Introducing a new car line in the crowded U.S. market has to be one of the riskiest ventures around. But South Korea's Kim Sun Hong did just that last February. The chairman of Kia Motors Corp. started selling low-priced Sephia subcompacts through a chain of new dealerships in Western states. This month, the dealers will get their first shipments of a second Kia car, the Sportage, a sleek sport-utility vehicle.
Such bold tactics are key to Kim's growth strategy. As he sees it, to survive in the auto business, you have to be a global player able to produce at least 1 million vehicles a year. But achieving that status has trapped Korea's No.2 vehicle maker in a vicious circle. With high costs for expansion and consumer financing, the company is forced to borrow heavily. Kia's debt hit $3.3 billion last year, up 68% in two years. This year, the company's estimated interest costs of $384 million will nearly equal its operating profits.
BUDDY SYSTEM? If Kim's strategy does not pay off soon, he may need to find a rich partner. Unlike archrivals Hyundai Motor Co. and Daewoo Motor Co., which are both part of chaebol, or huge conglomerates, Kia is an independent, publicly traded company. Although Ford Motor Co. owns a 10% stake in Kia and Japan's Mazda Motor Corp. holds 8%, their roles have so far been mostly limited to technological assistance.
Even as he looks to expand abroad, Kim is in a tough fight at home against market leader Hyundai. Kia is being hurt by a major shift in the car market, which has been growing at an average clip of 14.7% a year since 1991. While there is still a demand for entry-level subcompacts, the new Korean affluence has brought a rapid increase in demand for sedans with more horsepower, a market nearly monopolized by Hyundai's Sonata II and Grandeur models.
Despite offers of cut-rate consumer financing, Kia saw its unit sales drop 14% in the first 10 months of this year. As a result, some analysts have revised their 1994 estimates of Kia earnings downward. Analyst Don Lee of Barclays de Zoete Wedd in Seoul considered
Kia's first-half performance "so disappointing" that he cut his estimate of full-year net income by 40%, to $27.5 million on sales of about $6.8 billion. Kia's stock price has dropped 36% in seven months, to $18.25, the lowest in its history.
Kia is responding to the shift by speeding development of its own more powerful sedan. It now plans to debut the code-named G-car early next year. "We're in fine shape," says Kia President Han Seung Jun, who expects to sell 350,000 cars domestically next year, up 40% from this year. Kia is confident the new sedan will pose a strong challenge to Hyundai's best-selling Sonata.
But Kia's long-term growth will depend on its success in overseas markets, including the U.S. Kia has long supplied Ford with a small car to sell in the U.S. For nearly 10 years, it was the Festiva, and since late last year, it has been the Aspire, a subcompact designed by Mazda. Now, Kia has 88 dealers in 12 Western states selling the Sephia, a version of the Aspire. Sephia's base price is $8,495, about $1,000 less than a Chrysler Neon, but it's without such popular features as air bags.
SPORTING NEWS. Kia's sales in the U.S. are off to a slow start, and it will take two or three years to build a national sales network. But the Sportage, priced at $14,000 and competing with Isuzu's Rodeo and the Jeep Cherokee, should help boost showroom traffic and sales.
Kim is also eager to develop new markets in Europe and Asia. He recently signed agreements to assemble Kia cars in Germany, the Philippines, Iran, and Indonesia. He has also lined up distributors in Europe, where imports of Kia cars are taking off. Its shipments to Europe this year are expected to be up more than 50% from last year's 21,836. The export surge is being helped by the 8%-to-10% price advantage Kia cars enjoy over comparable Japanese models such as the Honda Civic and Toyota Tercel.
While the going may be rough now, Kim believes his company will be much stronger when its expansion program winds up in 1997. By then, Kia's capacity will be 930,000 autos per year, up from 650,000 units in 1993. The heart of the expansion is a $2 billion state-of-the-art production and testing facility on Korea's west coast. With the new plant and further improvement in design, styling, and quality, Kia just may be able to move upmarket in Korea as well as overseas.