Hyundai: Kissing Clunkers Goodbye

A five-year focus on quality has sent customer satisfaction soaring

When Hyundai Motor Co. Chairman Chung Mong Koo said his company could increase the quality of its cars to "Toyota levels" five years ago, few took him seriously. After all, Hyundai was the butt of talk-show jokes and a target of industry disdain for tinny cars that were about as reliable as a go-kart. So when J.D. Power & Associates Inc. on Apr. 28 said the Korean carmaker had virtually caught up with Toyota in terms of quality, jaws dropped from Detroit to Tokyo. "We still have a long way to go," says Suh Byung Kee, the senior executive vice-president heading Hyundai's quality-control team. "But we have completed the first phase of our task."

The second phase could well be tougher. The eye-opening survey measured initial quality -- the number of complaints customers had in the first 90 days of ownership. Hyundai owners reported just 102 problems per 100 cars sold -- earning a tie with Honda as the second-best carmaker on the list and falling just below Toyota's tally of 101. And its Sonata sedan was the top-ranked car in the "entry mid-sized" category. On longer-term measures, though, Hyundai remains a laggard: In Power's July, 2003, Vehicle Dependability Study, Hyundai tallied 342 problems per 100 vehicles after three years of ownership, vs. an industry average of 273. Hyundai execs counter that it will take time before the recent improvement shows up in the longer-term statistics.

There's reason to agree with Hyundai's optimism. First wooed by the company's generous warranty -- 10 years for the drive train and five years for everything else -- U.S. consumers are starting to believe that Hyundai is a changed brand. Last year they bought 400,000 of its cars, a 7% jump over 2002. Jeff Ball, a pharmacist from Laurence Harbor, N.J., has four of them: He and his wife share a Santa Fe SUV and a Sonata sedan ("I call it my Jaguar without the cat," he says), and he has bought smaller models for his sons. Sales like that are helping Hyundai's bottom line: Net profit totaled $1.5 billion last year, up 21% from 2002, on sales of $21.7 billion, up 1.6%.

A TEAM WITH TEETH. Hyundai's focus on quality comes straight from the top. Since 1999, Chairman Chung has boosted the quality team to 865 workers from 100, and virtually all employees have had to attend special seminars on improving Hyundai's cars. Chung presides over twice-monthly quality meetings in a special conference room and an adjacent workshop, with vehicle lifts and high-intensity spotlights for comparing Hyundais head-to-head with rivals. And this team has teeth: In the past year, the introduction of three new models was delayed by months as engineers scrambled to boost quality in response to problems found by the team.

The focus is on the details. In 1998, for instance, customers reported faulty warning lights and difficulty starting engines. So Chung set up a $30 million computer center where 71 engineers simulate harsh conditions to test electronics and pinpoint defects. The result: In Power's 2004 initial quality survey, Hyundai had only 9.6 problems in these areas per 100 vehicles, vs. an industry average of 13.8. Three years ago Hyundai had 23.4 problems, vs. the industry's 17.9. "This is not a shotgun approach," says Robert Cosmai, president of the company's U.S. affiliate, Hyundai Motor America.

The big test comes next year when Hyundai is due to begin building redesigned Santa Fes and Sonatas in Alabama. One encouraging sign: DaimlerChrysler (DCX ) and Mitsubishi Motors Corp. plan to use a Hyundai-designed four-cylinder engine in their own small- and midsize cars. "This is a vote of confidence for Hyundai's engine quality," says Ahn Soo Woong, an auto analyst at Hanwha Securities Co. Now it's up to consumers to decide whether Hyundai really makes the grade.

By Moon Ihlwan in Seoul, with Larry Armstrong in Los Angeles and Michael Eidam in Atlanta

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