Global Economics

Korean Carmaker Hyundai Goes Green


It'll take a lot to catch up with Toyota and Honda, but Hyundai has ambitious plans to be a fuel efficiency leader by 2015

For years, Hyundai Motor studied Toyota's (TM) renowned meticulousness in manufacturing to improve the quality of its own cars. Now the Korean company is setting its sights a lot higher: By 2015 it wants to leapfrog Toyota in green car technologies in the U.S. market. The company's hope is that its strategy will win cachet for the brand in America and other key markets.

But Hyundai's goal is nothing short of ambitious. Executives say their aim is to have the company's entire U.S. fleet averaging 35 mpg in 2015. Currently, Hyundai's average is 28.6 mpg, slightly lower than Toyota's 29 mpg and Honda's 28.7, according to the U.S. Environmental Protection Agency. That might seem a small margin until you consider Toyota's technological lead: Japan's largest carmaker has been selling its Prius gas-electric hybrid cars for a decade, during which it has had a chance to perfect the complex commercial production process.

To catch up, Hyundai says it's devoting lots of money and engineering brainpower. At its research labs in Namyang, south of Seoul, nearly 2,000 engineers are racing to prepare gas-electric hybrid and fuel-cell engines as well as flex-fuel and clean diesel powertrains. The company won't disclose how much it's spending, but it's forecasting an overall research and development budget of 5.2% of revenues this year, or roughly $1.4 billion. "We've achieved some breakthroughs," says Yang Woong Chul, senior executive vice-president, who heads the company's Eco Technology Center.

Hyundai won't have a hybrid on the road in the U.S. until its Sonata goes on sale in 2010, but the company is betting that it can make incremental progress. By next summer it will release a hybrid compact model, the Elantra, at home, its first with lithium-ion polymer batteries and a combustion engine that will run on propane instead of gasoline.

No Prototype Unveiled Yet

That would make Hyundai the first carmaker anywhere to introduce lithium-ion polymer batteries commercially. Hyundai says such batteries weigh 35% less than current nickel-metal hydride cells and are 40% smaller. They also last 1.5 times longer than nickel-metal hydride batteries, generate less heat, and are more resilient to shock than lithium-ion batteries. And because the polymer resembles a gel, the batteries don't have to conform to a set shape, allowing engineers to pack the batteries almost anywhere they want on the vehicle, Hyundai executives say. The bulkiness of batteries on hybrids has been a problem for engineers for years.

Being a latecomer could also be a benefit in another area: gas-electric computer technology. When Toyota began selling the Prius in the late 1990s, it had to invent the hybrid precision components; Hyundai only has to improve on them. Hyundai executives say engineers have been working with parts suppliers to make its own hybrid system from lighter materials and fewer parts and to tinker with areas such as acceleration. "This makes our hybrids lighter and cheaper than the Toyota system," says Lee Ki Sang, director in charge of developing the hybrid system.

It's hard to say for sure if Hyundai's hybrids will live up to expectations because the company hasn't shown off a prototype. Meanwhile, Toyota continues to accumulate experience churning out hundreds of thousands of hybrid cars. Hyundai, which hopes to sell 50,000 hybrids within a year after it starts selling the Sonata hybrid, has yet to face the production hiccups that Toyota has already solved. "Achieving a successful test and delivering a commercial success are two different things," says Kim Jae Woo, an auto specialist at Bermuda-based fund manager Orbis Investment. "With Hyundai trying to address technical challenges on all fronts, its resources will be thinly distributed."

Hyundai executives say they're prepared to continue spending on green technologies even as the global auto market slips more deeply into a slump. The company says it's building up a lead over Toyota and Honda in diesel engines—ranging from 1.1-liter to 3-liter engines—and it's aggressively forging ahead with several fuel-cell research projects. Since 2005, Hyundai and its subsidiary Kia Motors have shipped 32 fuel-cell versions of the Hyundai Tucson and Kia Sportage SUVs to the U.S. as part of an Energy Dept. program. Another 34 vehicles are being tested in Korea under a government-funded plan to start producing thousands of hydrogen fuel-cell vehicles in 2012. The vehicles will be leased to fleet customers in Korea, the U.S., and other markets with hydrogen refueling facilities. "Building up our image as a green leader will more than compensate for the losses," says Hyundai's Yang.

Moon is BusinessWeek's Seoul bureau chief.

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