Impala to Fusion Impress as Detroit Stymies Hyundai-Kia

Just a couple of years ago, dealers like Scott Fink were benefiting from steady inroads made for more than a decade by Korean carmakers in the U.S. Now, the owner of three Hyundai outlets is buying a Chevy store.

“The new Malibu and Impala are good-looking cars, the Fusion’s an excellent-looking car, and the customers are speaking with their wallets,” Fink, who owns three Hyundai stores in Florida and chairs the brand’s national dealer council, said in a telephone interview.

Fresh cars from Detroit such as Ford Motor Co. (F)’s Fusion and General Motors Co. (GM)’s Chevrolet Impala are pacing a comeback that may have seemed unthinkable in 2011, when Hyundai Motor Co. (005380) and Kia Motors Corp. (000270) capped a 13-year streak of combined U.S. market share increases. Hyundai and Kia are giving up more ground to the Americans this year than the Japanese, whose rebound last year from a tsunami a year earlier snapped the run of gains.

The trend probably continued this month, with Hyundai and Kia sales slipping a combined 1.6 percent from a year earlier, the average estimate of seven analysts in a survey by Bloomberg News. No other automaker’s deliveries are projected to drop, and industrywide sales may rise 7.1 percent, led by gains for Nissan Motor Co. (7201) and Ford.

Falling Behind

Even if the analysts are proven wrong this month, it’s clear that Hyundai and Kia’s momentum has slowed. Combined sales for the two Seoul-based affiliates fell 2.3 percent through April in a U.S. market that grew 6.9 percent, according to researcher Autodata Corp. The two have trailed industrywide sales growth in every month since September.

“There’s no doubt that the domestics have come back post-recession with good product across the board,” Finbarr O’Neill, president of J.D. Power & Associates and a former chief executive officer of Hyundai’s U.S. unit, said in a phone interview. Hyundai and Kia “are now in a cycle where their product is a little older. It’s just harder and harder as time goes on to maintain a steep growth curve.”

U.S. light-vehicle sales in May probably climbed to 1.43 million, the average estimate of 10 analysts surveyed by Bloomberg. The annualized industry sales rate, adjusted for seasonal trends, may have risen to 15.2 million, the average of 17 estimates, from 14 million a year earlier. That would keep the market on pace for its best year since 2007.

Production Constraints

Hyundai and Kia’s slowdown has to an extent been its own choosing: Chairman Chung Mong Koo chose a push for improved quality instead of adding to their North American manufacturing capacity. That has stretched thin the automakers’ ability to produce enough vehicles to keep up in the growing U.S. auto market, especially when they’ve faced strikes by South Korean union workers in the past year.

“We’re constrained by volume,” John Krafcik, CEO of Hyundai’s U.S. sales unit, said this week in a telephone interview. “The cars haven’t lost their competitive edge.”

A one-two punch since early November 2012 has since stopped Hyundai and Kia’s growth in its tracks. The two admitted to the most extensive overstatement of fuel economy ratings ever found by the U.S. Environmental Protection Agency, and the Japanese yen began plunging against the Korean won.

The fuel-economy flub, which led Hyundai and Kia to reimburse buyers of about 900,000 vehicles sold in the U.S. for some pump purchases, dented their reputations as fuel-economy frontrunners. The weakening yen threatens to arm Japanese competitors with the ability to stuff their cars with more content without raising prices, threatening the value proposition pitch that has served Hyundai and Kia so well during their ascent in the U.S. market.

Replacing Models

On top of all that, other “major players” in the industry have caught up to the Koreans on the basis of replacing their models with new or revamped versions, according to the Bank of America Merrill Lynch’s annual Car Wars report released this month. The gap will be closed by the 2014 model year, or this calendar year, said John Murphy, a New York-based analyst for Bank of America.

“It’s a much, much more competitive market,” Tom Loveless, Kia’s vice president of U.S. sales, said by telephone. With mid-size cars and small utilities, “there’s lots of noise, lots of activity in those segments, and those are big segments.”

The Korean automakers replaced their models at a faster rate than every automaker except Honda Motor Co. (7267) in the last decade, according to the Bank of America report. That helped drive market share for Hyundai and Kia to 8.9 percent in 2011, from 1.1 percent in 1998, according to researcher Autodata Corp. After slipping last year to 8.7 percent, their combined market share may slide to 8.2 percent by 2016, Murphy wrote.

‘Year Older’

“Our competitors have great product, newer product, especially in some of the largest segments,” said Fink, the Florida Hyundai dealer. “We think our cars face off extraordinarily well, but they are a year older.”

Ford, which has gained the most U.S. market share this year, probably led American automakers this month with an 11 percent increase in sales, the average of 13 estimates. The Dearborn, Michigan-based company will add capacity to build 200,000 more vehicles annually in North America on demand for F-Series pickups and Fusion sedans.

