control takes over

Meanwhile, the automaker has put a priority on quality control, and that’s beginning to show up in recent surveys. Though it still lagged slightly below the industry average in the latest J.D. Power Initial Quality Survey, Hyundai was the most improved brand, with a "problem" rate about the same as Chevrolet.

hyundai Tiburon
This home-market Tiburon shows the evolution of Hyundai’s styling ability.

The products the Korean carmaker is selling today are a far cry from the creaky subcompacts of 1984. They’re larger, more lavish and have earned Hyundai a reputation for solid styling. And they’re beginning to move the sales needle in the right direction. Overall, Hyundai Motor America posted a 28% gain during the first four months of 1999, but more significantly, when you remove rental cars and other fleet business, retail sales surged 69%.

O’Neill confidently predicted that by 2002, Hyundai will post a turnaround on a par with Volkswagen and Audi, two German brands that strongly considered pulling out of the market in the early 1990s.

Santa Fe will test that forecast. As Hyundai’s first light truck, it moves the automaker into a new segment, the hottest in the U.S. market. And it could serve as a starting point for other light truck models in the very near future. If it meets its mark, company insiders say overall volumes could hit 150,000 this year, and 200,000 early into the next decade.

Still fishing for first-timers

Hyundai officials promise they won’t abandon its roots in the entry-level market, but Kye Ahn Lee, President and CEO of parent Hyundai Motor Co., admits that won’t be easy. Rising Korean wages have eliminated much of the labor cost advantage that gave Hyundai a foothold in the mid-1980s.

"Now Korean wages are not low enough," he said during a news conference at the Seoul Motor Show, "so we have to improve productivity and lower costs in order to be competitive."

That’s all the more reason why Hyundai’s U.S. subsidiary is under heavy pressure to move the brand up-market. Though O’Neill insisted the XG is not yet on his schedule, Korean company sources said they intend to bring the car to the States by 2001, and the even more upscale Equis could follow soon after.

"They may be able to carry this off," said David Andrea, an automotive consultant with CSM Forecasting, in Detroit. By Andrea believes the Hyundai turnaround is likely to take a little longer than the company confidently predicts. "I would say a 5-year game plan is the minimum."

Complicating Hyundai’s challenges, the carmaker needs to find a place for its new subsidiary, Kia, which it acquired last fall. In Part 2 of his report next week, TCC Team looks at the turmoil shaking up the entire Korean auto industry.

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