Hyundai: Too Far, Too Fast?

Korea's strong currency and costly moves to improve quality are making its cars pricier

Global carmakers have become accustomed to Hyundai Motor Co. looming large in the rearview mirror. In recent years, no other major automaker has boosted sales and quality as fast as the Korean company. But that upstart in the mirror may not be as close as it once appeared.

Hyundai has been beset by poor productivity and shrinking profits. Net earnings for the quarter ended in September plunged 47% from the same period last year, to $307 million, on revenues of $6.4 billion. Sales in the U.S. fell to 28,417 vehicles in November, their lowest level in 22 months, cutting Hyundai's U.S. share to 2.4% from a July peak of 3.2%.

Hyundai's woes have been aggravated by the strength of the Korean currency. The won has climbed 10% against the dollar this year and 8% against the Japanese yen, which makes Hyundai less competitive against the likes of Toyota, Nissan, and Honda. Although Hyundai is raising prices to compensate, the currency's strength will still lop 2.7 percentage points off margins this year, says brokerage Prudential Investment & Securities. "The strong won has changed the whole competitive situation for us," says Hyundai marketing strategist Brandon Yea.

Americans aren't ready to pay a premium for Hyundais, no matter how great the quality. In the U.S., Hyundai's entry-level Accent now costs some $600 more than the rival Toyota Yaris. And U.S. sales of the Sonata sedan, which Hyundai began building at a Montgomery (Ala.) plant last year, have been disappointing. That's in part because a Toyota Camry today runs only about $1,000 to $2,000 more than a Sonata with similar trim. Three years ago, the difference would have been twice that. "They should have priced the cars lower to give them an edge," says Michael Marceca, business manager at a Hyundai dealership in Manhattan.

Hyundai is paying the price for strategic missteps that date back nearly a decade. As the won lost half its value against the dollar in the 1997 currency crisis, it seized the chance to spend big on quality. But with the won now back to pre-crisis levels, it's clear the quality drive came at the expense of productivity. Rather than improving the way it makes cars to minimize defects à la Toyota Motor Corp., Hyundai stepped up inspections and testing. The result: It needs two-thirds more man-hours to build each car than Nissan and Toyota do.

Hyundai says it can compensate for the rising won. It expects to make half its cars overseas by 2010, up from 30% today, and is dispatching engineers to suppliers' factories to help develop less costly parts. But its Japanese rivals are no doubt relishing the chance to put a little extra distance between themselves and the fast-moving Koreans.

By Moon Ihlwan, with Nichola Saminather in New York

— With assistance by Nichola Saminather

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