Should Texans buy Hyundais?

The product's main advantage over Toyota and Honda cars was quality for the price. Technology was not the edge. The Japanese leaders had built brands, and big price premiums, in an overcrowded field.

In late 2006, South Korea's currency, the won, spiked against dollar, making Hyundais more expensive in the US.

Hyundai sold only 45% of its 2010 US target, dropping to a 2.8% market share.

With the price advantage eroded, incentives were required to move product in the US. Average 2006 incentive spending was near $1,800 per vehicle, lower than Nissan and US domestics, but much higher than the leading Japanese brands.

Construction of new factories in Europe and the US was put off, and development of new models has slowed.

Hit by weaker profits, shares in Hyundai, traded lightly in the US (OTC:HYMTF), fell 30 percent in 2006, lagging the wider market's 4 percent gain, and continue to trend down in 2007. Kia shares fell 49 percent, and US market share dropped to 1.7%.

In 2007, the won-dollar relationship has reversed course, again giving Hyundais a price window versus the competition.

But major damage was done.

The brand's value image was tarnished, and a corporate culture iceberg loomed ahead.

The Untouchables

Hyundai Chairman Chung Mong Koo was convicted on charges of embezzling a $100 million slush fund.

Mr. Chung is oldest living son of Chung Ju Yung, Hyundai's founder, and is widely known for his autocratic and perfectionist management style. Surrounding himself with yes-men, cronies, and relatives, he is not known as a good delegator.

Ironically, he is also one of Korea's richest, and could have personally funded the bribes. His 33-year-old son, Kia Motors Chairman Chung Eui Sun, recently promoted amid shareholder protest, is also under investigation.

On Feb. 5, 2007, the 69-year-old Chung was sentenced to three years in prison. Chung is appealing, and as this type sentence is very unusual in Korea, he may yet prevail.

As evidence of the lack of change in Korea, he is still Chairman, and still owns 5% of the shares. Even in Enron-America, this would not be.

And the Chairman remains free to run the automaker during the inevitable long appeal. Strategic planning and product development are coming second to the legal crisis. New upscale models and crossovers for the US market are delayed.

If he should eventually go to jail, because of the nepotism, there is no executive succession plan, and the company may descend further. Reminds me of Ford.

Scandal, coming on the heels of the currency debacle, is a heavy blow to company morale.

Despite the above, I think Chairman Chung deserves credit for Hyundai's turnaround.

It was he who separated Hyundai Motor group from the Hyundai group, which was then the biggest conglomerate in Korea.

It was he who perceived the quality issue and forced change to happen.

Who can replace him and simultaneously reform the company's culture?

I don't think it will be Korean auto workers.

Eastern Union

Many Americans will be surprised to learn that South Korean autoworkers are unionized.

So much for copying the happy worker "Toyota Way" business culture.

This is the Achilles heel of Hyundai's low cost strategy for greatness, and of the Korean economic miracle.

With the Chaebol on top, a seething, under-productive working-middle class just waits to be dispossessed by globalization. Remind you of anywhere?

Over a month of strikes in 2006, as the won crisis cut bonuses, cost the company almost $2 billion in lost production.

An adversary environment prevents the company from instituting flexible production to copy the leaders.

Hyundai's quality drive came at expense of productivity. It takes almost twice the labor inputs to build Hyundais as to make Japanese rivals, trimming Sonata's advantage over Camry to under $2k.

This narrows dealer margins, slowing the dealership build-out.

Wow, a three faceted perfect storm hits Korea, what would you do?

In response to the three pronged crisis, the company did what Detroit wishes it could do.

It left town.

Hyundai is rapidly expanding operations worldwide, notably in all-important China, to avoid labor troubles at home and Korean currency risks.

New Kid in Town: Quality at Hyundai

Hyundai Motor Corp. has surprised everyone by making enormous increases in automotive brand value and recognition.

They improved quality dramatically over the past five years.

According to J.D. Power and Associates, Hyundai has one of the highest consumer satisfaction ratings and its brand value has greatly increased.

In the J.D. Power and Associates 2006 Customer Retention Study, Hyundais ranked a surprising 10th out of 37 makes. 51.6% of those surveyed returned to purchase another vehicle.

This has helped the brand's long time heavy depreciation.

Only a few years ago, banks wouldn't rush to finance Hyundais because of their low residual values.

By offering longer warranties than were then the norm, Chairman Chung drew notice to his quality crusade. Resale values and customer satisfaction ratings rose.

