Korea's Hyundai Begins Its Hybrid Push

There's no stopping Hyundai Motor these days. In yet another display of its determination to expand globally, the Korean automaker began selling the world's first LPG (liquefied petroleum gas) hybrid cars on July 8. Although Hyundai will be selling them only in South Korea for now, the LPG hybrids are harbingers of bigger ambitions. Selling the new cars, which start at $16,200, "will be a stepping stone for Hyundai as it prepares to face off against the likes of Toyota and Honda in the global hybrid vehicle markets," says Kim Pil Soo, automotive engineering professor at Daelim College near Seoul,

The introduction of Hyundai's first hybrid electric vehicle coincides with the company's relentless marketing blitz in the U.S. and elsewhere. Last week, for example, it launched a summer gas giveaway promotion in the U.S. that guarantees buyers of its vehicles a year's worth of gas at $1.49 per gallon. Earlier this year it began an "Assurance" program that allows buyers to walk away from a new-car loan without any negative effect on their credit rating if they lose their jobs.

Such aggressive marketing campaigns have helped Hyundai increase its sales in major auto markets. In the U.S., its market share has increased to 4.3% in the first six months of this year against 3.1% a year earlier. In China and the European Union, Hyundai's share jumped to 7.3% (from 5.3%) and to 2.3% (from 1.7%), respectively, in the first five months of 2009.

Now the Korean upstart is waging a catch-up campaign in green cars that's vital to fulfilling its ambition of becoming one of the top five carmakers within two to three years. The first hybrid electric model, largely based on the existing Elantra, makes Hyundai the first carmaker on the planet to offer lithium-ion polymer batteries commercially. Boasts Yang Woong Chul, Hyundai's research and development chief: "We are moving with 'Hyundai speed' to achieve our goal of environmental leadership in our industry and redefining the Hyundai brand as a technological innovator."

Lithium-Ion Leader?

Hyundai says such batteries weigh 35% less than current nickel-metal hydride cells used in Toyota's (TM) Prius and Honda's (HMC) Insight and are 40% smaller. They also last 1.5 times longer than nickel-metal hydride batteries, generate less heat, and are more resilient to shock than other types of lithium-ion batteries. And because the polymer resembles a gel, the batteries don't have to conform to a set shape, allowing engineers to pack the batteries almost anywhere they want on the vehicle, Yang says. The bulkiness of batteries on hybrids has been a problem for engineers for years.

Hyundai certainly isn't an immediate threat to Toyota or any other player in the hybrid markets outside of Korea. The Korean carmaker has no plan to sell the Elantra hybrid in export markets, as only a handful of countries use LPG as fuel for cars. However, it plans to introduce a gasoline-electric hybrid in the U.S. next year based on the next-generation Sonata sedan, using the same battery technology as the Elantra hybrid.

The first test whether Hyundai can defend its home turf against a push from Toyota. The Japanese giant now sells only hybrid SUVs in Korea but is considering introducing the Prius within a year. Hyundai execs stress that what's significant for their company is that Hyundai engineers developed major parts such as batteries, electric motors, and converters in Korea to avoid patent disputes with the likes of Toyota. "We now have all the key ingredients to compete in the hybrid segment," says Lee Ki Sang, director in charge of developing the hybrid system at Hyundai.

High Hybrid Hopes

Going for LPG instead of gasoline may limit Hyundai's export chances, but in Korea the move will help the company take advantage of low prices for propane. LPG costs about half the price of gasoline in Korea. For the price of one liter of gas, the Elantra hybrid can travel 39 kilometers, according to Hyundai; that's one kilometer better than the latest version of the Prius. Hyundai aims to sell 22,500 Elantra hybrids by the end of next year but wants to increase total annual hybrid sales to 50,000 once the Sonata hybrid is launched.

The fuel economy of the Elantra hybrid is boosted by the engine's "auto stop" function, which automatically switches off the ignition at idle. A driver traveling 20,000 km a year can save about $1,100 in fuel costs annually when compared to a conventional Elantra, which has the identical 1.6-liter engine that is rated at 15 km per liter. "This translates into the fastest payback period of any hybrid vehicle on the market today," says Hyundai spokesman Oles Gadacz.

Auto analysts say defending the home market is necessary for Hyundai as it makes the bulk of its earnings there. "Korea is not only the test market for Hyundai but also a profit center supporting its overseas expansion," says Kim Jae Woo, an auto specialist at Bermuda-based fund manager Orbis Investment Management. The weak Korean currency, down 26% since the start of 2008, increases Hyundai's competitiveness abroad, and the company's overall profitability is allowing Hyundai to keep spending in R&D and marketing.

Helped by the weak won and its strength in its small-car lineup, Hyundai has emerged as a beneficiary of the industry slump. It is doing well in Korea, too: The combined share held by Hyundai and its subsidiary Kia Motors in Korea jumped to 84.2% at the end of June, from 74.4% a year earlier. That's partly because General Motors' (GM) cash-strapped Korea subsidiary, GM Daewoo Auto & Technology, is losing ground. As a result, Hyundai's stock is up 92% so far this year, against a 27% gain by the benchmark Kospi index on the Seoul bourse. "Hyundai faces hurdles ahead to become a top player, but it certainly has a fighting chance," says Orbis' Kim.

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