Hyundai Hopes to Avoid Toyota Trap

The recall crisis at Toyota could create a big opportunity for Hyundai as the Korean automaker launches a new campaign focusing on the quality of its cars

By Moon Ihlwan

Since the start of the Great Recession, Hyundai Motor (005830:KS) has been a standout in taking advantage of the hardships of other automakers. The South Korean company has increased its global market share significantly, to 5.2% last year from 4.3% in 2008, as titans such as General Motors and Chrysler fought to get life support from taxpayers. Moreover, a weak Korean currency gave Hyundai a windfall profit that enabled it to spend heavily to promote its vehicles.

Now, Hyundai is poised to benefit from another giant's woes. Toyota's (TM) expanded recall of more than 5 million vehicles in the U.S. could create an opportunity for Hyundai to widen its U.S. presence. "The recall could not have come at a better time for Hyundai," says auto analyst Suh Sung Moon at brokerage Korea Investment & Securities.

That's because the big blow to Toyota's quality reputation could magnify the impact of a Hyundai marketing blitz that focuses on its improved quality. The campaign will begin with the U.S. launch next month of the new Sonata family sedan designed to compete in the segment largely associated with Toyota's Camry. The top-selling Toyota sedan is among eight models for which the Japanese auto stalwart on Jan. 26 suspended U.S. sales and production following the recalls.

Expansionist Ambitions

The Korean company can afford to burn cash in marketing. On Jan. 28 it said its net profit doubled to a record $2.56 billion last year. Hyundai said it sold 3.11 million vehicles around the world, up 11.7% from 2008. Yet executives feel Hyundai's presence should be much more prominent, given its improving product quality. After all, researcher J.D. Power & Associates last year named Hyundai the top non-luxury brand for new cars in the U.S., ahead of Toyota, Honda, and Ford.

Yet auto industry watchers caution that Hyundai's breakneck expansion could later push the Koreans into Toyota's trap. Hyundai Chairman Chung Mong Koo earlier this month set a target that Hyundai, together with its affiliate Kia Motors (000270:KS), will sell a total of 5.4 million vehicles this year, up from 4.64 million last year and more than double the 2.53 million in 2000. "Hyundai's rapid overseas expansion in recent years smacks of Toyota's expansionist ambition that failed the Toyota way in some overseas operations," says Lee Hang Koo, auto industry specialist at government-funded think tank Korea Institute for Industrial Economics & Trade in Seoul.

Not that analysts expect Hyundai to run into a major quality control problem soon. Hyundai is much smaller than Toyota and its less extensive lineup of vehicles makes it easier to control its supply chain. "Unlike Toyota, part suppliers followed Hyundai to set up their own factories near Hyundai's overseas assembly plants," says analyst Lee Hyung Sil, who follows Hyundai for brokerage Solomon Investment & Securities. "But it's time Hyundai must take a more cautious approach."

Sonata Campaign

Hyundai's top brass has no plan to go slow now. Executives believe the company should step up growth in the U.S., where it sold 435,000 vehicles in 2009, up 8.3% from the previous year. That was the biggest gain among major carmakers and came at a time when overall demand in the market plunged 21%.

Hyundai has a lot riding on its reengineered Sonata.

Business Exchange

Track and share business topics across the Web.