Hyundai Profit Soars on China, U.S. Sales

While international rivals are swimming in red ink, Hyundai Motor is on a roll. A day after the South Korean company posted a record quarterly profit, investors pushed the automaker's stock 6.3% higher, extending year-to-date gains to a dizzying 177%. Executives forecast booming sales in China and a growing market share in the U.S. will maintain momentum in the months ahead.

"No auto company has outperformed during the industry turmoil," says Ahn Young Hoe, chief investment officer at fund manager KTB Asset Management, which holds Hyundai stock. Ahn reckons Hyundai's projection that it will sell 3.05 million vehicles globally this year, up from 2.84 million last year, is "reasonable."

Hyundai is a rarity among global automakers during this global financial crisis. Its net profit hit a new record of $832 million for the three months that ended in September, breaking its previous record of $690 million registered only three months earlier. Boasting a strong lineup of small cars, Hyundai has benefited from government incentives promoting more fuel-efficient vehicles in many countries. It is also capitalizing on a weak Korean currency, which increases profits earned overseas and has enabled it to finance aggressive marketing campaigns. That's the opposite of Japanese rivals, such as Toyota (TM) and Nissan (NSANY), which expect to sustain losses for a second straight year in 2009, weighed down by the strong yen.

Stimulus in China Hyundai's biggest gains have been in China, the world's hottest auto market. Despite earlier predictions of a gloomy period, overall passenger car sales there jumped 43%, to 5.74 million units, in the first nine months of this year, thanks to a government stimulus package, including generous incentives for buyers of cars with engine capacities of 1.6 liters or less.

Hyundai was well prepared. Models such as its Elantra Yuedong sedan, i30 compact, and Accent subcompact meet the requirements. What's more, Hyundai had doubled Chinese production capacity to 600,000 just before the global financial crisis hit last year. The result: Its auto sales in China are up 88% this year, increasing Hyundai's market share in the country to 7.2% from 5.5% last year. It is now selling more cars than any Japanese rival, including Toyota, Honda (HMC), and Nissan, and trails only market leaders Volkswagen (VOWG.DE) and General Motors. "Everything has worked out nicely," says Michael Sohn, auto analyst at brokerage Woori Investment & Securities.

Hyundai managers dispute that the company's success in China stems from good fortune. Lee Jong Sup, Hyundai's Beijing-based marketing general manager, points out that its plant in Beijing rolled out the Elantra Yuedong model in 2008 after spending 18 months reengineering the standard Elantra to make it fit better with Chinese tastes. Designers changed headlamps and the grille to make the car appear bigger and flashier. Meanwhile, engineers hardened the suspension to make the ride better suited for Chinese roads. And tweaking the engine and transmission helped boost fuel efficiency by 8%. That has helped the Yuedong become the best-selling car in China, beating rivals such as the Toyota Corolla, Volkswagen Jetta, and Buick Excelle.

A Shield Against Recession The Korean company's decision to build up its presence in China and India in the past two years is a shield from the collapse in demand in the U.S. and Europe. By early last year, Hyundai had spent $2 billion on the new plant in Beijing and another in Chennai, enabling it to build small cars in large numbers. In India, Hyundai is the No. 2 carmaker, behind Maruti Suzuki (MRTI.NS), and reported a 12.3% growth in sales to 406,000 cars in the first nine months of this year. That generated a profit of $51 million compared with a loss of $26 million a year earlier.

Of course, that doesn't mean Hyundai wasn't lucky. Had it not been for the global financial crisis that forced the Korean won to plunge against rival currencies, the company could not have embarked on an expensive marketing blitz that earned it a bigger market share, particularly in the U.S. The cheap currency, which at one point fell by some 40% against the dollar, lowers production costs and gives Hyundai higher profits when dollars earned overseas are converted back into the won. Apart from spending millions on advertising during the Super Bowl and Academy Awards, Hyundai could afford to embark on various promotional programs, including a popular scheme that lets customers return their cars and cancel loans without hurting their credit ratings if they lose their jobs.

Such campaigns have paid off. In the first nine months, Hyundai's U.S. sales rose 1.3%, to 342,000 vehicles. That's much better than the overall U.S. market, which shrank by 27%, and Toyota, which was down 28%. The federal Cash for Clunkers program also helped. In August, when the rebates were in full swing, Hyundai's sales surged 47%, to a record 60,467 vehicles.

The big challenge now for Hyundai is whether it can sustain its hot streak when the won starts regaining strength. The currency is now about 20% lower than it was at the end of 2007, but a swift appreciation would erase much of Hyundai's competitive advantage, especially if it were accompanied by a weakening of the Japanese yen. "There's no doubt Hyundai has capitalized on the currency advantage to make a big leap forward," says Lee Hang Koo, auto specialist at the Korea Institute for Industrial Economics & Trade, a Seoul-based, government-funded think tank. "The big test will be if it could maintain its market share without the currency help."

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