Korea's Kia Is Drawing Drivers

How does a company like Kia Motors, with a reputation for so-so quality, thrive when the U.S. unemployment rate is 9.6 percent and many household budgets are ultra-tight? First, the No. 2 Korean automaker has kept average prices of its cars about $8,000 below those of key market rivals. Next, cue the rapping hamsters. Kia is blanketing American television with commercials starring human-size hamsters that rap to the hip-hop group Black Sheep's song The Choice is Yours while driving Kia's boxy Soul wagon through an urban landscape.

It's all loud and a bit crazed, but the strategy seems to be working. Kia's U.S. sales gained 15 percent this year through October, outpacing growth at General Motors, Toyota Motor (TM), and Honda Motor (HMC). If Kia can keep it up, it should log its highest annual U.S. sales ever. "People are looking for value in this market, and they're looking at brands they might not have considered in the past," says Rebecca Lindland, director of U.S. auto industry research with IHS Automotive (IHS). "The advertisements are so good and are helping to create a buzz for the models."

To be sure, pricing is a decisive factor behind Kia's appeal. Its passenger vehicles sell for an average of $21,598, compared with the industry average of $29,494, says Edmunds.com, an auto-industry data provider. Still, the company's advertising has helped improve Kia's brand awareness in the U.S. among young car buyers and families with kids. Thanks to its popularity on Google's (GOOG) YouTube and social media sites, the spot logged more than a million views online in the first two months, according to the company.

While that marketing buzz is welcome, Kia's slide in U.S. quality rankings remains a problem. Kia dropped 10 places, to 25th, in J.D. Power and Associates' (MHP) latest survey of initial quality of mass-market and luxury brands, and Consumer Reports recommended only three of the Korean automaker's eight models. Customers complained about wind noise and the interior design in Kia's Forte compact, says Raffi Festekjian, director of automotive product research at J.D. Power. A separate J.D. Power survey on vehicle dependability, assessing the quality of models on the road for three years, rated Kia 20th. The company also recalled about 104,000 vehicles worldwide this year because of an electrical wiring problem that can cause fires. The recall prompted former production chief Jeong Sung Eun to resign as vice-chairman in September, according to Kia spokesman Michael Choo.

Kia's woes are in stark contrast with the image for quality enjoyed by Hyundai Motor, Korea's largest automaker and owner of a controlling 34 percent stake in Kia. The differing perceptions of Kia and Hyundai vehicles (which generally score well in J.D. Powers surveys) is surprising, since the two companies share some vehicle platforms, engines, parts suppliers, and a chairman. The companies retain separate factories and workforces, however. Kia improved its design after the recruitment of former top Audi designer Peter Schreyer. "The image of Kia's old models with poor quality hasn't completely disappeared," says Charles Bang, director of the division overseeing quality at Hyundai and Kia in Seoul. "But it's not correct to say there's a huge quality gap between Hyundai's and Kia's cars."

This year the automakers opened a second joint quality-management center near Seoul. They plan to produce 40 models with six shared platforms by 2013, vs. 32 models with 18 platforms last year. Back in 1999, a year after Hyundai bought control of Kia, the two companies shared only 18 percent of their combined 740 parts suppliers. By 2009, they shared 78 percent of 400. "The new cars they're bringing out are much more competitive, but it takes time to change that perception," says Jeremy Anwyl, chief executive officer of Edmunds.com.

Kia's U.S. lineup is led by the Sorento and Sportage SUVs, the Soul, and the Forte and Optima cars. All were either introduced or revamped in the last two years, offering buyers a reason to give Kia a try. Michael Mincey of Orlando this year bought his first Kia, a Soul, after being turned onto the brand by a buddy and discovering the car had better fuel economy than his Chrysler Jeep and a comparable interior. "A friend mentioned the Soul because he liked the commercials," Mincey said. "I took a look, went for a test drive, did my research, and I was sold."

The bottom line: Despite low quality scores, Korean automaker Kia is on a roll in the U.S. Its image is benefiting from TV ads featuring rapping hamsters.

    Before it's here, it's on the Bloomberg Terminal.