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Hyundai-Kia Growth Pared in Collision at Same Price Points: Cars

Sibling Cannibalization Seen in Rising Hyundai-Kia Rivalry
Kia Motors Corp.'s K5 hybrid sedan. Photographer: SeongJoon Cho/Bloomberg

When General Motors Co., Volkswagen AG and Toyota Motor Corp. look into their rear-view mirrors, they see Hyundai Motor Co. When Hyundai looks behind, it sees its own smaller affiliate, Kia Motors Corp.

Kia’s deliveries of the midsize Optima sedan -- called K5 in South Korea -- more than tripled last year, partly at the expense of Hyundai’s Sonata, whose increase was limited to 5.2 percent. Kia says it plans to introduce the K9 in April to challenge Hyundai’s Equus and Genesis models among luxury-minded customers.

The two Seoul-based companies sold a record number of vehicles in 2011 and their shares outperformed all other major carmakers. With both Hyundai and Kia increasingly fighting for customers at all the same price points, the competition still may take a toll, said Im Jeong Jae, a Seoul-based fund manager.

“Sales growth without cannibalization is impossible under their current corporate structure,” said Im, at Shinhan BNP Paribas Asset Management Co., which oversees about $28 billion, including Hyundai and Kia shares. “The two companies’ target markets are almost identical, which makes cannibalization unavoidable, and difficult to solve anytime soon.”

For Chung Mong Koo, chairman of both Hyundai and Kia, the internal rivalry is heating up as Toyota and Honda Motor Co. are recovering from last year’s natural disasters in Japan and Thailand. This year, all four carmakers will be pushing to increase sales to customers seeking high quality at a good value.


Frank Ahrens, a spokesman at Hyundai, says the intensity of the sibling competition is “car-to-car” across segments. His Kia counterpart, Michael Choo, who refers to Hyundai as an affiliate instead of the parent company of his employer, says the two compete “head-to-head” in most of the world’s auto markets and vehicle categories.

Both spokesmen declined to say whether the competition is by design, saying any such strategic decisions are made by Chairman Chung, who was unavailable for an interview.

Intended or not, the rivalry didn’t hurt Chung’s two automakers last year. Combined operating income, or sales minus the cost of goods sold and administrative expenses, at Hyundai and Kia rose 38 percent to 11.6 trillion won ($10.3 billion) in 2011, overtaking the amount earned at Ford Motor Co., according to reported data.

Saving Kia

Hyundai and Kia rose 23 percent and 32 percent, respectively, in Seoul trading during 2011, the only two companies to gain on the 28-member Bloomberg World Auto Manufacturers Index.

The relationship started as a hierarchical one in 1998, when Hyundai Motor led the 1.18 trillion won purchase of a 51 percent stake in bankrupt Kia. Chung, the eldest living son of Hyundai Group’s founder, placed his own son, Eui Sun, as president at Kia in 2005.

Kia’s ascent was helped by Hyundai, which shared its technologies and automotive platforms, Shinhan BNP’s Im said. Over the years, Kia became increasingly competitive as its Optima and Rio cars gained popularity in Korea and overseas. Chung’s son was summoned back to Hyundai Motor in 2009.

Spokesmen at both companies now say that aside from their common chairman, the joint research center and adjoining twin headquarters buildings in Seoul, the two are rivals.

Hindering Growth?

While the competition helped the two carmakers improve the quality of their vehicles when they were focusing on the South Korean market, the strategy may now risk hindering growth as the two carmakers seek to gain market share worldwide, said Shin Chung Kwan, an analyst at KB Investment & Securities Co.

By contrast, Renault SA and Nissan Motor Co., who share the same chairman in Carlos Ghosn, generally target different markets and segments, Shin said.

Some officials at the Korean carmakers say changes are already afoot.

“Product differentiation needs to increase” and has started to become evident in Kia’s tiger-nose grill and Hyundai’s fluid styling, Paul Philpott, Kia’s chief operating officer in Europe, said in an interview on Jan. 20. “Hyundai will become the mainstream brand with Kia the sportier, dynamic little brother,” he said.

Going Upscale

Efforts to differentiate the brands will take a step backward as Kia prepares to introduce the K9, its first major push into the luxury sedan market since the flop of the Opirus - - also known as the Amanti -- whose lack of popularity outside of Korea forced the company to discontinue exporting the vehicle in 2010.

Kia’s push toward luxury coincides with Hyundai’s plans to boost sales of its top-of-the line Equus and Genesis vehicles. The K9 will be priced between the two Hyundai luxury models, Lee Jae Rok, Kia’s chief financial officer, said last week. The Genesis starts at $34,200 and Equus at $59,000 in the U.S., according to the company’s website.

“Both brands seem to be going upscale rather than just one,” said Christian Yang, an analyst at IHS Automotive, an industry researcher. “The K9 will again represent problems if Hyundai and Kia’s plans of alignment does not go as planned.”

The rivalry may be most intense at home. While Hyundai grabbed market share in the U.S. last year, led by a 41 percent surge in deliveries of the Elantra -- winner of the North American Car of the Year award -- its Sonata midsize sedan was outsold by Kia’s K5 for the second time in October last year. Deliveries of Kia’s Sportage sport-utility vehicle jumped 16 percent in 2011, versus the 7 percent drop in Hyundai’s rival Tucson, according to the Korea Automotive Manufacturers Association.

Tougher Competition

South Korea made up 17 percent and 19 percent of the total number of vehicles sold by Hyundai and Kia, respectively, last year, according to data from the companies.

External competition may also be getting tougher. Toyota, Asia’s largest carmaker, last week forecast record group sales for 2012, a year Honda President Takanobu Ito said he expects to be “the year of the complete rebound” for his company as Japan’s auto industry regains its confidence after reeling from natural disasters throughout 2011.

In the U.S., Ford Motor Co. is counting on its Fusion midsize sedan to help it boost automotive profit this year, while GM plans a revamped Chevrolet Malibu to help protect its lead as the world’s largest automaker.

Such intensifying competition globally means more reason for the Hyundai and Kia to battle each other, KB’s Shin said.

“As Hyundai and Kia gain global presence and market share, the need for segmentation will intensify in order for the two to avoid cannibalization,” Shin said.

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