Hyundai Targets the Lexus Set

The Korean carmaker's new flagship sedan is named Genesis, and it heralds the recasting of an image from economy to luxury

You can't say Hyundai Motor doesn't have guts. When the company on Dec. 5 introduced its new flagship sedan, the Genesis, it parked the four-door next to BMW 5 Series and Mercedes-Benz E-Class models, then invited journalists to drive all three to compare their power and performance. "We've benchmarked the Genesis against German, Japanese, and U.S. luxury brands, and it performs either better or just as well," boasts Jerry Shin, a Hyundai quality control executive.

As its name suggests, the Genesis marks a new beginning for Hyundai. The car, available in Korea next month and in the U.S. by midyear, is supposed to put to rest the stigma of the cheap, crude vehicles Hyundai made in the 1990s. The rear-wheel-drive sedan can go zero-to-60 in less than six seconds, executives say, and will inject oomph into the brand. "The Genesis will raise consumers' opinion of Hyundai," says John Krafcik, vice-president for product development and strategic planning.

The big question is whether the Genesis can get Hyundai back on track. The Korean automaker, the industry's fastest-growing major player earlier this decade, is nowadays stuck in neutral. The Korean currency, the won, is up 12% in the past two years, making Hyundai's cars less competitive when compared with Japanese and U.S. rivals. And while Hyundai has outscored Toyota (TM) and Honda (HMC) in new-car quality in two of the last four years, according to J.D. Power & Associates, its revamped Sonata family sedan has seen lackluster sales.

Rebuilding an Image

Hyundai's previous move upmarket in the U.S., the $25,000 Azera sedan, hasn't been a big seller. Its sales have fallen 5%, to about 20,000 cars, through November, and many Azeras have been turning up in rental fleets—a sure sign of distress for a model. Overall U.S. sales for the brand are up just 0.6%, to 420,000. "The Genesis will make or break Hyundai," says Kim Ki Chan, an auto industry specialist at the Catholic University of Korea. "Creating a new consumer perception of its cars is critical to its rapid expansion."

The problem is Hyundai's image. "We had to start all over again to build a car to wow consumers," says Shin. So in the four years it took Hyundai to develop the Genesis, engineers ripped apart a dozen or so BMW, Mercedes, Lexus, and Cadillac sedans to ensure its new model would be up to snuff. They wanted a stiff body, a powerful engine, a luxurious cockpit, and a killer sound system.

All told, Hyundai spent some $540 million on development and a new factory in the southeastern city of Ulsan, staffing it with its most experienced engineers and factory hands. And it invited hundreds of suppliers—including Bosch, Harman Becker, and Continental Teves —that have worked with top European luxury brands, to develop key components such as suspension, engine controls, and audio systems.

BMW and Mercedes Take Note

Hyundai is hoping the effort will pay off with lots of buzz. Already, Motor Trend and Car & Driver magazines—big factors in the buying decisions of many U.S. drivers—have applauded the new model. "This car is going to shock you," Motor Trend writes. "It's going to shock GM (GM) and Toyota, too. Even BMW and Mercedes-Benz are going to pay attention."

Despite all the hoopla, Hyundai says it doesn't plan to price the Genesis at anywhere near the level of the luxury brands—at least not yet. A V6 Genesis will likely sell for about $30,000 in the U.S., or about the same as a fully loaded Honda Accord or Nissan (NSANY) Maxima, but with the features and performance of a premium car. The higher-end Genesis will fetch close to $40,000, about the price of a well featured Lexus ES350 or BMW 3 Series, but more than $10,000 below most BMW 5-Series.

And Hyundai plans to follow up with a premium rear-wheel-drive sports coupe and a luxury sedan, code-named VI, in 2009. "Hyundai will have to convince…?car buyers that Genesis represents a smart buy, offering more than a BMW 5-Series at a fraction of the cost," says Dan Gorrell, an analyst at California consultancy AutoStratagem. "This will be tough, but not impossible."

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