Hyundai Takes Advantage Of Supply Debacle

By Dale Buss April 28, 2011

Hyundai takes advantage.jpg

Hyundai may not be able to take complete advantage of the supply debacle of its Japanese small-car rivals because the Korean giant has output limitations of its own. But the company is making gains while its top competitors are still stumbling -- in transaction prices, corporate and dealer profitability, brand reputation, and even market share. On Thursday, Hyundai reported profits for the quarter ended March 31 surged 47 percent to $1.75 billion, surpassing analysts' estimates.

In the first quarter, Hyundai vehicle sales abroad rose nearly 12 percent to 752,466 vehicles; while domestic sales held steady at 166,664 vehicles. Hyundai’s performance caused its stock to climb 7.3 percent to its highest closing price since it began trading in 1975. Hyundai’s affiliated company, Kia, also is predicted to post a double-digit profit increase. By contrast, Japan’s Honda’s profit for its fourth quarter ended March 31 plunged by 39 percent to $545 million; revenue fell 3 percent. Its performance caused its stock price to down 7 percent since the March 11 earthquake. As a result of the two divergent performances, Hyundai outsold Honda, 919,000 vehicles to 860,000. A year earlier, Honda outsold Hyundai 874,000 to 842,000 vehicles.

Hyundai Q1 2011 MSDTT.jpgStateside Meteoric Rise
In the U.S., Hyundai – and its affiliate Kia – have been on a meteoric rise in the past couple of years and could get an added boost from the Japanese automakers’ woes. Edmunds.com forecasts Hyundai will sell 60,071 vehicles in April, when it reports sales on Tuesday. That is a 27-percent rise from a year ago. That would put Hyundai’s market share in April at 5.1 percent, about even with March and up from 4.5 percent a year ago. Kia could see a 45-percent hike in year-to-year sales in April, with Edmunds.com forecasting it will sell 43,461 vehicles for a 3.7 percent share of the U.S. market, up from 3.1 percent in March and 3.5 percent from April a year ago.

And consider what’s happening in the showrooms of many of Hyundai’s 800 dealers across the United States. “Dealers tell us the common story is that they have a white board in the showroom listing the next arrival of a [transport] truck and each of the cars on it, and salespeople put their initials by each one when a customer deposit is placed on that vehicle,” said Mike O’Brien, Hyundai’s vice president of strategic and product planning. “Each one is taken before the truck shows up. Dealers can’t get our products fast enough.”

The brand “has been on a meteoric rise,” assessed Scott Dube, president of Bill Dube Hyundai, in Wilmington, Mass. “It has accelerated incredibly in the last six to eight months. Brand acceptance is phenomenal. Even before the unfortunate events in Japan, we were seeing demand outstripping supply of our brands. Our factories are operating as hard as they can. We were already in a bit of an enviable position with regard to days’ supply and consumer demand.”

George Magliano, senior economist of IHS Global Insight, agreed that Hyundai and Kia have a “minimal” chance to take short-term advantage of the Japanese supply difficulties, citing Hyundai management expectations that the brand’s market share will level off this year in the United States. “The circumstances actually might provide more potential for Ford or GM, with [Chevrolet] Cruze and the [upcoming Chevy] Sonic [small cars] and Ford’s Focus and Fusion. And with good used small cars in tight demand, that might make the Ford and GM products look even better.”

Yet, Dube added, the earthquake aftermath provides yet another sort of opening for Hyundai. “Windows of opportunity open and close all the time,” he said, “and clearly this is an opportunity for us to get people to look at our cars and understand what they’re all about.”

Too Much Success?
While Toyota, Honda and Nissan are handcuffed by varying levels of production constraints because of the earthquake aftermath, in Japan and in North America, production by Hyundai and its sibling Kia brand has been left relatively unscathed because they have few parts source out of Japan. The fact that Hyundai has been trying to unseat one of the Japanese Big Three brands in the U.S. market for a decade would seem to open up a tremendous opportunity nowadays for the Korean upstarts.

But not so fast. Because Hyundai, in particular, has been adding U.S. sales and market share so quickly over the last few years, the company hasn’t been able to accommodate fast-rising demand – especially in the last six months. “Hyundai already had finally hit the sweet spot, and of course that limits their leeway now,” Magliano of IHS said. “And that comes from their own issues, nothing to do with Japan.”

And a shift in consumer interest toward the Koreans – as well as American Big Three small cars – post-quake already has tightened up inventories even more. Hyundai’s “days to turn” for the sale of a vehicle dropped to 37 days in the first week of April from the first week of March, right before the March 11 earthquake and subsequent manufacturing disruptions, according to an Edmunds.com analysis. Similarly, Kia’s days to turn fell to 49 days from 57 days in the same period.

