Korea's Hyundai Begins Its Hybrid Push

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Hyundai execs stress that what's significant for their company is that Hyundai engineers developed major parts such as batteries, electric motors, and converters in Korea to avoid patent disputes with the likes of Toyota. "We now have all the key ingredients to compete in the hybrid segment," says Lee Ki Sang, director in charge of developing the hybrid system at Hyundai.

High Hybrid Hopes

Going for LPG instead of gasoline may limit Hyundai's export chances, but in Korea the move will help the company take advantage of low prices for propane. LPG costs about half the price of gasoline in Korea. For the price of one liter of gas, the Elantra hybrid can travel 39 kilometers, according to Hyundai; that's one kilometer better than the latest version of the Prius. Hyundai aims to sell 22,500 Elantra hybrids by the end of next year but wants to increase total annual hybrid sales to 50,000 once the Sonata hybrid is launched.

The fuel economy of the Elantra hybrid is boosted by the engine's "auto stop" function, which automatically switches off the ignition at idle. A driver traveling 20,000 km a year can save about $1,100 in fuel costs annually when compared to a conventional Elantra, which has the identical 1.6-liter engine that is rated at 15 km per liter. "This translates into the fastest payback period of any hybrid vehicle on the market today," says Hyundai spokesman Oles Gadacz.

Auto analysts say defending the home market is necessary for Hyundai as it makes the bulk of its earnings there. "Korea is not only the test market for Hyundai but also a profit center supporting its overseas expansion," says Kim Jae Woo, an auto specialist at Bermuda-based fund manager Orbis Investment Management. The weak Korean currency, down 26% since the start of 2008, increases Hyundai's competitiveness abroad, and the company's overall profitability is allowing Hyundai to keep spending in R&D and marketing.

Helped by the weak won and its strength in its small-car lineup, Hyundai has emerged as a beneficiary of the industry slump. It is doing well in Korea, too: The combined share held by Hyundai and its subsidiary Kia Motors in Korea jumped to 84.2% at the end of June, from 74.4% a year earlier. That's partly because General Motors' (GM) cash-strapped Korea subsidiary, GM Daewoo Auto & Technology, is losing ground. As a result, Hyundai's stock is up 92% so far this year, against a 27% gain by the benchmark Kospi index on the Seoul bourse. "Hyundai faces hurdles ahead to become a top player, but it certainly has a fighting chance," says Orbis' Kim.

Moon is BusinessWeek's Seoul bureau chief.

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