Enough with the Hyundai Jokes

Yesterday's laughingstock is today's profitable carmaker

Last June, when Hyundai Motor Co. announced plans to set up a joint truck venture with DaimlerChrysler and sell a 9% stake to the Stuttgart giant, the Korean company was portrayed as a crucial part of the German-American company's Asia strategy. A year later, some analysts are wondering whether a full-fledged venture will ever happen: In April, DaimlerChrysler agreed to buy out Volvo's stake in Mitsubishi Motors Corp.'s truck business, giving it the truckmaking capacity it needed. Yet whatever happens to its alliance, Hyundai is actually making money--a boast neither Chrysler nor Mitsubishi can make.

Hyundai executives are feeling more bullish than they have in years. Global sales of their cars rose 28% to $14.5 billion last year, and pretax profits surged 58% to $619 million. Hyundai is even hoping to bust out of the low-cost car category and take its main Asian rivals head-on. "Five years down the road, the [quality] gap between a Hyundai car and a top Japanese car will be negligible in some segments," says Kim Noi Myung, Hyundai's chief operating officer.

That would certainly be a major leap for a carmaker that only three years ago fell to the bottom of J.D. Power & Associates' quality ranking. It was also losing market share, as sales in the U.S. plunged to a record low of 90,000 and the company lost $26 million. Today the company is in the midst of a dramatic turnaround; Hyundai sold 74,773 cars in the U.S. just in the first quarter of this year, a jump of 35%.

ATTITUDE ADJUSTMENT. The sales surge is thanks largely to two new models targeting drivers who previously would not be caught dead in a Hyundai. The 2.7-liter Santa Fe, a small-scale sport utility, is shooting for buyers who don't want a monster SUV. Hyundai sold a better-than-expected 11,040 Santa Fes in the U.S. in the first three months of 2001. Then there's the $25,000 XG300 sedan, which has a three-liter 192 horsepower aluminum V6 engine, and is a key player in Hyundai's upscale dreams. In March it sold 1,592 XGs in the U.S., raising hopes that it will meet its goal of 12,000 to 15,000 a year. "There are signs buyers are slowly changing attitude toward Hyundai's brand," says Richard Pyo, car analyst at Credit Suisse First Boston.

The real challenge is still to come. Starting with 1999 models, Hyundai hit on a new ploy to move its metal: It offered U.S. buyers a generous warranty of 10 years or 100,000 miles on engines and transmissions. Industry analysts generally agree that the Korean company needed such a radical move to change its low-quality image. But, cautions Chang Choong Lynn, an auto analyst at Daewoo Securities Co., "the warranty could haunt Hyundai's future profitability if its cars aren't good enough." Hyundai sets aside an estimated $1,000 a car to provision against future warranty costs. But should those transmissions start conking out, it may prove insufficient. Hyundai also faces longer-term uncertainty: Although its technology is improving, the company lacks the engineering to develop fuel-cell or other technology required to meet zero-emissions regulations expected in the future. The tie-up with DaimlerChrysler was supposed to give it access to such knowhow--but it's unclear the alliance will last.

Meanwhile, Hyundai, led by CEO Chung Mong Koo, is tightening its grip on its domestic market. No one expected much when the company took over insolvent Kia Motors Corp. in the depths of the Asian crisis. But Korea's fast economic recovery and the two companies' platform-sharing program motored Kia to a profit of $263 million last year, vs. a $5.3 billion loss in 1998. With such hot sellers as Hyundai's Elantra and Sonata and Kia's Optima, the two companies control more than three-quarters of the Korean market.

The recent separation of Hyundai Motors from the troubled Hyundai Group has also ensured that it won't subsidize weak group affiliates any longer. That allows the car company to focus resources overseas. Management predicts exports will reach more than one million vehicles this year--a milestone in Hyundai's 34-year history--for a 28% annual rise, following a similar jump last year. Maybe Mitsubishi Motors, DaimlerChrysler's big Japanese ally, could learn something from the Koreans.

By Moon Ihlwan in Seoul, with Christine Tierney in Frankfurt

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