How Hyundai Sells More When Everyone Else Is Selling Less

As American automakers struggle for survival, South Korea’s Hyundai Motor appears to be gaining on the pack with bold marketing and broad-based initiatives to improve quality. The company made a splash earlier this year when it unveiled its Hyundai Assurance program allowing customers to return a car if they lost a job. Competing automakers and other types of businesses soon followed with similar promises.

Years earlier, however, Hyundai had already begun to invest in new models and quality programs that have put the company on solid footing to profit from the current chaos in the global auto industry, according to Wharton faculty.

“There’s a sense that what Hyundai is doing on many fronts is working in terms of actually gaining some advantage during the crisis,” says Wharton management professor John Paul MacDuffie, who specializes in the automotive industry and is co-director of the International Motor Vehicle Program.

In 2008 — a brutal year for the auto business — Hyundai’s global unit sales rose 2%, lifting revenues by 5%. In the first three months of this year, the company’s global market share rose to 4.7%, compared to 4% a year earlier.

MacDuffie says Hyundai first made a name for itself in the United States in the late 1980s when it exported the low-cost Excel to the American market. The car was popular at first, but soon earned a reputation for developing rust and other quality problems. “Sales dropped and it left reputational damage in consumers’ minds,” according to MacDuffie. In the 1990s, Hyundai attempted to introduce a range of high-priced vehicles into the U.S. market, but MacDuffie says the company was “haunted” by its reputation: “Quality has always been Hyundai’s Achilles heel in … the U.S.”

It was another economic crisis — the 1997 Asian financial collapse — that sowed the seeds for Hyundai’s recent success, according to MacDuffie. He notes that during that global economic slump, the South Korean currency fell sharply. As a result, Hyundai’s competitor Daewoo went into bankruptcy and Hyundai was able to acquire another Korean automaker, Kia Motors. Surviving consolidation in its home market, Hyundai emerged from the crisis with new strength to address its problems.

Risky Moves

Beginning in 2001, MacDuffie says, Hyundai launched a major push to upgrade quality with a daily focus on improvement through new processes at its manufacturing plants, and from better design and engineering. At the same time, to help overcome its reputation for poor quality, the company announced a 10-year, 100,000-mile warranty. The Hyundai program was far more comforting than the industry’s standard three-year, 30,000-mile warranty, and essentially guaranteed the car for its entire expected working life.

“It was risky, but a powerful impetus to improve quality,” says MacDuffie. “They pulled it off and it helped them make a major jump forward.” This year, Hyundai’s Genesis was named 2009 Car of the Year by independent automotive journalists at the North American International Auto Show in Detroit.

Meanwhile, as it was working to improve quality, the company also was expanding in Europe, the United States and in developing markets. MacDuffie notes that the Hyundai Sonata was selected to be the official taxicab during the Beijing Olympics and the company has been more successful than some of its Japanese competitors in gaining market share in India and China. “That’s another risky, big bet that has paid off well for them,” he says.

In January, Hyundai grabbed attention in the United States as consumers were reeling from the collapse in housing and stock market prices and growing fears of unemployment, by offering to take back a car that is financed or leased by a worker who subsequently loses a job. When it was introduced, the Hyundai Assurance program was seen as more than just a marketing campaign, but also as psychological affirmation that the economy was not going to collapse entirely.

“What they are doing is empathizing with the plight of people who are struggling,” says Wharton marketing professor David J. Reibstein. He observes that the Assurance program is similar to the warranty that Hyundai used to build confidence among consumers. “There might be hesitancy to buy because people don’t know if they will be employed, but this provides the safety net which allows them to say, ‘I can still afford to be in the market.’ Clearly, the market needed some stimulation and Hyundai was able to provide that stimulation.”

Analysts proclaimed the program a success when Hyundai reported U.S. sales were up 14% in January compared to the same month a year earlier, while the entire U.S. auto market fell 37%.

Reibstein says the offer was a groundbreaking concept, which was later adopted by other companies. The idea might be used successfully in other industries to inspire confidence among consumers, he adds. Big-ticket durables would likely benefit the most, although he says the idea might also succeed in real estate. Pfizer has a similar program assuring the users of its products that they will be able to continue to receive medication if they lose their jobs. “It won’t work with every product,” explains Reibstein. “It’s got to be a product with greater risk. What this strategy does is reduce the risk to the customer.”

John Zhang, another Wharton marketing professor, agrees the program was a good move by Hyundai. He adds that the company’s U.S. customers, who tend to buy cars at lower price points, may be more affected by the recession than other carmakers’ customers. “Economic uncertainty and layoff threats will certainly make customers think twice before they purchase a new car,” he says. “Hyundai’s offer will convince those on the fence to jump over now.”

