Hyundai: Crowding Into The Fast Lane
When Moscow construction foreman Anatoly Berestovoi started shopping for a new car, he didn't want to go with a Russian-made model. "It would be patriotic, but unfortunately the quality leaves a lot to be desired," he says. Instead he settled on a $15,390 Hyundai Elantra compact built in Korea. He liked the air conditioner, air bag, stereo, and antilock brakes -- and the fact that it was cheaper than similarly equipped Japanese models. "The trade-off between price and quality is definitely in this car's favor," Berestovoi says.
Auto buyers in developing markets worldwide are making that same calculation -- and coming up with the same answer -- more and more often. Although Hyundai Motor Co. was a latecomer to many emerging markets, this year it is trouncing more established rivals. In India, Maruti Udyog Ltd. (controlled by Japan's Suzuki Motor Corp. (SZKMF )) held 80% of the market until the late 1990s. Today, Hyundai is a strong No. 2 and is vying for leadership in small cars. In China, where Hyundai began selling cars in earnest only in 2003, the company skyrocketed to the top spot in the first quarter of 2005 by moving 56,064 Elantras and Sonata sedans off its showroom floors -- more than double what it sold a year earlier. In Russia, Hyundai jumped into the lead among foreign brands last year.
Hyundai's steady rise in the U.S. has commanded the attention of investors and rivals alike. But its drive into emerging markets may prove just as important to the company's goal of becoming the world's fifth-largest auto maker -- and just as disruptive to competitors' plans. The Korean company is trying to outflank its rivals and take over smallish markets before they grow, building large, modern plants to give it and its suppliers the economies of scale they need to operate profitably.
The risk is huge. The plants aren't cheap to build, and Korean rival Daewoo Motor followed a similar strategy in the 1990s, adding new plants in far-flung locations such as Uzbekistan and Vietnam before going belly-up in 1999. Hyundai, though, has focused on more promising markets, and it's not racking up huge losses. In fact, its margins in India and China are higher than its overall operating margin. "Once we decide to enter a market, we make an all-out push," says Kim Jae Il, who heads Hyundai's international business.
That strategy stands in stark contrast to many bigger rivals. In India, for example, U.S. and Japanese carmakers tiptoed into the market in the '80s and '90s with tired offerings built from imported kits. Hyundai held off until 1998, but then set up a plant capable of building 100,000 of its latest-model cars a year and established a network of dealerships and service stations. "It was a no-brainer for Indian customers to figure out who offered the most up-to-date technologies," says Min Wang Sik, who oversees Hyundai's sales and marketing in India. As India's economy boomed, sales from plants there rose to 215,630 last year from 111,051 in 2002, and the factory has since been expanded to a capacity of 250,000.
There's plenty of homework, though, that precedes Hyundai's assault on any market. The company floods each country with engineers, who spend months studying consumer habits and potential pitfalls. This followed a hard lesson in Canada, where Hyundai assembled Sonata sedans in the late 1980s, losing some $1 billion and shuttering the plant three years after it opened. "It almost looks like Hyundai is in a sprint once it sets up shop, but following the [Quebec] experience they carry out extensive studies when they make new investments," says Ahn Soo Woong, auto analyst at Hanwha Securities Co. in Seoul.
That's one reason why Hyundai hasn't done much in Brazil, an emerging market often coveted by auto makers. Hyundai officials say Brazil is too crowded, with 14 manufacturers operating at less than half their capacity on average. So the company has bided its time, though it plans to let a local partner assemble its cars there next year. It's the method the company relies on for two models sold in Russia, where uncertainty lingers even though the Korean company doubled sales, to 22,418 vehicles, in the first four months of 2005.
Although Hyundai is still considered a low-end car in many developed countries, in emerging markets it's seen as a high-quality manufacturer -- and it doesn't want to blow that image. So this year, it's launching a revamped Sonata in China, India, and Russia just a few months after the car is introduced in the U.S. It's a formula that so far has added up to booming sales from Moscow to Madras. If Hyundai muscles its way into the Top Five of global auto makers, it will have consumers like Anatoly Berestovoi to thank.
By Moon Ihlwan in Seoul, with Jason Bush in Moscow