If last year was a good year for Korean manufacturers Hyundai and Kia, it just keeps getting better.
In 2000, the Hyundai brand had sales of 244,391, up 49 percent from 164,190 in 1999. Through September of this year, sales totaled 260,472, a 36 percent increase over the first nine months of 2000 when the company sold 191,539 vehicles.
In 2000, Kia brand had sales of 160,606, up 19 percent from 134,594 in 1999. Through September of this year, sales totaled 164,899, a 38 percent from a year earlier, when the company sold 119,727 vehicles.
September was the best sales month ever for Kia and Hyundai, and both have gained market share.
Last year, Kia’s share of the market was 0.9 percent; through September it is 1.3 percent. The Hyundai brand’s market share went from 1.4 percent a year ago to 2 percent.”The industry as a whole is down 5.7 percent through September, so they are going very much against trend, and they’ve had extraordinary years. Hyundai has become a significant, to-be-reckoned-with player in this country,” said Tom Libby, director, consultive operations, J.D. Power and Associates.
The overall industry saw sales decline 12.6 percent in September from a year ago, in part because sales slowed almost to a halt in the days after the terrorists attacks on New York and Washington.
“It’s extraordinary. They did go very much counter to the industry,” Libby said.
Kia and Hyundai are owned by Hyundai Automotive Group in Korea, but the two compete.
The other Korean manufacturer, Daewoo, is not experiencing this sales surge Libby said. A bankrupt Daewoo couldn’t maintain last year’s momentum when its sales were up 55 percent from 1999. This year sales are down 25.7 percent through September and market share declined to 0.3 percent from 0.4 percent, and in September General Motors Corp. essentially took over the bankrupt Korean manufacturer.
“But that’s a very unique situation,” Libby said. “The company is basically financially insolvent and it’s not a viable contender right now.”
How have Hyundai and Kia done it? Price has been the key selling point for Korean automakers Hyundai, Kia and Daewoo as they have carved out a niche in the low end of the market. Hyundai, and recently Kia, also offer the longest warranty package in the business with its 10-year/100,000-mile powertrain protection.
Add to that a string of new products that all fall under that warranty and you have the recipe for success, Libby said.
And it doesn’t hurt that the Big Three automakers have pretty much abandoned the $10,000 new-car buyer because they have found it difficult to make much money building small cars. Instead, they have focused on the profits from large, expensive sport-utility vehicles.
Ronald L. Zarrella, president of General Motors North American Operations, has said that nearly all of the company’s loss of market share since 1997 has occurred in the low-end car segment, which accounts for 37 percent of young, first-time buyer purchases in North America. It is an important group because automakers hope that as young buyers become more affluent, they will buy more expensive vehicles in the family.
“The Koreans have shown that there continues to be a market for extremely affordable vehicles, especially when you are aggressive in terms of removing some concerns in consumers’ minds about warranties and operating expenses,” said Paul Ballew, GM’s executive director of global market and industry analysis.
Those who are budget constrained and want a new car pretty much have to buy Korean, according to J.D. Power and Associates data tracking actual transaction prices of new-car purchases.
Many vehicles in the three low-end segments–entry compact, entry sport-utility and premium compact–are Korean.
In the entry compact segment, the lowest price vehicle on the J.D. Power list is the Japanese-made Suzuki Swift (for which 2001 is the last model year) at $9,145. But the next three are the Daewoo Lanos at $10,386, Hyundai Accent at $10,579 and Kia Rio at $10,965. The Kia Sephia leads the premium compact segment at $11,948, and the entry sport-utility segment lists the Suzuki Vitara at $16,278, followed by the Kia Sportage at $16,772.
The Koreans’ fortunes are improving after a fall from grace with many American buyers. Hyundai, which has been in the U.S. the longest, is probably the best example of the rise, fall and rise. After a successful product launch in 1986, consumers encountered quality problems that the company couldn’t correct.
“They would take them back, fix them and they would break again,” Libby said. “It led to extreme dissatisfaction and everybody deserted the brand.”
Hyundai President and CEO Finbarr O’Neill called it a “near-death experience.”
