Hyundai Gets Hot

Chairman Chung has boosted quality and design while keeping prices low. And as sales soar, the big leagues beckon

When Chung Mong Koo became CEO of Hyundai Motor Co. (HYMTF ) in March, 1999, the industry yawned. Chung, the eldest living son of Chung Ju Yung, Hyundai's late founder, was widely deemed a colorless executive who would promote the status quo: cranking out cheap knockoffs of Japanese cars and flooding the market with them. Chung, 63, had spent much of his career running Hyundai's after-sales service division, a post that required no overarching vision or boardroom combat. Was this the man to breathe new life into a company on the brink? True, Hyundai Motor dominated the car market at home, but in crucial overseas markets, it had a reputation for poor quality--doors that didn't fit properly, frames that rattled, engines that delivered puny acceleration--and it was losing money.

Chung has proved the skeptics wrong. Turns out the socially awkward CEO had a real agenda, and he was prepared to use unconventional means--at least for a Hyundai exec--to ensure its success. Days after he took over, Chung visited Hyundai's sprawling plant at Ulsan on the southeastern tip of the Korean peninsula. To the shock of his employees, who had rarely set eyes on a CEO, Chung strode onto the factory floor and demanded a peek under the hood of a Sonata sedan. He didn't like what he saw: loose wires, tangled hoses, bolts painted four different colors--the kind of sloppiness you'd never see in a Japanese car. On the spot, he instructed the plant chief to paint all bolts and screws black and ordered workers not to release any car unless all was orderly under the hood. The plant chief recalls Chung fuming: "You've got to go back to basics. The only way we can survive is to raise our quality to Toyota's level."

Today, Chung is well on his way. Thanks to improved quality and design--and brisk sales in the U.S.--Hyundai sold 1.34 million vehicles in the first 10 months of this year, an increase of 8% over the same period in 2000. Much of the improvement was in the U.S., where, by the end of November, sales had hit 322,000, up 42% from 2000. Net profit for 2001 is projected to reach $860 million on revenues of $13.2 billion, up 65% year-on-year. And the U.S. was responsible for 40% of that. The stellar results have prompted Chung to authorize the opening of Hyundai's first U.S. plant, though no date is set. And increasingly, he is moving the design process to America, too, including a planned test track in the Mojave Desert.

Along the way, Hyundai has become emblematic of the changes sweeping Korea's economy. "Not all companies have taken advantage of the Asian crisis to strengthen their market positions at home and abroad, but Hyundai Motor is one of them," says Chu Wu Jin, professor of motor-industry economics at Seoul National University. "More significantly, it has a chance to make another leap forward."

The encounter at Ulsan was the opening salvo in Chung's battle to turn the Korean auto maker into a global player. Within months, Chung had established a quality-control unit. He shuffled management, promoted a pair of top U.S. designers, and wrested control of Hyundai Motor from parent Hyundai Group, which has a history of using profitable units to prop up weak ones. Last year, Chung sold 10% of Hyundai Motor to DaimlerChrysler with the aim of building a strategic alliance. The partnership has yet to bear fruit, but it could give Hyundai access to technology down the road.

At the same time, Chung's team used the 1998 acquisition of Kia Motors Co.--bought at the depth of the Asian crisis for the fire-sale price of $910 million--to boost both companies' market pull. "The combined operation gave us not only bargaining power but important leverage to play parts suppliers against each other, making them compete for quality," says Han Sang Joon, chief engineer of the Ulsan plant.

After these initial restructuring moves, Chung could have reverted to type and used Hyundai's new quality controls and economies of scale to flood the world with more cheap Korean cars. Instead, he decided to change Hyundai more profoundly. Chung poured money into research and development--$1.4 billion this year, up 20% from 2000--to build cars that not only compete on price but also deliver on quality. He chose to make the U.S. the key battleground.

That required a radical shift in corporate mindset: For the first time, Korean execs were ordered to act on key recommendations made by their American colleagues. At the same time, Chung was determined to build cars that would appeal to U.S. drivers. To that end, he handed his California design team unprecedented control over the company's first sport-utility vehicle.

The result: the Santa Fe, which has developed an almost evangelical following in the U.S. Leonard Guest, a 57-year-old retired school teacher from East Aurora, N.Y., bought a Santa Fe last February after exhaustively researching the small SUV segment. "I love the styling," he says. "To me, it's aggressive but pleasing." Guest has put 24,000 km on the odometer and says the quality is "exceedingly high." His assessment is echoed by J.D. Power & Associates, the U.S. arbiter of auto excellence. The firm reports that Hyundai's quality has jumped 28% over the past four years. That compares with 14% for the industry as a whole. Says Brian Walters, J.D. Power's director for product research: "Hyundai has done a tremendous job."

The key was creating the post of quality-control czar, something Hyundai never had before. Chung turned to Kim Sang Kwon, a veteran who developed the latest model of the Sonata sedan. Kim's first job: coming up with a quality-control bible. After studying manuals of U.S. and Japanese auto makers, he and his 100-strong team produced their own. It makes clear who's responsible for each manufacturing step, what outcome is required, and who checks and confirms performance levels. To drive home the message, Kim held a ceremony in which all 380 Hyundai and Kia section heads vowed to uphold the manual.

With the quality-control issue on its way to resolution, Chung focused on producing hits. "We needed attention-grabbing models to improve our image," he says. In 1991, Hyundai had opened a design studio in Fountain Valley, Calif., and hired Andrew Kort, formerly of Chrysler and Mercedes-Benz, and Derek S. Sancer, who had worked at ASHA Corp., a small component designer in Santa Barbara, Calif. Kort and Sancer were recruited to design concept cars for the auto-show circuit. In 1995, Hyundai execs told Sancer and Kort the company needed an SUV. Midway through devising a concept car based on the Ducati motorcycle, the designers transferred the theme, with its distinctive exoskeleton, to what is now the Santa Fe.