In addition, the program is likely to generate strong goodwill toward the company. “Hyundai scores a huge publicity point, by being compassionate towards [those who are] down and beaten,” according to Zhang.

In another surprising marketing move, the company last month offered to send buyers of some Hyundai models up to $333 a month for six months. The catch: The deal applies only to cars on which Hyundai is offering rebates. Buyers may opt for either the rebate or the monthly check (not both), and the value of the two offers is about equal. But such programs tend to generate consumer buzz.

Wharton management professor Lawrence G. Hrebiniak says Hyundai’s success is the result of a cohesive strategy clearly designed to differentiate the firm from its competitors, combined with a willingness to make substantial investments to carry out the plan.

Hrebiniak adds that the company is now taking a lead in endorsing new, tougher environmental standards for the industry: It has promised to meet new federal energy standards requiring that cars get 35 miles per gallon of gasoline five years ahead of the 2020 deadline. “Something like that is just one more part of differentiation strategy — to say, ‘We’re cool. We’re high quality people,’” says Hrebiniak. “It’s all on TV. They won Car of the Year. They are the first mover in helping people in trouble get over the hump and now they are a leader when it comes to the environment.”

Hyundai is not afraid to spend money to reap benefits down the line, Hrebiniak notes. “Here’s a company that no one really knew about other than it was a South Korean company that made cheap cars. They’re biting the bullet and investing a lot in research and development and advertising while also improving quality, and letting people know that they will be there for them if they need help.”

The Chairman: A Revered Convict

MacDuffie says the Hyundai’s ability to take bold actions may lie in its structure as a family-run company that is dominated by its chairman, Chung Mong-koo. Hyundai Corp., the automaker’s former parent company, was founded by Chung’s father in 1947. By the time the automotive business, Hyundai Motor Co., was founded in 1967, the corporation had grown into a chaebol – or jaebeol, a conglomerate that benefits from government ties. “Chung is viewed as all powerful, and for him to drive top-down initiatives around quality would no doubt get the attention and responsiveness of everybody in the company,” says MacDuffie. Even after he was arrested in a corruption scandal in 2006, Chung remained in control of the company, according to press reports, using a telephone from his jail cell. He was serving a three-year suspended sentence when he was pardoned by South Korea’s president, Lee Myung-ba, in 2008.

“Within the company, he remained admired and revered,” says MacDuffie. “In the larger population, my sense is that many admire these larger-than-life figures who have driven so much of Korea’s economic growth, and some feel the government is overzealous in prosecuting them.”

He adds that Hyundai’s governance structure is geared toward innovation and improvement, even including members of its parts supply organization, known as Hyundai Mobius, in the highest levels of the corporation. Many of Hyundai’s top leaders have come through the supplier network. “It seems clear that in an era when a lot more design is done by suppliers, the very close relationship between Mobius and Hyundai Motor has helped Hyundai to have effective designs and good quality,” says MacDuffie.

MacDuffie points out that Hyundai’s attitude was captured in a speech delivered by John Krafcik, CEO of Hyundai Motor America, at the Chicago Auto Show in February. Krafcik called out his peers for their grudging response to environmental and safety concerns, corrupt business practices, outlandish compensation and long-time reliance on government assistance. He compared the experience of a customer entering an auto showroom to going to the dentist.

 “While no other industrial sector has a greater impact on the health of our economy, there is no other business with a bigger perception problem. Let’s face it — our reputation as an industry is horrible,” Krafcik said. “In the U.S., we are viewed for the most part as a slow, dim-witted industry that is typically unresponsive to consumer and environmental needs. If that weren’t bad enough, our executives are criticized for lavish compensation, abundant perks and unnecessary entitlements.

 “We need to work more consistently as an industry to change those negative perceptions,” he continued. “By taking personal responsibility for our shortcomings, rather than ignoring them, we gain back our credibility.”

Hrebiniak notes that it is hard to say whether Hyundai’s current strategy will be profitable in the long run. “They may be spending more than they are reaping now, but that could be part of the strategy — to incur costs and hope it all comes together not only in sales and market share, but also in terms of profitability,” he says. “They are spending money to make money. I give them credit.”

Zhang agrees that Hyundai is steadily gaining approval in markets around the world. “This is an unassuming, late-coming company that is consciously trying harder to please customers than anyone else in the marketplace,” he says. “When you try harder, sooner or later, you get noticed. Hyundai will soon, if not already, become a force to be reckoned with for the U.S. and Japanese manufacturers because it gives the most bang for customers’ money.”

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