For Korean Cars in the U.S., Cheaper Is Better

Hyundai and Kia have spent billions to go upmarket, but it turns out that U.S. buyers mostly want their cheaper cars

South Korean brands Hyundai (HYMLF) and Kia (KIMTY) have spent years and billions of dollars to add SUVs, crossovers, and near-luxury cars to their lineups to live down their reputations for building entry-level cars—only to find that cheap, and especially fuel-efficient, vehicles are exactly what U.S. buyers want.

U.S. sales of tiny models like the Hyundai Accent, the Kia Spectra, and the Kia Rio are up sharply this year. Sure, they're fuel efficient, but it also helps that Hyundai has been largely able to undo its former reputation for poor quality. In July sales of the Accent were nearly double the year-ago month, according to AutoData of Woodcliff Lake, N.J.

But Hyundai's newest model, the Genesis sedan, is aimed at luxury-car shoppers. Starting at $33,000, it debuted in June. With an optional V8, the first V8 ever offered by Hyundai, the Genesis will go for $38,000 suggested retail. That's cheaper than competing V8 models but much higher than any previous Hyundai.

The company hopes to sell about 8,000 units this year, and then about 20,000 a year, says Michael Deitz, manager of product development for Hyundai Motor America in Irvine, Calif. He expects customers to buy about 80% V6 models, and 20% V8s. Right now only V6 models are available. The less fuel-efficient but more powerful V8 goes on sale in October.

A Switch to Unibody

Meanwhile, Kia this month introduces its most expensive model ever: the Borrego, a midsize SUV built on a traditional truck platform instead of a car-like unibody. The trend for the industry, including the next-generation Ford Explorer, is to switch to unibody construction. With its version of the optional V8, the Borrego starts at $31,745.

Kia recognizes what one of its executives called "the elephant in the room," meaning expensive gasoline and the industry trend toward small cars.

"Our head's not in the sand regarding fuel economy. It helps to be the best, or among the best in the segment, when you have consumers studying choices within the segment," says Tom Loveless, vice-president for sales at Kia Motors America. Next year, Kia will add the Kia Soul model for the U.S. market, a squared-off mini-crossover.

Deitz of Hyundai said at an Aug. 12 press introduction for the Genesis in Tarrytown, N.Y., that Hyundai is not abandoning its strength in entry-level models even though it is also introducing more upscale models.

"We're the third-most fuel-efficient brand out there. It's just that there are people who don't know about Hyundai," he said. Deitz cited Environmental Protection Agency figures to show that at a fleet average of 22.7 mpg, Hyundai is only a fraction of a mile per gallon behind U.S. market leaders Honda (HMC) and Toyota (TM).

Hyundai's Ambitious Plans

Hyundai and Kia both belong to Hyundai Group (HYNDF), which bought control of Kia in 1999. The brands share engines and some components but are still largely separate. Kia is the smaller partner in terms of auto sales, both in the U.S. market and in the domestic South Korean market.

Hyundai Group's big plans for the U.S. market have been dented but not killed by the present sales downturn. Its small cars are selling well this year, but as with other carmakers, sales are way off for its SUVs and minivans.

Kia said earlier it intended to double sales in North America from 2006 to 2010. That time frame has inevitably been pushed back, since sales in 2007 were only 3.8% ahead of 2006, but Kia hasn't dropped the goal, at least not publicly. If that sounds like a lot, consider that Kia's U.S. sales already more than tripled since 1998, to 305,473 in 2007.

Hyundai has been more careful not to put a number publicly on its long-range targets, but the carmaker nearly tripled its U.S. sales since 1999, to 467,009 in 2007. Hyundai is now the No.7-selling brand in the U.S., behind Toyota, Chevrolet, Ford (F), Honda, Dodge, and Nissan (NSANY), but ahead of the Chrysler brand. Hyundai and Kia combined would still be No.7 behind Nissan.

Hopes for Global Growth

Hyundai Group is no less aggressive globally. By 2014 the group is expected to more than double its factory capacity from 2001 levels to about 6.7 million, including joint ventures in China and growing capacity in North America, South America, and Europe, according to consulting firm CSM Worldwide of Northville, Mich.

The group's expansion plans are "very, very hyper-aggressive," says Jeff Schuster, executive director of global forecasting for J.D. Power & Associates of Westlake Village, Calif.

"They don't take a step approach, where they focus one area, wait, and then go to another area. They take a buckshot approach. In mature markets like the U.S., they are planning huge expansion. They are also growing swiftly in developing markets, like China. They are in Eastern Europe and through there, they are spilling into Western Europe," he says.

Schuster says that besides the scale of Hyundai's growth itself, he's amazed the group has been able to grow and improve product quality at the same time, something that's tough to do. Some Hyundai and Kia models are among the leaders in J.D. Power quality surveys in the U.S. That would have been hard to imagine in the late 1980s. When Hyundai was first introduced to the U.S. market in 1986, its quality was terrible.

Moving Up the Ranks

"Hyundai in particular is one of the few manufacturers to have had a second chance at life, here in the U.S., anyway. Their quality problems, issues, in the mid- to late-80s essentially led to them leaving the market, but they have turned it around. They did it with long warranties, and they certainly did it with price," Schuster says.

Hyundai has a $1 billion assembly plant in Montgomery, Ala., which builds the Santa Fe crossover SUV and the Sonata midsize sedan. It started production in 2005. Kia is building a $1 billion assembly plant in West Point, Ga., to build the next-generation Kia Sorento SUV starting in 2010, and other models to be named later. Each factory can build up to 300,000 vehicles a year.

Hyundai's Deitz says that sooner or later, the company will move up the ranks of global automakers: "Consumers are slowly becoming aware of it, but Hyundai is one of those big brands out there."

Click here to see a round up of the best- and worst-selling Korean cars in the U.S.

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