As the designers were tinkering with clay models, Toyota Motor Corp. and Honda Motor Co. rolled out the RAV4 and CR-V, auto-chassis SUVs of the same kind Hyundai was developing. Hyundai bought several of each and tore them apart to analyze them and devise features that would set the Santa Fe apart. "We looked at every interior and exterior component to find a way to improve on it," Sancer recalls. Innovations ranged from a cupholder sufficiently capacious to hold a liter soft-drink bottle to extra power points for cell phones.

Hyundai needed to make sure the Santa Fe stood out on the highway, too. Hence the decision to widen and lengthen it--a shrewd move because the RAV4 and CR-V were often criticized for being too small. Sancer and Kort also gave the truck muscular curves on the hood and door panels--a design flair since echoed by Toyota, Nissan Motor Co., and others. Back in Korea, Park Jong Suh, a 54-year-old design chief, recalls battling company conservatives--they felt the Santa Fe looked crumpled--to preserve Kort and Sancer's vision. "People have a strong opinion about it," says Kort. "Some may not like it, but at least they can see the difference."

One of Hyundai's most important moves was the decision to feed the American driver's hunger for horsepower. The RAV4 and CR-V came equipped only with two-liter, four-cylinder engines. The Santa Fe offers a 2.7-liter, V-6 engine. "It turned out to be a winning factor," says Lee Hyoung Keun, who runs global marketing. Indeed, the Santa Fe was a bona fide hit when it debuted in the autumn of 2000. "The Santa Fe was well-received right out of the blocks," says George H. Glassman, a Hyundai dealer in Southfield, Mich. "It's not just the price, it's about styling, value, and warranty." Not that the impact of price should be underestimated: The Santa Fe sells for an average of $21,000. When a friend asked him why he bought one, Arnie Goodman, a roofing-company manager in Southfield, said: "When I drive down the street, I've got leather, a CD player, four-wheel drive, and anti-lock brakes. The only thing missing is the $42,000 price tag."

Encouraged, Hyundai's next step is to cement its place in the biggest car segment: the family sedan. Through next summer, Hyundai is focusing its marketing efforts on the Sonata, which competes with the top-selling Honda Accord and Toyota Camry. After giving the Sonata a facelift and a new engine, Hyundai moved 5,923 units in November versus 2,881 a year earlier. One reason for the robust sales is that the V-6 Sonata, at about $20,000, costs about the same as four-cylinder versions of the Accord and Camry. The current model was designed in Korea, but the next will be dreamed up in the U.S.

IMAGE SHIFT. So far, so good: Chung & Co. have rescued Hyundai's image and designed cars that people want. The next question is whether customers will stick with Hyundai when they decide to buy another vehicle. "They started like the Japanese, selling inexpensive cars. Over time, the Japanese were able to convince the consumers to pay more," says a U.S.-based auto executive. "So, can Hyundai move the transaction price up?" Indeed, the Hyundai name continues to turn some people off. When the company conducted a blind test for the Santa Fe, customers who liked the car said they would expect to pay $5,000 to $10,000 less because it was a Hyundai.

Another question is the role of Hyundai's famous 10-year drive-train warranty in the U.S. A brilliant stroke, it convinced Americans that they should give Hyundai cars one more chance. At some point, though, the company will have to pull the plug because the warranty will be too costly to maintain. Finbarr O'Neill, president and CEO of Hyundai Motor America, says the warranty will continue through the 2005 model year. Will sales plunge once it's withdrawn? Not likely, says O'Neill. "The warranty allowed us to get on people's shopping lists," he says. "But warranties don't sell cars."

Despite all the progress made under his stewardship, Chung still has his critics. Many expressed doubts when he replaced respected Hyundai Motor President Lee Kye Ahn in July with his close associate Kim Dong Jin, who negotiated the DaimlerChrysler alliance. "I think he is surrounding himself with yes-men," says Lee Jeong Ja, a strategist for HSBC Securities Inc. in Seoul. Another concern is that Chung's ambitious expansion plans could prompt Hyundai to put market share before profits--in the hoary chaebol tradition. Indeed, Chung aims to boost the combined capacity of Hyundai and Kia this decade to about 5 million units a year from some 3 million now. Hyundai argues that it must make 1 million vehicles per platform to survive bruising competition. But that strategy could leave the auto maker with a lot of unsold cars.

Still, there's no denying that Chung has made an enormous difference to Hyundai Motor's international stature. That can be seen in the kind of people buying the company's cars. Traditionally, Hyundai customers were budget shoppers who often had bad credit. O'Neill says the people who now shop for Hyundais also look at Hondas, Nissans, and Toyotas. And dealer Glassman says he even gets Lincolns and Mercedes as trade-ins. "Our customer," says O'Neill, "is now more educated and has a higher income than five years ago--than one year ago."

Back in Korea, Chung exudes confidence. "Our prospects are good as long as we offer value for money," he says. Chung aims to make Hyundai one of the top five carmakers on the planet before 2010. To do so, he will have to resist the temptation to overreach--the fatal mistake of many a Korean executive. For an example of what can go awry, Chung need look no further than his father, the man who founded Korea's top conglomerate--only to see it crumble under a mountain of debt.

By Moon Ihlwan in Seoul, with Larry Armstrong in Los Angeles and Katie Kerwin in Detroit

    Before it's here, it's on the Bloomberg Terminal.