For the first time in two decades, Ford, Detroit-based GM and Chrysler Group LLC pulled off a sweep in the first three months of a year, with all three gaining U.S. market share in 2013’s first quarter. Deliveries may have increased 5.5 percent for GM and 6.4 percent for Auburn Hills, Michigan-based Chrysler in May, the average estimates of 13 analysts.

Volkswagen AG (VOW), based in Wolfsburg, Germany, may post an 7.7 percent gain in combined sales for its VW and Audi brands in April, the average of four estimates.

Accord, Fusion

Hyundai and Kia rolled out updated versions of the Accent subcompact, Elantra compact and Sonata and Optima mid-size sedans in 2010 and 2011. While demand for Elantra has continued to grow, the carmaker has had trouble keeping up with newer models in the mid-size car segment such as Tokyo-based Honda’s Accord and Ford’s Fusion, and the Accent has fallen behind GM’s Chevy Sonic and Ford’s Fiesta.

To counter the new-product challenge, Korean automakers have been boosting incentives on important models. Spending on Hyundai Elantra rose sixfold in April to $1,196 from $196 a year earlier, according to researcher Edmunds.com. Incentives rose 94 percent for Kia Rio, to $838, 63 percent for Hyundai Sonata, to $2,377, and 42 percent for Kia Optima, to $2,598.

Tough Comparisons

“We’re comparing ourselves to brands now that are doing better than they’ve done in five years,” Hyundai’s Krafcik said. “Those comparisons at times disadvantage us because they’re up year-over-year, but we were very strong last year.”

The weakening yen may already be giving Japanese manufacturers a leg up. Nissan, Japan’s second-largest automaker, this month cut the price of seven models, including its top-selling Altima sedan.

Nissan probably will lead all automakers with a 22 percent increase in U.S. sales, the average of eight estimates. The Yokohama, Japan-based company said its price cuts aren’t related to the yen and instead are aimed at getting sticker prices in line with what customers actually pay for their models.

Honda and Toyota Motor Corp. (7203) sales may have risen 5.7 percent and 3 percent in May, respectively, the average estimates of eight analysts. Toyota forecast an increase in May sales from a year earlier, helped by a gain in Prius hybrid deliveries. Carly Schaffner, a company spokeswoman, declined to provide specific figures for total sales or Prius.

The yen has weakened about 21 percent versus the U.S. dollar and 18 percent versus the Korean won since Oct. 31, when Prime Minister Shinzo Abe advocated for its decline to aid his country’s economy.

‘Product Offensive’

“Shinzo Abe may go down as the greatest car salesman in Japanese history,” Adam Jonas, Morgan Stanley’s auto analyst, wrote in a May 28 report. “We don’t think the Japanese will start a price war, but rather a product offensive.”

The average Japanese car selling in the U.S. has 44 percent content from Japan, according to Morgan Stanley, which cited National Highway Traffic Safety Administration figures. Nissan and Toyota have 52 percent and 48 of content in their cars sourced from Japan, behind Mazda Motor Corp. (7261)’s 85 percent and Mitsubishi Motors Corp. (7211)’s 84 percent.

“We look for the Japanese to use the model-year change-over to adjust option packages at favorable prices, leading to more profound product enhancements from mid-2014 onward,” wrote Jonas, who is based in New York.

Value Proposition

Such moves would be straight out of Hyundai and Kia’s playbook, said O’Neill, who led Hyundai as its U.S. sales more than quadrupled from 1998 to 2002. When Hyundai introduced a new Accent small car in the middle of his tenure, it was the only model in its class to offer airbags as standard, he said.

“It was pricing and packaging,” O’Neill said. “What are the features that people really wanted in cars, and how do you offer them at a competitive price relative to the competition? These are ways of adding value to your product that cause consumers to look twice.”

To contact the reporters on this story: Craig Trudell in Southfield, Michigan at ctrudell1@bloomberg.net; Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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Photographer: David Paul Morris/Bloomberg

Hyundai Motor Corp. vehicles are displayed during the 2013 North American International Auto Show (NAIAS) in Detroit.

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Photographer: David Paul Morris/Bloomberg

Hyundai Motor Corp. vehicles are displayed during the 2013 North American International Auto Show (NAIAS) in Detroit. Close

Hyundai Motor Corp. vehicles are displayed during the 2013 North American International Auto Show (NAIAS) in Detroit.

Photographer: Peter Foley/Bloomberg

The 2013 Ford Motor Co. Fusion vehicle stands after being unveiled during an event in New York. Close

The 2013 Ford Motor Co. Fusion vehicle stands after being unveiled during an event in New York.

Source: General Motors via Bloomberg

A 2014 Chevrolet Impala LTZ is shown in this handout photo taken on Jan 12, 2013. Close

A 2014 Chevrolet Impala LTZ is shown in this handout photo taken on Jan 12, 2013.

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