And The Checkered Flag Goes To Korea

Hyundai, Kia, and Daewoo lead in U.S. small-car sales growth

Americans are on a new-car buying binge this year, racing well ahead of last year's 17 million vehicles, itself a record-setting pace. And the surprising winners? The Koreans.

Hyundai, Kia, and Daewoo sold 142,812 vehicles in the U.S. in the first four months of this year, up 72%-- while overall car sales are up just 10%. That's on top of already prodigious gains in 1999, when Kia sales rose 62%, Hyundai 82%, and Daewoo 313%. Hyundai has zoomed past Mazda to become the fifth-largest Asian brand in the U.S. market, and it's gaining on Mitsubishi for No. 4. All told, the three Korean companies now account for 4% of U.S. passenger car sales. Their share of the market for all vehicles, including trucks, is 2.4%.

Much of that feverish growth is coming in the small-car market, which U.S. and Japanese auto makers have all but given up on. But the Korean carmakers have lined up a raft of new products, including a new entry in sport utilities. "They're taking a lot of share on the low end of the market," says Ronald L. Zarrella, president of General Motors Corp.'s North America unit, who labels the Korean surge "a phenomenon." Adds James N. Hall, an analyst at market researcher Auto Pacific Inc.: "If you want an entry-level car these days, you almost have to buy Korean."

American companies blame the Koreans for their struggles in the small-car business, including the problems at GM's Saturn unit. And they are furious about the trade imbalance, lobbying for sanctions if Korea doesn't throw open its home market to imports. Another option is to buy out the offenders. GM, which sold only 68 cars in Korea last year, is angling to acquire Daewoo's auto operations.

It's all a giant change. Just two years ago, Korean carmakers were saddled with a reputation for shoddy, styleless cars that could be had for little money but fell apart quickly. Hyundai Motor Co. was in the midst of its worst year ever, its sales falling below 100,000 for the first time since its 1986 American launch. Kia Motors Corp., facing bankruptcy at home, was taken over by Hyundai in a government-sanctioned buyout. And Daewoo Corp. was just getting ready for its ill-conceived U.S. launch: It would rely solely on college students to sell cars on campus.

The turnaround in Korean carmakers' fortunes has a lot to do with quality, or at least the perception of it. Korean cars have always bunched up at the bottom of quality surveys, and still do. In J.D. Power & Associates' annual consumer survey of car quality during the first 90 days of ownership, released earlier this month, Korean car companies took three of the bottom five places, along with Japan's Suzuki Motor Corp. and Germany's Volkswagen.

FIERCE ASSAULT. But the spread between the bottom and top scorers is not as vast as it used to be. "The quality of Korean cars has improved substantially, but the same can be said of most other brands," says Tom Libby, an analyst at J.D. Power in Troy, Mich. The J.D. Power figures show the three Korean carmakers at 44% below the industry average, compared with 55% worse three years ago. Another indication of the Koreans' strides in quality: Hyundai's warranty costs dropped 30% last year.

The Koreans have mounted a ferocious marketing program to reassure customers. Daewoo offers its buyers free maintenance for the first three years. Hyundai caught the attention of car buyers with a 10-year or 100,000-mile warranty on engines and transmissions, a five-year bumper-to-bumper warranty, and free roadside service. "Getting people to consider us is still our biggest problem," says Finbarr O'Neill, president and CEO of Hyundai Motor America Inc. in Fountain Valley, Calif. "For the consumer, our warranty offers freedom from worry."

Having staked out their turf, Korean carmakers are plotting their moves into more segments of the business, including more lucrative ones. Until now, their strategy has been to sell sedans that undercut the Japanese competition by several thousand dollars. But Hyundai will bring out its XG300 model this year, which, at $24,000, is both pricier and larger than a Camry. This summer it will introduce its first sport utility, the $18,000 Santa Fe.

OUT IN FRONT. Kia, after struggling for years with just two models, will introduce three new cars this year, including the just-launched Spectra, the entry-level Rio this summer, and an unnamed midsize sedan toward the end of the year. The midsize entry, Kia's biggest, will share its platform with the Sonata. Despite its acquisition of Kia last year, Hyundai plans to keep the brands separate in the U.S.

And the Checkered Flag Goes to--Korea

Dealers couldn't be happier about the resurgence of Korean brands. Last year, Hyundai ranked in the top five franchises in J.D. Power's annual survey of dealers. That's often a measure of the brand's profitability. In January, Los Angeles dealer group Keyes Automotive, a big Toyota dealer, shuttered its Mazda and Isuzu store and opened a Hyundai franchise. "We asked ourselves where Mazda Motor Corp. would be in 10 years, compared to Hyundai," says Howard Tannebaum, a Keyes vice-president. This time,when it came down to choosing between a Korean and Japanese brand, the fast-growing Korean contender won out.

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