Toyota Takes On Hyundai—in Korea

No global automaker enjoys a more dominant position in its home market than Hyundai Motor. Not only does Hyundai control 51% of the Korean market, but its affiliate Kia Motors is the second-largest player, with a 30% share. Put together, that's an astonishing 81%—a figure that dwarfs Toyota's (TM) 43% share in Japan.

Now Toyota wants to turn the tables on its Korean rival. In a statement on Oct. 20, the Japanese automaker said it has opened for business in Korea. Toyota announced it has begun selling Toyota-branded models at five dealerships, including three in Seoul. It will sell three models: the Prius gasoline-electric hybrid, the Camry midsize sedan, and the RAV4 crossover SUV. Toyota will also market a hybrid version of the Camry. "We intend to make every effort to contribute to South Korean society and earn a loyal following," Toyota Executive Vice-President Yukitoshi Funo said in the statement.

Whether Hyundai has much to fear is another matter. Toyota's ambitions, to start with at least, are modest enough not to worry its Korean rival. Toyota aims to sell just 500 vehicles a month, rising to 700 by the beginning of 2010. That compares to roughly 420 monthly sales of Lexus, Toyota's luxury marque that has been in Korea since 2000. With numbers like those, Toyota and Lexus won't make much of a dent in Hyundai and Kia's joint annual sales of 782,000.

Currencies Not in Toyota's Favor So what explains Toyota's move into the Korean market? Analysts say it is unlikely that Toyota can make a profit exporting cars from Japan to Korea even if it sells them at a premium price; its 2.4-liter Camrys will retail for $29,000, compared with $22,360 for the most expensive Hyundai Sonata. Indeed, Funo told reporters at a press conference in Seoul that he didn't expect profits in the near term.

Exchange rates are a major factor. The strength of the yen puts Japanese exporters at a huge disadvantage against Koreans, who have been able to take advantage of a relatively weak won. Since January 2008, the yen has gained some 36% against the Korean currency, plunging many Japanese companies into the red at a time when Korea exporters are thriving. This year, Toyota expects to lose around $5 billion, whereas Samsung Electronics, LG, and Hyundai are all recording strong earnings this fall. "I don't think Toyota will be a threat to Hyundai in Korea at all," says auto analyst Suh Sung Moon at brokerage Korea Investment & Securities. "Hyundai enjoys price advantages of up to 30% over Toyota while the quality difference of the two brands has narrowed to marginal levels recently." The weakness of the won also goes some way toward explaining why foreign imports to Korea account for just 5% of the market this year, compared with 6% in 2008.

Honda's (HMC) recent experience points to difficulties Toyota faces in Korea. Honda was the most popular import brand last year, with a 20% share among imported cars, but its sales plummeted 71.5%, to 2,921, in the first nine months of this year.

Sensible Move Over the Long Term Longer term, though, building up in Korea could make more sense, says Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo. The country "is a decent market size, it has a close proximity to Japan, and it's opening up," he says. What's more, unlike Japan, where auto sales have been declining for years, the Korean market retains growth potential, and the yen is unlikely to remain at its current highs indefinitely.

For sure, while demand has plunged this year, Japanese sales in Korea have been trending upward in recent years. Even without the Toyota brand, Japanese automakers' combined sales have increased from zero in 1999 to almost 22,000—ranking second only to German carmakers, which sold a combined 26,000.

Still, the prospect of an aggressive push by Toyota into Hyundai's home turf does conjure up one additional concern. What happens if Hyundai, emboldened by its currency advantages and rising brand, retaliates and steps up its presence in Japan? There is certainly room for growth across the Sea of Japan (the East Sea to Koreans). In the six months through September 2008, just 257 Hyundai cars and one Kia were imported into Japan.

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