Hyundai And Kia Prosper Now But Look To Future
By Dale Buss July 25, 2011
Hyundai Motor America and Kia Motors America have met the enemy, and they are them. Both ascendant brands owned by Korea’s Hyundai Group chaebol have the opportunity to build on their recent sales and market-share gains in the United States, but inconvenient capacity constraints are holding them back from gobbling up a lot more. There also are looming issues of differentiation between the two brands so that they don’t cannibalize each other. Still, Hyundai is now projecting a 16-percent rise in U.S. sales for 2011 – even against its bursting-at-the-seams 2010 – and Kia has earmarked a gain of 22 percent, which would be remarkable achievements. Each brand probably could pick up even more territory if their manufacturing operations could supply eager U.S. consumers with enough vehicles.
But leaders of each company profess contentment in taking the tortoise’s approach, seeking long-term elevation in the North American market rather than to further immediate, opportunistic gains that might eventually compromise what are becoming solid franchises. “Our primary objective is to maintain outstanding quality,” said John Krafcik, president and CEO of HMA. “Companies get strained on that when they add too much too quickly. We’re not going to do that. If it means we lose some share next year, not keeping up with industry growth, but it means that in ten years we’re in a better place, that’s the way to go. We’re not looking at this as optimizing business results for the next 12 months.”
Similarly, Kia’s vice president of U.S. sales, Tom Loveless, noted that the brand’s “mantra is to concentrate on market share” rather than sales volume. "That’s our target. We’ve had 17 consecutive years of share growth in the U.S. market, and we’re looking for more this year."
Unstoppable Force
Specifically, Hyundai just raised its 2011 sales forecast to 624,000 units, compared with a record 538,228 sales last year; through June, Hyundai’s 2011 U.S. sales were up 26 percent compared with a year earlier. Kia just boosted its forecast for this year to 433,000 units compared with a record 356,268 sales last year; through June, Kia’s sales were up 44 percent. Both brands benefit heavily from the momentum they acquired over the last couple of years, when Americans’ regard for their brands and products rose significantly, as well as the second-quarter turn to Hyundai and Kia showrooms by many consumers lusting for fuel-efficient vehicles and the disaster in Japan slashed production of high-mileage Japanese-brand vehicles in Japan and in the United States.
The all-new 2012 Hyundai Accent, for example, is “flying out of stores,” Krafcik said, and for the first week in July was “the best-selling subcompact car in the country at retail, outselling both the Honda Fit and Ford Fiesta.” Sales of the Elantra compact and Sonata midsize sedan each pushed 20,000 units in June and turnover of Elantra nearly doubled from last year during the first six months. Meanwhile, Kia sold more than 11,000 units of Soul as the chic, boxy subcompact became the brand’s best-selling model in June and the new, midsize Optima sedan nearly septupled its sales over a year earlier. “Inventory of Optima is almost nonexistent,” Loveless said, “and we expect that to continue through the end of the year.”
As a result, the company’s combined U.S.-market share finally hit 10 percent in May (up from 7.7 percent last year and just 3.3 percent in 2001) and continued at that level in June, with Hyundai providing about six percentage points of that share and Kia the other four points. “Right now, there’s nothing stopping Hyundai and Kia,” said Jessica Caldwell, head of U.S. industry analysis for Edmunds.com. “The segments that are hot are where they have brand-new products.”
Scrimping For Every Unit
But Hyundai and Kia’s escalating brand credibility – and subsequent new levels of consumer demand – also brings both brands to a dilemma. Executives began insisting last year that forseeable capacity constraints would hold back product availability and sales to some extent in the United States. “At the beginning of the year, we weren’t even sure we could break through the 600,000-sales level this year,” Krafcik said. But Hyundai found its way to slotting another roughly 24,000 deliveries beyond that mark for the U.S. this year after plant management in both Korea and in the United States “found some real intelligent incremental capacity by identifying and breaking some production-equipment constraints in some areas,” he explained. “They’ve also done some real smart things with operating patterns and have added resources where we needed to increase production by small, measured amounts.”
Nevertheless, Hyundai’s inventories have plunged to a very slim 31 days to turn, according to Edmunds.com, about half the figure that’s usually comfortable in the business, down from 52 days to turn at the beginning of the year and nearly 42 percent below the industry average at the end of June. Meanwhile, the brand’s True Cost of Incentives was an average of just $1,034 in June, according to Edmunds.com’s proprietary formula, among the lightest in the U.S. market and 54 percent below the industry average. Krafcik said Hyundai hasn’t made any changes at all in factory incentive spending on individual products since the beginning of the year.
Quality Is Paramount
“What has changed is the number of people telling us they’re coming from other brands, and this is their first experience with Hyundai, and they’re frustrated because they can’t get the car they want,” he said. Krafcik doesn’t see much of an easing in that pent-up demand for Hyundai products even once venerable Japanese small-car brands get their inventories back to normal over the next several weeks. “For the entire year, we’ve had a much higher share of ‘shops’ than of retail sales,” Krafcik said. “So the demand signals are higher than our ability to provide cars – and were before the tsunami.” The recovery of the Japanese automakers after the March natural disaster “doesn’t change the dynamic we had (prior to the Japan disaster): more people are interested in buying Hyundai cars than there are Hyundai cars to buy.”
At the same time, Kia’s inventories also have dropped, though not as precipitously as Hyundai’s: to 48 days to turn at the end of June, according to Edmunds.com, from 60 days at the beginning of the year and about 10 percent below the industry average at the end of the first half. Kia’s True Cost of Incentives averaged $1,373 a car, about 39 percent below the industry average in June. Besides a flood of new Japanese-brand supply, Edmunds.com’s Caldwell said the only factor that could give Hyundai and Kia some relief from such pressures in the short term is that the second half typically brings more demand in the U.S. market for larger vehicles, including trucks, “and Hyundai and Kia don’t have any presence there. I could see their market shares not continuing to be as high in the second half.”
