Hyundai Takes A Hard Curve Into Swank

John June was all set to trade his Acura TL for a Toyota Avalon this summer when he saw the first photos of Hyundai's new 2006 Azera sedan. "It just knocked me out," says the retired Fire Dept. dispatcher from North Bellmore, N.Y. June, 57, likes the car's crisply edged looks, plentiful luxury goodies, and generous 10-year warranty. "Who would ever have thought," marvels June,"that Hyundai would be building a car like this?"

Who indeed? When Hyundai Motor Co. first arrived in the U.S., 19 years ago, it was best known for rattletrap econoboxes. Appropriating the Toyota Motor Corp. (TM ) and Honda Motor Co. (HMC ) playbook, the Korean upstart has since moved into larger, better-made cars and expanded into more lucrative segments such as minivans and SUVs. Now, with the $30,000 Azera, Hyundai is aggressively moving upmarket and even harbors ambitions of getting into the profitable -- and crowded -- luxury segment. Going lux is a big stretch for Hyundai, and some analysts wonder if the auto maker is moving too quickly to shed its value image. "I think it's way premature," says John Wolkonowicz, an analyst at Lexington (Mass.) researcher Global Insight Inc. "The brand doesn't carry any prestige."

The Azera, which rolls out in November, is something of a baby step. Aimed at Avalon and Nissan Maxima drivers, the big sedan serves to show that Hyundai is capable of building a classy vehicle while still offering the decent price Americans have come to expect. Buyers get a lot for their 30 grand: eight air bags, a five-speed automatic transmission, and an aluminum 3.8-liter V6 engine that pumps out some 265 horsepower. The Azera also is loaded with all the upmarket extras: stability control, a premium sound system, rain-sensing wipers, and a telescoping steering wheel. Robert Cosmai, Hyundai Motor America's chief executive, says he hopes eventually to sell 50,000 Azeras a year, a leap from the 17,000 annual sales its more pedestrian predecessor, the XG350, racks up.

The bigger test will come in spring, 2008, when Hyundai introduces a rear-wheel-drive entry luxury sedan. Details about the car are scarce, but Hyundai's long-term strategy is plain: Use the car to see if a separate luxury brand -- à la Lexus or Infiniti -- is feasible. It's a long shot. Says Daniel A. Gorrell, automotive partner at the San Diego consulting firm Strategic Vision Inc.: "If Infiniti, which has been out for more than 10 years, is still struggling, think how far Hyundai has to go." But skipping the expensive step of creating an independent luxury franchise would also be risky. Witness Volkswagen's Phaeton flop: Sales have sputtered as buyers resist shelling out $70,000-plus for a sedan from mass-market VW.

Hyundai's gambit could also short-change efforts to fill out its core lineup. While the carmaker's Korean executives want the cachet of selling an upscale car, analysts say, American dealers are clamoring for a pickup truck. The company aims to sell one million cars in the U.S. by 2010, up from 418,600 last year -- a tall order, especially without a truck. Cosmai says the company is still considering adding a pickup. A new minivan and a larger SUV are coming next year.

Launching a luxury car will keep Hyundai marketers busy for now. Lacking the status most companies rely on to sell premium cars, Hyundai's strongest suit may be its own reverse chic. Like millionaires who shop at Costco (COST ), owners of Santa Fe SUVs and XG350 sedans don't care about snob appeal. They're eager to bend your ear about what a good deal their cars are. To keep attracting the likes of John June, cheap chic may still be Hyundai's best bet.

By Kathleen Kerwin in Detroit

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