O’Brien and dealers told AutoObserver.com that pressures on Hyundai inventories already had begun rising about six months ago. “We already were facing a situation where our products were selling at maximum production-capacity levels predating all this [earthquake-related] activity,” O’Brien said. Hyundai of America President John Krafcik noted a handful of times last year that Hyundai would be capacity-constrained in the U.S. market this year.

Hyundai Q1 2011 TCI.jpgLong-Term Goals
So, what now? Hyundai is doing its best to squeeze marginal production out of its facilities, announcing plans recently to boost production of Sonata and Elantra sedans at its Montgomery, Ala., plant by 10 percent this year over the plant’s stated 300,000-unit annual capacity. “We’re caught in a catch-22 because dealers are begging and screaming for product on one hand, but [Hyundai] has said that they’re not going to throw on a third shift just so we can sell 10,000 more cars this year,” said Jeremy Day, general sales manager at Hyundai of Tempe. “While I hate that today, I’m going to be real happy next year that they took that approach. They’re still an infant manufacturer, and they can’t afford 800,000 recalls of cars made this year just because we wanted to put 10,000 more cars on the street.”

O’Brien explained that “our key motivation right now is doing the best we can in terms of customer satisfaction. When we think of the scale of our business, we have to cover every part, not just the production of vehicles. We want to make sure if we change our production level that our distribution system can support it.”

In the meantime, Hyundai’s profitability may become the biggest winner in how the U.S. small-car market has changed drastically over the last couple of months. Overall incentive levels in the segment were already shrinking before the earthquake. And now, at a time of rising demand for small cars because of higher gasoline prices, tens of thousands of Japanese-brand small cars are disappearing from the equation. Even Ford would like to have more of some of its small cars to sell.

And Hyundai is taking advantage. The average transaction price for a Hyundai was up about $40 from the first week of March to the first week of April, according to Edmunds.com research, while Kia’s average rose by about $20. That is essentially flat, of course.

Incentive Picture
But while both O’Brien and Hyundai dealers point out that they don’t want to benefit from other brands’ tragic circumstances, dealers said their transaction prices and margins are rising. “Absolutely” there’s upward pressure under prices of his vehicles, said Day of Hyundai of Tempe. He also said that the current environment may allow Hyundai to address long-running complaints by its dealers about inadequate dealer profitability.

However, Bobby Tobanyi, general sales manager of Glendale Hyundai, in Glendale, Calif., noted that the average price of a transaction by his dealership actually has been dropping lately because of how demand has shifted toward small cars and away from Hyundai’s higher-margin vehicles. “Not long ago, we were selling a lot of Genesis, at $33,000 to $43,000 a piece, but now it’s a lot more Sonata and Elantra,” Tobanyi said.

O’Brien said that Hyundai has had “drastic declines in total incentive spending” over the last few months, even though Hyundai’s spending on incentives didn’t change much over the last month per se – including on its hottest-selling models. The only incentive increases by Hyundai were slight improvements for its Veracruz SUV and its Genesis near-luxury mid-size sedan; for Kia, the only incentive bumps came for its Sorento CUV, Forte subcompact and Sedona minivan. “Rebates are something of the past,” Day said. “We have no [incentive] program at all on Elantra or Sonata.”

Yet, as Dube, the Massachusetts dealer put it, Hyundai remains “limited in how much advantage we can take” because of yet another factor: the continuing misgivings that many American consumers still have about the brand. “There are still people who feel that Hyundai is a brand on sale,” he said.

Latest Gambit
To introduce a new way to attract American consumers to its showrooms without resorting to new incentives that wouldn’t be particularly necessary or helpful given its supply constraints these days, Hyundai has come up with a clever new promotional program: guaranteeing the future trade-in value of a new Hyundai bought today.

Following in the tradition of Hyundai’s ground-breaking 100,000-mile warranty several years ago, and its Assurance job-loss protection program a couple of years ago, the new program beginning May 1 will guarantee trade-in values for two to four years. It covers only vehicles whose market trade-in value drops below the guaranteed price. And to qualify, customers have to show proof that they’ve kept up with factory-recommended routine maintenance at Hyundai dealers.

The move could be a smart one for Hyundai for a number of reasons. First, it is yet another way for Hyundai to get some promotional mileage by relying on a marketing innovation that it thought of first.  Second, it isn’t likely to cost Hyundai very much. Just as only a relative handful of Americans actually cashed in on the Assurance job-loss guarantee, few Hyundai purchasers are likely to have to take advantage of the trade-in pledge. That’s because of how the prices of late-model used cars have surged lately.

And third, the service-certification requirement is a good way for Hyundai to increase traffic at its dealerships and improve service retention, an area where Hyundai significantly trails top-flight competitors. So score another point for Hyundai. They’re getting quite a tally.

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