Hyundai's Turbocharged Quarter

Superb sales at home and a big product push in the U.S. are starting to make the Korean carmaker look like a turnaround story

by Moon Ihlwan

Killer profits at home, coupled with a daring upscale product push abroad: That more or less sums up the strategy of Hyundai Motor (HYMTF). South Korea's champion automaker has big ambitions to move into the big league of the automotive world. It certainly nailed some impressive numbers in the second quarter, and on July 26 halted a recent earnings slide and posted the first year-over-year profit jump in six quarters.

The company reported that its net income rose 52%, to $666 million, in the April-June period from the year-ago quarter. Hyundai officials say the upbeat outlook for the Korean economy, along with the prospect of a stable currency, spells even better days ahead. Barring unexpected circumstances, "we expect our earnings will steadily improve," Hyundai Motor Executive Vice-President Chung Tae Hwan said. Revenues jumped 15%, to $8.74 billion.

The biggest contributor to the earnings gain was robust domestic sales. Hyundai, which generated nearly 40% of its revenue and some 90% of its profits at home last year, reported a 16% sales increase in the Korean market. "The favorable local market will serve as a big windbreaker for Hyundai, which has been exposed to the cold because of the rapid appreciation of the Korean currency," says Suh Sung Moon, senior auto analyst at brokerage Korea Investment & Securities.

Wealth Effect Fueling Demand

Hyundai's results were released one day after the Bank of Korea, the nation's central bank, confirmed that the economy was expanding faster than expected. Compared to the previous three months, gross domestic product grew 1.7% in the second quarter, which economists say translates into a 7% annualized growth, the highest since the fourth quarter of 2003.

The solid economic expansion and the expectation of better profits in 2008 by Korean companies have fueled a rally on the Seoul Stock Exchange in recent months. That has created a wealth effect and underpinned a rise in local vehicle sales. "The booming stock market has served as a catalyst in creating demand for expensive cars," Suh says. The Seoul bourse's benchmark Kospi index has soared some 40% so far this year. Local sales of the Grandeur (called the Azera in the U.S.) premium sedan, for example, jumped 20% in the quarter.

Hyundai executives hope the sales gain at home will herald a jump in exports as the company adds new models to its lineup to improve its brand image. In the U.S., where it introduced the Azera last year and the Veracruz crossover sport-utility vehicle this year, Hyundai plans to launch a rear-drive, near-luxury sedan next year to compete with the likes of the BMW 5 Series (see BusinessWeek.com, 4/2/07, "Hyundai Pitches Luxury in the U.S."). In Europe this fall, it will start selling a new compact car, the i30, designed and developed in Europe to cater to drivers there.

Currency Fluctuations Subsiding

There are signs its game plan to go upscale might be paying off. Hyundai's average selling price for overseas shipments hit an all-time high of $13,057 in May, up 11.4% from a year earlier. In the all-important U.S. market, it sold 132,390 vehicles in the second quarter, up 27% from the previous quarter and 3.4% from a year earlier. In June, its U.S. market share rose to 3.39%, from 2.97% a year earlier (see BusinessWeek.com, 5/21/07, "At Hyundai, Branding Is Job 2").

Just as important, Hyundai's profit margin has begun expanding again. Its net profit margin, which dropped to 5.6% last year, from 8.5% in 2005, is expected to rise to 5.9% this year and 6.5% next year, according to Prudential Investment & Securities.