BMW, Mercedes -- And Hyundai?

Not quite, but the carmaker is gunning for the luxury market

Amid the current spate of riches-to-rags tales in the auto industry, Hyundai Motor Co. stands out for moving in the other direction. Since 1999, Korea's largest carmaker has transformed itself from an easy target for late-night comedians into a global leader in quality. In the process, the company has grown faster than any other major auto maker, setting up factories, research centers, and design labs worldwide, including its first U.S. plant -- in Alabama -- in May.

Now Hyundai is hitting the accelerator again. Aiming to shed forever its image as a builder of crude econo-boxes, Hyundai is moving upscale. In the U.S., the campaign revs up in December. That's when Hyundai plans the American launch of the Azera, the most expensive car it has ever sold in the U.S. "It is the first model for our metamorphosis," says Kim Jae Il, senior executive vice-president for overseas business. "Other models will follow to make Hyundai a premium brand."


Will anybody want a premium Hyundai? Company executives think 40,000 Americans will buy Azeras next year and 100,000 will do so the year after. The sedan is expected to go head-to-head with Toyota's (TM ) Avalon, Nissan's (NSANY ) Maxima, and Ford's (F ) 500. But with sticker prices ranging from $25,000 to $30,000, the Azera will come in anywhere from $1,600 to $4,000 lower than its rivals. "Our key strategy is to ensure our customers get the equipment they really want at a fair price," says John Krafcik, vice-president for development and strategic planning at Hyundai's U.S. sales subsidiary.

In that, Hyundai is taking a page from the playbook of its compatriot Samsung Electronics Co. Since 2000, Korea's other giant has changed its image from that of a cheap, low-quality manufacturer to a high-end contender by offering feature-packed cell phones. Similarly, Hyundai plans to offer oodles of extras as standard fare and hopes to make a name for itself as a leader in safety at the same time. Safety will be "a key part of our DNA," says Krafcik.

Take the Azera. The base model is equipped with extras normally reserved for the high end: eight air bags, electronic stability control, a traction control system, rain-sensing wipers, a six-CD changer, and a power rear sunshade that retracts when the driver puts the car into reverse. The Azera replaces the XG350, an earlier stab at the luxury market that never took off. After the XG350's lackluster sales -- it peaked at just 18,000 units, in 2003 -- Hyundai studied its mistakes. Customers found that model's ride too mushy, its engine underpowered, and its lines a bit stodgy. So to give the Azera more oomph, Hyundai developed a 3.8-liter aluminum V6 engine, called Lambda, which Hyundai says will rocket the sedan to 60 miles per hour in 6.5 seconds, on par with many luxury sedans. It beefed up the suspension and streamlined the design. And the car's cabin is roomier than the Avalon, the Mercedes-Benz (DCX ) S-Class, and BMW's 7 Series.

The Azera, though, is only the beginning. In 2007 the company will roll out a true luxury model, with a U.S. debut the following year, possibly under an upmarket nameplate like Toyota's Lexus or Honda's Acura. The car, code-named BH, will be the Korean carmaker's first rear-wheel-drive sedan and will sport a powerful 4.6-liter engine to make it a rival of the BMW 5 series. "We still have to overcome a perception problem, but we have confidence in our new lineup of vehicles," says Brandon Yea, Hyundai's marketing director.

Investors and drivers seem to have confidence, too. Hyundai's stock has soared 51% in the past six months as the company projects sales will jump 12% this year, to $35 billion. That growth will help boost net profit by 35%, to $2.3 billion, Daewoo Securities estimates. Koreans, meanwhile, have bought 40,000 Azeras since its launch in May, and today there's a one-month waiting list. "I've driven Mercedes and BMWs, but I'm happy with my new car in every measure," says 43-year-old Henry Oh, a sales director at a logistics company in Seoul, who bought an Azera in September.

Critics, however, say it may be tough for Hyundai to break into the luxury segment. "Hyundai has to make its brand carry prestige if it wants to be a major player," says Park Sung Jin, an analyst at Hannuri Investment & Securities in Seoul. "But I don't see Hyundai competing head-on with the likes of BMW anytime soon." Although the Azera will help boost Hyundai's image, Park says the company may have trouble reaching its ambitious sales targets. Some also wonder whether the move toward bigger cars makes sense as oil prices skyrocket. Hyundai executives answer that the new models will be snapped up by customers trading down from even bigger gas guzzlers. The Azera gets a respectable 19 mpg in the city and 28 on the highway.


Hyundai is taking its sport-utility vehicles upmarket, too. The Tucson, introduced in the U.S. last year, will cover the low end of the segment, while a revamped Santa Fe will target more upscale buyers. The company on Nov. 22 unveiled the new Santa Fe in Korea and expects to introduce it in the U.S. next year. The SUV, bigger and more expensive than today's model, is aimed squarely at Toyota's Highlander. The engine is 20% bigger than the current Santa Fe's. The car's styling will change from a rugged, muscular look to more refined, sleek lines designed to appeal to soccer moms. The Santa Fe also will have an optional third row of seats to accommodate seven people, compared with a maximum capacity of five in the current model. And like the Azera, the new Santa Fe will have numerous air bags, electronic stability control, antilock brakes, and active headrests -- all standard. Sticker price? About $2,000 more than the $22,000 to $24,000 that this year's model costs, compared with $25,000 to $31,000 for a 2006 Highlander.

While Hyundai is hardly a luxury brand today, it already has shifted upscale in recent years. In 2002, Hyundai models sold for 15% below comparable Toyotas across the board, company executives say. Today, that gap has narrowed to less than 10%, though Hyundai typically offers more extras as standard features. In October, Hyundai grabbed a record 5.7% share in the fiercely competitive mid-size sedan segment with its new Sonata, a revamped model designed to challenge Toyota's Camry. That compares with 4.3% last year and 1% in 1999. The Sonata is a crucial test for Hyundai's U.S. business as it is the first car built in its Alabama factory. Helped by the new Sonata, Hyundai expects its U.S. sales to climb to 470,000 vehicles this year from 418,600 in 2004 and 164,190 six years ago. Next year, Hyundai intends to sell 570,000 cars in the U.S.

As it pushes upmarket, the Korean carmaker isn't ignoring smaller cars. Next year it plans to launch a new Elantra compact and a revamped Accent subcompact. But Hyundai wants the Sonata, Azera, and the SUVs to account for the bulk of its U.S. sales, with the Alabama plant churning out 25,000 Sonatas and Santa Fes every month starting next spring. In these troubled times for the U.S. auto industry, numbers like that are no joke.

By Moon Ihlwan

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