Kia's Lofty Goal: A U.S. Home

The Korean auto maker plans to build plants in North America and Europe to avoid currency problems and broaden its appeal

You might think a company that saw its operating profits plunge 85% last year would play it safe. But that's not Kia Motors. On Mar. 13, Kia unveiled plans to build its first North American factory, a $1.2 billion assembly plant in Georgia. That is a big bet on a market where Kia has all of a 1.6% market share and a brand better known for affordability than for snazzy design, engineering excellence, or reliability.

Yet the move is critical to Hyundai (HYMTF) Chairman Chung Mong Koo's long-haul strategy to turn his automotive group (Hyundai owns 36.3% of Kia and enjoys full managerial control) into one of the world's top 5 auto makers in terms of sales within five years.

To get there, Chung is drawing from the Toyota (TM) playbook: Make quality a near obsession and invest heavily in overseas plant capacity and design centers to better understand and serve the needs of car buyers in the U.S. -- a critical market. He pretty much did that with the Hyundai brand. "Now it's Kia's turn to take a page from Hyundai," says Kim Kwang Joo, executive vice-president in charge of corporate planning at Kia.


  True, Kia has a long way to go. In the closely watched 2005 J.D. Power Initial Quality Study, which tracks consumer complaints during the first three months of ownership, Kia owners experienced 140 problems for every 100 vehicles. The industry average is 118. That said, Kia has been making rapid strides. The survey shows that Kia actually scored better than Porsche, Volkswagen, and Mazda (MZDAF).

Chung's aim is to refashion Kia into a quality leader by 2008. That's one year before the Georgia plant is due to start rolling out vehicles. Again this is a replay of what Hyundai pulled off. Last year, Hyundai opened a factory in Alabama capable of assembling 300,000 Sonata sedans and Santa Fe SUVs annually, just one year after Hyundai matched the best Japanese brands in new-car quality surveys.

Kia could do the same if plans to share car-making platforms with Hyundai come on full strength over the next two years. By 2008, "all our vehicles will be sharing platforms and expertise with Hyundai's and their quality should be the same," says Lee Wook Ki, Kia's director overseeing sales abroad.


  Kia is in the final phase of seven-year makeover by Hyundai. The company actually went bust during the Asian financial crisis before being taken over by Hyundai in 1999. Back then, the Kia brand was synonymous with cheap and cheerful cars aimed at budget-conscious, first-time car buyers such as college students and other young adults.

The brand is now starting to get some respect in the U.S. with such models as the Spectra compact, the Sorento SUV, and the Sedona minivan. Kia sold 275,851 vehicles last year and grabbed 1.6% of the U.S. market. That may be small by Asian auto company standards, but it's double the levels back in 1999.

Last year, the Spectra was the second best compact car in the J.D. Power new-car quality survey after the Toyota Prius, beating out long-running brands such as the Honda Civic and Toyota Corolla.


  The big problem Kia faces now is dwindling profitability. Its operating profits plummeted to $76 million in 2005 from $514 million in 2004, although sales rose 4.9% to $16.4 billion. In the all-important U.S. market, Kia's sales rose a meager 2.1% in 2005, while Hyundai posted an 8.7% sales gain for a market share of 2.6%, up from 2.5% the previous year.

The poor performance last year is all the more reason for Kia to push ahead with overseas expansion. Company execs and analysts note that Kia's excessive reliance on factories back in South Korea has made it vulnerable to currency fluctuations. The Korean won has appreciated 20% against the dollar during the past two years, which has squeezed export profit margins (see BW, 6/3/06, "The Road Narrows for Hyundai").

Only 9% of Kia's global sales of 1.22 million were of vehicles manufactured outside of Korea. "To shield ourselves from foreign exchange risks, we must expand our overseas production activities," says Choi Soon Chul, an executive vice-president at Kia.


  The process is well underway at Hyundai, which is ramping up production at its plant in Alabama while doubling output in China and India. Soon Hyundai is expected to strike a deal in the Czech Republic to build a plant that will turn out some 300,000 cars a year.

Kia is also expanding production to Europe where it is set to open a plant with similar capacity in Slovakia this year. By 2009, Hyundai and Kia together plan to build about half of the six million vehicles they hope to sell globally by then in overseas manufacturing facilities.

Now, with signs that the won is stabilizing at around 970 to the dollar, Kia is placing priority on grabbing a bigger share in the U.S. It rolled out a revamped Sedona minivan in late 2005. This year Kia is introducing a completely overhauled Optima mid-sized sedan and a compact minivan, codenamed UN.


  Suh Sung Moon, auto analyst at Korea Investment & Securities, expects this trio of cars, plus existing models such as the Spectra sedan and the Sorento and Sportage sports-utes, to make an impact. He thinks Kia could improve its market share to just under 2% by year-end. He is also forecasting an eight-fold jump in operating profits overall to $587 million, provided there are no more currency shocks.

Kia has a loftier goal. It aims to more than double its market share to about 4% in North America by 2010. That, of course, will require adding some pizzazz to the Kia brand. "We're going to be a lot more dynamic and enabling -- a lot sportier." says Kia's Executive Vice-President Kim. If so, Kia could be a brand to watch in the years ahead.

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