Consumer

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

In carmaking, fate is often tied to the ability to seize a moment.

When Henry Ford spotted the economies of scale involved in mass production, he created the modern auto industry. When all those black Model Ts were starting to look tired and uniform in the mid-1920s, Billy Durant let his designers' imaginations run wild and created General Motors. While Detroit was busy pushing the boundaries of speed and power in the late 1960s, Japanese automakers instead offered stolidly affordable family cars, and cleaned up when the 1973 oil crisis pushed gas prices through the roof.

Moving in Second Gear
China has reaped the spoils of rich countries' lost share in the global auto market. Korea has stood still
Source: Bloomberg Intelligence
Note: Excludes production outside the five regions shown (eg. Tata, Yulon).

That ought to be good news for Hyundai and Kia. After years of building their profile in overseas markets, Korea's automakers are facing suddenly weakened opponents: Volkswagen is setting aside at least $10 billion to pay for legal claims after admitting it rigged diesel cars to trick U.S. emissions tests, a person with knowledge of the matter said Thursday. Hours earlier, Mitsubishi Motors admitted manipulating the fuel-efficiency performance of 625,000 vehicles, causing the biggest drop in the company's shares since 2004.

Stalled
Hyundai's U.S. vehicle sales have gone sideways in recent years
Source: Bloomberg data
Note: Rebased. FY2010=0.

There's an opportunity here for any auto company whose worldwide growth has been stalling. Sales in China, Hyundai's largest market, declined 5 percent last year. In the U.S., the second-biggest, they've been growing, but at a relatively modest rate. That's disappointing given some of the strong fundamentals out there: Korean carmakers have been widening their global lead in quality ratings, according to JDPower, and have also forked out for some prime advertising real estate, including a four-year deal to sponsor the U.S. National Football League.

The problem is product. At a time when the auto world is bifurcating rapidly into a market composed of SUVs burning newly cheap gasoline and clean-energy vehicles more dependent on a plug socket, Hyundai and its Kia affiliate have been caught in the middle with a line-up of conventional sedans that seem to be going the way of the Tin Lizzie. Of the top 15 SUV brands in the U.S., Hyundai and Kia rank last and second:

Stuck in the Slow Lane
Unit sales of best-selling SUV models in the U.S. last year
Source: Goodcarbadcar.net

The companies have plans to address this. Hyundai's Tucson and Santa Fe SUVs made up about a quarter of its overseas sales last year, and for all the hoo-hah about Toyota's hydrogen fuel-cell Mirai released at the end of 2014, the Korean company had a hydrogen-powered car -- an SUV, no less -- in its line up nearly two years earlier. Kia, meanwhile, boasts the Sorento SUV and Soul plug-in car.

Still, those models clearly aren't setting the market alight, and given the wide turning circle on refreshing a major carmaker's model line-up, you shouldn't expect the Koreans to be able to bring compelling new vehicles to market in a hurry.

In the shorter term, they should take a leaf out of Japan's playbook. The likes of Toyota and Honda finally got over American drivers' suspicions of their inferior quality in the 1960s and 1970s by putting their money where their mouths were and offering extra-long warranty periods.

At a time when the reputation of Japanese and European models is taking a hit, the 5.64 trillion won ($5 billion) Hyundai has set aside to cover repairs under warranty represents an untapped opportunity. That was a very conservative 6.1 percent of Hyundai's sales revenue in the most recent fiscal year, versus 4.9 percent at Toyota, 3.2 percent at Honda and 2.1 percent at Nissan. It's even more robust when you consider that the amount Hyundai adds to the provision each year -- a decent proxy for the amount it expects to have to eventually pay out in fixes -- is lower than its Japanese rivals.

Virtue Rewarded
Hyundai's charges for warranty provisions are now lower than its major Japanese rivals
Source: Company reports

That's capital that could be deployed on burnishing Hyundai's quality reputation and setting it apart from rivals. Hyundai's standard U.S. warranty -- 10 years for the powertrain, seven for the vehicle body and five for everything else -- already beats the likes of Lexus and other major brands. Just lifting it to, say, 10-7-7, could be game changing.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net