Then, with the 1999 model year, Hyundai executives instituted the warranty package that provides 10-year/100,000-mile powertrain protection, five-year/60,000-mile bumper-to-bumper coverage and five-year/unlimited-mile roadside assistance.
“We viewed it as a way to address one concern with our brand, the risk consumers saw in buying a Hyundai,” O’Neill said. Sales rose 82 percent in 1999, he said. “By offering the warranty, we made a statement of our confidence in the quality of the product. And increasingly that’s got people to come on down and check us out and be pleasantly surprised by the value that they see.”
Coverage plan spreads
Kia, wanted to share in Hyundai’s sales success, lobbied its parent company for the warranty package and began to offer it in July 2000. Kia saw sales increase about 30 percent, said Geno Effler, manager of public relations at Kia Motors America.
This month the 100,000-mile level of coverage showed its first sign of extending to manufacturers in other countries. Ford is offering an “extended service plan” in which owners are covered for five years or 100,000 miles, but must pay a $100 deductible after the regular 3-year/36,000-mile warranty coverage expires.
But one issue that intrigues analysts is whether Hyundai and Kia can afford such a long warranty, especially given the small profit margin on relatively inexpensive vehicles.
“A 10-year warranty is going to kill you if your car is going to be coming in every other week,” said Wes Brown, analyst at Nextrend, a market research, consumer trend and consulting company in Thousand Oaks, Calif.
“It may be a far better warranty set up than any of us imagine,” said James N. Hall, vice president of industry analysis for AutoPacific Inc. a consulting firm with offices in Detroit and Tustin, Calif. “They may be less at risk than it looks. But as the model range expands, and they get more and more products that’s when they start to become exposed–and the issue is how do they handle that exposure.”
But Hyundai is counting on some help from consumers who sell the vehicles and stop the clock on the 10-year powertrain warranty. If the vehicle is sold outside the family, the powertrain warranty is reduced to five years or 60,000 miles. In doing its long-term calculations, Hyundai figured only 50 percent of the owners would keep the vehicles for 10 years, O’Neill said, adding that even at that number the company is erring on the side of caution.
Plus, O’Neill said executives were encouraged because warranty costs were down 30 percent in 1998 and 20 percent in 1999.
“I think it is a prudent business decision given what we know about the quality of our products and the trend of our costs, it just makes sense,” he said.
Value counts, too
But the long-term issue still facing the Koreans is whether an automaker can make its living primarily on low price.
“When people come down to the dealership, you have to have well-styled, high-content, high-value vehicles,” O’Neill said. “They’re not coming down to buy a warranty; they’re still coming down to buy a vehicle. We’ve gone to great lengths to make sure that our vehicles are properly positioned to be of very high value in each segment in which they compete.”
Brown contends that while the extended warranty may attract people who have a limited amount of money to spend, it doesn’t mean anything to people with more disposable income looking for an appealing vehicle, not just transportation.
The problem with selling on price is that “you never become an aspirational vehicle,” Hall said. “You become the vehicle that people want to get out of. And that’s why it’s in Kia’s and Hyundai’s best interest to be more than just price.
“At least in the case of Hyundai, I think they are getting beyond price because they’re getting product lined up. The Santa Fe sport-utility is by anybody’s definition a darned good vehicle,” Hall said.
For model year 2002 Kia has two new products–the Sedona minivan and the Rio Cinco wagon–and for model year 2003 a new sport-utility (codenamed “BL”). It is about the size of a Montero Sport, will be powered by a 3.5-liter V-6 engine and built on a truck-like ladder frame.
Daewoo plans no changes to current products and no new products for the 2002 model year. Two trim levels have been discontinued: the Leganza SX and the Nubira sedan CDX.
The Sedona and Santa Fe are important because before their introduction Kia didn’t have a minivan and Hyundai didn’t have an SUV, so it’s all add-on business, Libby said.
For the 2002 model year, Hyundai is coming out with a new Sonata, the XG350 (a more powerful XG300) and the Elantra GT. After that comes the all-new 2003 Tiburon.
Furthermore, Hyundai has no plans to back out of the entry-level segment of the market, O’Neill said, and plans to bring out a revised 2003 Accent.