An emphasis on safety, with 6 airbags in Santa Fe and 8 in Azera, further enhanced perceptions.

A new $1 billion non-union assembly plant in Montgomery, AL and an engineering center in Michigan began the process of "Americanizing" the company's image.

Hyundai has only one factory in the U.S., building Sonata and Santa Fe. With capacity of 300,000 units, the new factory is capable of building over half of Hyundai's annual U.S. sales volume.

It remains to be demonstrated that the Koreans will not experience quality degradation as they offshore production around the world. Will cars built in Alabama, Turkey, Hungary, and Czechia, retain the quality the company has made its signature?

After the Japanese and Germans have had so much trouble moving offshore, I have a hard time seeing the corrupt Korean culture succeeding.

Hyundai's credibility problem was worsened by class action lawsuits claiming overstated horsepower ratings on 1.3 million vehicles sold between 1992 and 2002.

This makes me worry about warranty claims.

Hyundai's famous 10-year drive-train warranty in the U.S. may be unsustainable. Warranty claims cost big money, and slighting them is very common for companies in financial trouble. At some point in the future the warranty bubble is going to burst.

Great Expectations: Hyundai Product Pipeline

Hyundai’s “24/7” campaign to release seven new models in 2 years may be stalled. Tucson, Sonata, Accent, and Azera are relatively new.

Platform sharing with Kia does not help the brand get noticed.

Research and development of hybrids and other technology has slowed.

The booming Chinese auto market has drained product development resources: manufacturers cannot ignore China.

The Koreans must also compete in India, Turkey, Russia, Europe, and another 100 world markets, if they really want to escape from the peninsula.

Cars designed for these markets will not suit America.

The company launches a promotional campaign to coincide with the North American debut of its Veracruz mid-size crossover SUV in the spring of 2007.

Hyundai's proposed rear-wheel-drive luxury sedan, code-named BH and popularly called Equus, with a six-speed transmission and 8-cylinder 4.6-liter engine, scheduled for 2008, has rumors flying in the forums and blogs.

A rumored new luxury nameplate for the car, following the Lexus/Acura/Infiniti model, may be planned. How would the dealership build-out, and current flagship Azera, be affected by a new brand effort?

I believe this strategic quandary is the key to understanding Hyundai today.

For more on the new brand strategy, see "Hyundai Bh Equus Review", linked below.

Deal or No Deal?

Dealer network growth is one key to the success of foreign brands coming to America. Hyundai has about 700 franchises in the states, with a goal of 900 dealers by 2010. The company wants to add 50 in 2007.

Only 30% of US franchises have solo stores, most are combined with other brands. The goal is to get as many stand-alone dealers as possible, but what about the hundreds of Ford, Chrysler and GM shops in smaller Texas cities where there are currently no Hyundai dealers? They could effectively add Hyundai as sales of current brands shrink.

Average gross profit per Hyundai vehicle is only $1,064, maybe not enough to attract top franchisees.

Rumored interest in buying assets of finally-for-sale Chrysler centers around the dealership network: an easy way for the Korean company to achieve critical mass?

There are about 26 dealers selling Hyundais in Texas, concentrated in the urban centers.

Hyundais continue to be a good quality product at a reasonable price.

The biggest problem I have is the technology lag, most evident in critical fuel economy.

Consumers are warned on almost every page here at texas-cars-and-dealerships.com: seek true total cost of ownership, not just a "deal" or "low monthly payments."

If one brand has significantly lower fuel bills and depreciation, you can buy a better car instead of making your second car payment at the gas station.

Buying a Hyundai in Texas is still a risk.

But the question has changed from "can Hyundai stay in the car business?" to "are they as good as Honda and Toyota?"

And "can Hyundai open a new luxury division to challenge Lexus/Acura/Infiniti?"

At texas-cars-and-dealerships.com, both answers are no.

But look out Ford/GM/Chrysler, Mazda, VW, and Nissan.

And for Japanese tier 3 companies, Suzuki, Izusu, Subaru, and Mitsubishi: when the Chinese copy what Hyundai has proven can be done, times will be tough.

News-Blog Updates for Hyundai

10/29/07 Hyundai Sales Growth Slows

For more on the leap frog strategy to build a luxury brand,

see Hyundai Genesis Luxury V8 Preview

and Hyundai Azera Review

Hyundai Dealer Profiles

Don Davis Hyundai Lake Jackson