All of that spells out the dilemma for company leadership in Seoul and California: How much do they try to garner still more market share for their hot brands, and when? Presumably, one major consideration is that Hyundai still is trying to stamp out a reputation for poor manufacturing quality that got attached to the brand when it debuted in the United States a quarter-century ago. “They sold a lot, but there was poor quality,” said Doug Scott, senior vice president of GfK Automotive, a Southfield, Mich.-based firm that evaluates and advises automotive brands. Hyundai’s trailblazing introduction of a 100,000-mile powertrain warranty about a decade ago offset much of that concern and so has its appreciably improved actual quality.
The Luxury Question
But Scott believes one stubborn vestige of the problem is that consumer regard for individual Hyundai models still exceeds that for the brand. “The brand, per se, lags,” he said. “And you never want to create a brand issue that endures well past what you’re actually doing in the market.” Indeed, despite minor efforts to squeeze out extra production, Krafcik said, “we won’t do anything that would in any way imperil or endanger quality. If you look at what kept people from buying Hyundais, we have taken care of quality and reliability” with the continuation of the warranty, he added.
Another thing “inhibiting” consumer consideration of Hyundai, Krafcik said, is concern about trade-in value. So the brand has tried to take that off the table with the latest incentive wrinkle under its Assurance banner, a guarantee to Hyundai new-vehicle buyers of a predetermined trade-in value. “As our residual values grew to pretty much industry-leading levels, we struggled with how to communicate that to consumers,” he said. “We tried just telling people, but that doesn’t work as well as something like this (incentive).” Such a lure also has the advantage of not costing the company much up front, if ever, at a time when tight supplies and still-growing demand allow Hyundai to play the incentive game for cheap.
Hyundai is walking other tightropes as well. Perhaps the most important for the long term is its determined foray into the upscale market with its Genesis and Equus models. “With our premium strategy, we want to raise the entire brand,” Krafcik explained. He said that contrasts with the Japanese Big Three, which, of course, broke off their premium lineups in the United States into separate luxury brands. “If you take that approach, you don’t raise the retail experience for (the other) 85 to 90 percent of your volume.”
Car By Car
Consultancy GfK’s Scott questioned Hyundai’s strategy. “Can they sell luxury vehicles through the Hyundai channel itself? That will be difficult to achieve. These vehicles are superb in content and probably are going to prove to be high-quality, and with that they’ll intercept some people who are moving up from non-luxury to luxury vehicles. But they’re unlikely to make conquests of people who’ve already bought an Audi.”
Also with the longer-term in mind, Hyundai is adding capacity at the company’s manufacturing complex in West Point, Ga., where it originally built the Kia Sorento CUV and to which it recently shifted production of the Hyundai Santa Fe CUV from its Montgomery, Ala., plant. For example, Kia will begin producing the hot-selling Optima in Georgia, adding a third shift at the facility to take over production from a Korean plant. “That will give us a nice increase in availability for the long term,” Loveless said. For Kia, buttressing its brand in the United States has begun with success for each individual vehicle line. “Since early 2009, we have introduced seven new products, in what we’re calling a design-led transformation that is really driving growth for the brand,” he added. Having these new products in each of the market’s hottest segments has certainly helped.
The Soul, for example, “has kind of taken its segment by storm,” Loveless offered, after gasoline prices pierced the $4-a-gallon mark. Its popularity clearly has taken chunks out of the market for other risk-takingly-styled small cars such as Scion’s xB. The Soul is “such a versatile vehicle that it draws people from a lot of different segments to give it a look,” he said. “There’s also an emotional connection” with its geometric design and a popular advertising campaign featuring animatronic gerbils. “Soul is quickly becoming a third leg of the stool for us” in addition to the high-volume Sorento and fast-growing Optima, Loveless said. Later this year, he added, a new version of the Rio subcompact “will do very well in the market, we think.”
Hyundai vs. Kia
The company faces another long-term challenge in the United States: differentiating Hyundai from Kia so that each has room to expand in a defined space in the American marketplace. Over the long haul, the luxury-car possibilities for Hyundai may give the larger brand a premium patina that will help in this important marketing exercise. But for now, there’s a lot of confusion among consumers.
Scott’s company analyzes automotive brands all day long and he said that an initial differentiation point for Kia, after the Hyundai holding company took over its smaller rival in 1997, “was that Kia was supposed to be the sportier and younger brand. But I’m not seeing a styling differentiation – and Hyundai’s styling has ended up being pretty aggressive anyway. So what else is there? A horsepower issue? Male versus female buyers? What is the differentiating point? With the exposure that Hyundai is getting and its momentum out there, I would say that Kia is in need of some differentiating points.”
Loveless, however, said, “We do our own thing. We feel the brands go in completely different directions in terms of attracting the car-buying public.” He mentioned Kia’s design emphasis, for instance, and its appeal to “active lifestyle” buyers who are getting younger and younger. In any event, the creditworthiness of Kia’s buyers has climbed to about 90 percent prime or near-prime candidates, he said, although for some vehicles – such as Soul and Forte – that trend may reflect parents buying or signing for vehicles for young-adult children. Quality and safety features have improved apace as well. And exciting Kia designs “are bringing the right side of the brain into the equation, where the car is something that people are connecting with emotionally.”
Hyundai’s brand dominance over Kia so far might actually be a product of all the glowing media attention to Hyundai, Scott said. “Kia hasn’t been getting the sort of highly favorable, galvanized press that Hyundai is getting,” he said. Maybe Kia merits more, “but they’re not getting it. That might be one reason to differentiate the two brands from each other at some point.”
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