Hyundai Pitches Luxury in the U.S.

The South Korean carmaker hopes its Veracruz SUV and Genesis sedan will liven up sales in the U.S. and give a premium flavor to the name

Has the scandalized and financially weakened Hyundai Motor company lost its oomph in the all-important U.S. car market? That's a question hanging over the South Korean automaker as it aims to break into higher-end model segments just as oil prices are starting to move again to uncomfortably high levels.

Hyundai (HYMTF) executives, however, think they have just the right car and pricing strategy to break into the higher-margin arena for premium-priced cars. It's the new crossover Veracruz sport utility vehicle (SUV) that has just begun hitting U.S. showrooms. Their plan is to offer consumers Lexus-quality vehicles for a bit less. "Our car is much quieter than the much more expensive Lexus RX," says John Krafcik, vice-president at Hyundai Motor America in charge of product planning.

At the same time, Hyundai will unveil its first premium sedan at this week's New York International Auto Show. It will be introduced as a concept called the Genesis, but the company says that save for some minor design changes with the headlamps, grill, and bumper, this is pretty much the production model that will go on sale in 2008.

Like the Japanese Approach

Once code-named BH inside the Korean automaker, the Genesis is Hyundai's first rear-wheel drive car and has been benchmarked against the BMW 5 Series, Lexus GS, and Mercedes-Benz E-Class in terms of power and performance.

The Veracruz and the Genesis represent an essential part of the Korean company's strategy of doing away with a stigma associated with its old vehicles. "Genesis and the Veracruz bring luxury and performance, an entirely new dimension, to the Hyundai brand," says Hyundai spokesman Oles Gadacz. "They will not only help close the gap between consumer perceptions and the real quality of our vehicles, but they'll also lift sales of our volume products."

Hyundai is taking a page from Japanese carmakers that have introduced premium brands. "If you look at what happened at Nissan (NSANY), the sales growth of the Altima exploded only after it managed to increase sales of cars with its Infiniti premium brand," points out Yoo Young Kwon, auto analyst at Prudential Investment & Securities.

Stands On Its Own

Indeed, Hyundai's goal is to firmly establish its Sonata midsize car as a strong family sedan in the U.S., comparable to the Camry and the Accord. Krafcik sees the Sonata and the Santa Fe crossover—which is smaller than the Veracruz—as his company's anchor products in the U.S. for years to come, although he is determined to deliver "world-class products across all model segments."

Genesis has all the ingredients of a luxury sedan, although Gadacz says Hyundai has no plan to introduce a separate premium brand over the next couple of years. The Genesis will be powered by a new 4.6-liter V8 engine and will boast a body that's stiffer, lighter, and larger than the BMW 5 Series. The base model, equipped with a 3.8-liter V6 engine and 6-speed transmission, will cost less than $30,000.

As for the Veracruz, Toyota's (TM) Highlander and Honda's (HMC) Pilot will be the biggest competitors. However, when the Korean carmaker designed the new crossover three years ago, it used the Lexus RX as one of its primary functional targets to make sure the vehicle won't be overshadowed by new models of the Highlander and the Pilot, which will arrive in the U.S. a few months after the Veracruz.

Avoiding Detroit's Fate?

Again, Hyundai's hope is to repeat the success of the Japanese titans, which increased their shares in the fiercely competitive sport utility segment at the expensive of hitherto popular vehicles of the U.S. Big Three. Ford's (F) Explorer, Chevrolet's (GM) TrailBlazer, and the Jeep (DCX) Grand Cherokee all suffered sales plunges of between 15% and 29% last year, while the 2006 sales of the Pilot jumped to 170,000, up 15% from the previous year.

Why should the Veracruz avoid the fate of the Big Three? Because there's a huge shift in U.S. drivers' preference from truck-based SUVs like the Explorer and the TrailBlazer, to car-based uni-body vehicles like the Veracruz and the Pilot. "There's a tremendous growth opportunity for us," says Krafcik.

Industry observers expect the combined midsize category for both crossovers and SUVs to stay at between 5 million and 5.4 million units annually for the remainder of this decade, although the preference is leaning quickly toward crossovers that have the space and hauling capacity of an SUV with the driving characteristics of a car.

Uphill Challenge

The big question is, will U.S. drivers pay more than $30,000 for a Hyundai? The Veracruz starts with a base price of $26,300, but the fully loaded one will cost as much as $34,000. This compares with the average selling price of $27,676 for the Highlander and $27,959 for the Pilot, according to the Power Information Network.

Krafcik argues that the Veracruz will compete against its Japanese counterparts because its fit and finish are designed to be better than anything else in the segment. Hyundai officials claim even the base Veracruz is equipped to perform well with a 3.8-liter V6 engine generating 260 horsepower and a six-speed automatic transmission, as well as electronic stability and traction control. By contrast, the Pilot has a 3.5-liter V6 engine creating 244 horsepower, and a five-speed transmission.

The U.S. sales launch of the Veracruz comes as the Korean company is struggling against headwinds. Hyundai's net profit plunged 34% last year to $1.64 billion, and its operating profit margin was halved to 4.5% from 9.0% three years ago. The Korean won has appreciated by nearly a quarter against the dollar in the past three years and gained in value by more than 17% against the yen in the past two years. The stronger local currency, which is eroding Korean exporters' price competitiveness, led to a double-digit fall in shipments of subcompact and small cars to the U.S. and Europe in 2006 (see, 12/25/06, "Hyundai: Too Far, Too Fast?").

A Currency Break?

Corporate analysts warn that unless the appreciation of the won slows down and the management mends its ties with the hostile union, the company will face a bumpy future. "Certainly Hyundai's health has been weakened, making it vulnerable to swings in outside variables," says Stephen Ahn at Woori Investment & Securities.

Fortunately, the Korean company could expect respite on the currency front. The expansion of the country's economy is expected to slow down to around 4.5% this year from 5% last year, taking some of the steam off the pressure to push the won higher. The fear of an unwinding of yen carry trade, where investors borrow in yen and invest in higher yielding assets outside of Japan, is also limiting the fall of the Japanese yen.

Yet the reprieve could be short-lived. And that's all the more reason for Hyundai to add premium models to improve its brand power and profitability. The company stunned U.S. drivers—not to mention Japanese automakers—by beating Toyota in J.D. Power's initial quality surveys in two of the past three years. Now, with the Veracruz and Genesis, Hyundai believes it's ready to impress in the U.S. once again.

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