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Feb 11, 2011

Fast-growing Korean car group believes it can sustain the pace

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It’s going to be difficult to stop Hyundai from becoming one of the top four vehicle manufacturers in the world, with the South Korean manufacturer and Detroit giant Ford currently jostling for the bottom spot of this exclusive club.

It has been a tough two to three years for the global automotive industry, with sales only last year showing signs of recovery after a bruising global recession.

Of the world’s top five manufacturers, the top two have been feeling the strain as Toyota continues to battle quality issues – or the perception thereof – and General Motors has had to run for cover as crippling debt forced it to file for protected bankruptcy. The US car maker has since recovered, but the cost of its funds and attention being diverted away from product development may only be seen at a later stage.

A reinvented Ford has become a profit- able business as it moves to smaller cars and a more focused business model, and German crown prince Volkswagen remains a top-selling badge, with its sights set on stealing the number one spot from Toyota.

This leaves Hyundai, which saw sales surge to 3,6-million vehicles in 2010, up from 1,6-million in 2000.

While some commentators regard this as stellar growth, even when referring somewhat nervously to the steepness of this curve, Hyundai Motor Company (HMC) president and CEO Steve Yang merely says: “Our speed is reasonable. We don’t think we are growing so fast”.

In South Africa, the Hyundai importer, Hyundai Automotive South Africa (HASA), wants to move from number three to the number one selling brand in the South African passenger car market.

In Africa, Hyundai is currently the number two selling brand in terms of new passenger car sales in 2010, with 80% of sales coming from four markets, namely Egypt, Libya, Algeria and South Africa.

In the US, where Hyundai has been present for 25 years, the brand saw sales of around 500 000 units last year, as the Korean manufacturer worked hard to polish its image. In Europe, however, Hyundai still suffers from poor public perception.

South Korea is Hyundai’s biggest market, followed by China and the US.

But why has the 44-year-old motor manu- facturer suddenly seen such an increase in sales? It has been exporting vehicles to the US since 1986 in the form of the Excel, but with limited success. What has changed in recent years?

The answer can be summarised best by HMC’s latest financial results, as the company posted a record quarterly profit in January, with a 48% increase in net profit to $1,26-billion, driven by what it said were new models and an improving brand image.

Changing Perceptions
When considering the company’s history, Hyundai global public relations team overseas business division director Frank Ahrens says that Hyundai’s initial focus was on volume, which resulted in the brand suffering “some quality problems”.

However, in 2000, Hyundai changed course and instituted a quality management initiative.

“We spent time building a quality brand, and now the challenge is to further elevate the brand.”

Ahrens marks certain important milestones in developing the company to its current stature.

For example, 1991 was a “liberation year” for the company as it pushed its first self- developed petrol engine onto the market.

From then on, things developed at a rapid pace as Hyundai opened its first overseas plant in Turkey.

However, the Asian crisis of the late 1990s saw the vast Hyundai empire collapsing, with HMC emerging in 2000.

In 2004, HMC developed its own diesel engine, followed by three new plants in China, in addition to a US plant and two Indian plants, besides others. Several research and development centres also opened their doors across the globe, including one in Germany.

Today, around 1,6-million Hyundai vehicles are made in South Korea, and 1,5-million are manufactured abroad.

Another highlight came in 2009, as the Hyundai Genesis was named Car of the Year in North America, which Ahrens, a former Washington Post journalist, says raised a few eyebrows.

In the end, he mulls, “it takes a long time to change perceptions”.

However, despite accolades such as the one bestowed on the Genesis, and growing sales, brand remains a sticky issue for the Korean manufacturer.

Even if Hyundai has become one of the top five car manufacturers in the world, its brand has not achieved the same success.

In 2010 the eighth-placed Hyundai brand was valued at $5-billion, compared with Toyota as the number one automotive brand at $26,2-billion, followed by Mercedes-Benz in second place, and BMW in third.

To achieve a brand breakout, the company has made available a healthy research and development (R&D) budget, with 4,7% of revenue going to this department in 2009, and 4,9% in 2008, coupled with some big spending on sporting sponsorships, such as the soccer World Cup.

Already, engineers at the sprawling Namyang R&D centre, outside Seoul, note that the drag value (wind resistance) of Hyundai vehicles has been cut by 30% on average for the last ten years, which has seen average fuel consumption drop by 15% at highway speeds.

Namyang covers 3,5-million square metres, and employs 10 000 people. When it was built in 1995, explains one Hyundai manager, it was running at around 50% capacity until five to ten years ago, when the company outgrew its newcomer boots.

