Hyundai Happily Downshifts Back to Small Cars

But as it cashes in on demand for gas-sippers, the Korean giant is slowing its upmarket push

SEOUL - For years, Hyundai Motor has sought to shed its image as a maker of small, inexpensive cars. Since 2000 the Korean automaker has introduced SUVs, an upscale sedan called the Azera, and soon, the Genesis, a $38,000 V8 sedan designed to take on luxury icons such as BMW and Mercedes.

But $4-a-gallon gas has dampened that strategy. Now Hyundai is again trumpeting its gas-sippers—and it shows. In June, as U.S. auto sales fell by 8% from the previous June, Hyundai sold 50,033 vehicles, up 14%, according to researcher Autodata. Sales jumped by 69% for the compact Elantra, 91% for the subcompact Accent, and 26% for the midsize Sonata sedan. "This new era of high oil prices will be a good opportunity for us to expand our reach," says Yoon Mong Hyun, Hyundai's top strategist.

Seizing the opportunity, the company is adding to its line of diminutive vehicles. This year it will introduce a new Elantra wagon in the U.S., the first of a half-dozen small-model debuts planned for the American market over the next five years. Hyundai may also make the Elantra and other small cars at a new plant in West Point, Ga., which was previously expected to produce a pickup and an SUV for its affiliate, Kia Motors.

The small-car windfall and a sharply weaker Korean currency are adding up to record profits. Hyundai will post operating earnings of $2.3 billion this year, up 25%, on sales of $33.7 billion, up 11%, brokerage Korea Investment & Securities estimates. "Of all major global carmakers, Hyundai will probably be the biggest beneficiary of high oil prices," says Kim Jun Kyu, a researcher at the Korea Automobile Manufacturers Assn.

That's not to say the company faces a totally smooth road. Its unions have resisted plans to switch production to smaller cars from SUVs and big sedans. Hyundai is behind in developing greener vehicles: Its first hybrid, a version of the Elantra, isn't expected until next year. And even as Hyundai's small cars race out of the lot, U.S. sales of its SUVs and minivans tumbled by 41% in June and are off by 27% year-to-date. When the Genesis hits showrooms this fall, it could well face a similar fate—though Hyundai executives say they remain optimistic. "We must press on with our campaign to move into the premium segment," says strategist Yoon, "but the focus right now is on small cars."

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