Ahrens points to the importance of R&D in Hyundai’s future development.

“If you cut R&D, you have downstream problems for years, as can be seen in some US manufacturers. You need to crank out good solid product. If you have a year or so gap in product, you really lose ground.”

Product has been a big driver of Hyundai’s success in recent years. More than any- thing, it has been the combination of value-for-money, yet stylish, cars which has grabbed the attention of the motor- buying public.

However, will this, as well as rising sales, tempt the company to push up the price of its products? And, if it does, will buyers remain loyal, or seek an alternative?

But it seems value for money remains a pivotal aspect of the company’s new brand-management-orientated philosophy, as announced at the Detroit auto show at the beginning of this year, as it seeks to build “modern premium” cars, which it describes as “high-value products at an accessible price”.

Underneath all of this lies the “fluidic sculpture” design, churning out better- looking cars than the boxy-looking Hyundai vehicles seen as recently as the early 2000s.

Hyundai has also attempted to remain with the green development trend, and has also already developed the Sonata hybrid to go on sale this year, with a full electric vehicle based on the small i10 to go on sale at a yet undetermined date.

Innovator
By Hyundai executives’ own admission, the vehicle maker has been viewed largely as a “fast follower”, rather than a company which churns out its own original products.

“This is not so any longer,” says one executive. “The Veloster is unlike anything ever seen before.”

The Veloster, unveiled in January, is a three-passenger-door coupe boasting low fuel consumption, and it may find its way to South Africa by the end of the year.

It is not only Hyundai that has been described as a fast follower. Another Korean company, electronics giant Samsung, has also been under fire for being a copycat rather than an original product developer – a case in point being the development of the Samsung Galaxy tablet to follow where Steve Jobs’ iPad led.

Samsung has an interesting profile. Chairperson Lee Kun-hee is to be succeeded by his son, Jay Y Lee. Kun-hee reinstated himself as chairperson in March 2010, having stepped down after receiving a three-year suspended jail sentence for tax evasion and breach of trust in 2008.

The South Korean President later pardoned him, saying he was too important to the nation to be behind bars.

Samsung accounts for around 20% of the nation’s exports.

Hyundai Motor Corporation chair- person and CEO Chung Mong-Koo was in a similar position, as he was found guilty of fraud and embezzlement in 2007. However, he stayed out of jail as his three-year prison sentence was sus- pended, and until he was also pardoned by the same South Korean President, Lee Myung Bak.

It is clear that South Korea reveres its conglomerates and their leaders as national assets – another case in point being that the current President is the former CEO of Hyundai Engineering & Construction.

The South Korean public is also fiercely loyal when it comes to home-made products.

Between Hyundai and sister company Kia (Hyundai holds a 34% share), these manufacturers have an 80% share in the South Korean automotive market.

Trade deals currently in the pipeline may see opportunities for Hyundai to grow bigger internationally. However, there are also some who fear that these pacts may erode Hyundai and Kia’s king-sized market share at home.

South Korea and the US are in the process of finalising the text of a trade deal, with a signing ceremony expected in mid-February. Seoul and the European Union have also sealed a trade pact, which comes into force on July 1.

Another factor in Hyundai’s favour as it hunts for a spot in the top four is that its subsidiary, Hyundai Steel, churns out steel for HMC’s plants at a cozy price.

HMC’s production has also aided the development of Hyundai Steel, with 8,1- trillion won to be invested at the operation – which uses some iron-ore imported from South Africa – by 2015 as a third furnace is to come on line.

There is also talk of a fourth furnace.

While the second furnace satisfies auto demand, Ahrens does note that new furnaces will be able to “further support the auto business”.

Hyundai will be developing 225 grades of steel by 2012, with 50 of these for the automotive sector.

If everything conspires to work in Hyundai’s favour, it should see further healthy growth on a global level.

People do not always know what they want, but they normally know when they see it, and, at the moment, this is a Hyundai for many members of the car-buying public.

However, the vehicle manufacturer is currently at a product peak with several new, indeed exciting, vehicles coming out of its stable over the last two years, with still more to come in 2011 – but what happens after that?

Can Hyundai maintain its active new product flow? Can it secure brand loyalty among its many new customers so that people come back for a second or third vehicle? Can the company maintain quality standards?

These are questions only time – and perhaps 2011 and 2012 sales – can answer.

Edited by: Martin Zhuwakinyu
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