Image: Hyundai Genesis
Stan Honda  /  AFP - Getty Images
The Hyundai Genesis is a new rear-wheel drive full-size luxury sedan due to go on sale in the United States later this year.
By Roland Jones Business news editor
msnbc.com
updated 1/30/2008 12:44:56 PM ET 2008-01-30T17:44:56

The appearance of Chinese automakers at this year’s Detroit auto show sparked a new round of gossip and speculation over when companies such as Changfeng and Geely will start selling budget-priced cars in the coveted U.S. market. But perhaps analysts and executives should have focused on a more immediate competitive threat — South Korean automakers.

The odds are slim that any Chinese manufacturers will begin selling cars in the United States before 2009 at the soonest. But Hyundai, the world’s sixth-largest automaker, has been marketing cars here for two decades, and it once again impressed pundits at the show with its latest offerings.

Mark Rechtin of trade publication Automotive News referred to the “scary-good Koreans” at the show and singled out the Hyundai Genesis, a new rear-wheel-drive, full-size luxury sedan due to go on sale this year.

“Can someone explain to me how an engineer chained to his desk in Ulsan can create a better Buick than a team of guys in Detroit?” Rechtin wrote. “The Hyundai Genesis’ performance and interior quality could turn the near-luxury sedan segment on its ear. If dealers can convince Americans to shell out 35 grand for a rear-drive V-8 Hyundai with leather everything, look out. Same goes for the Kia Borrego and the full-sized SUV segment.”

The success of Toyota, Honda and Nissan in recent years is well-known, but it’s not just Japan’s automakers taking the U.S. market by storm. Hyundai and Kia also have made significant inroads, with Hyundai enjoying record sales of the Sonata sedan it builds at its plant in Montgomery, Ala.

Now, after years of toiling in the shadow of Japan’s heavyweights, it looks as though Hyundai is trying to “do a Toyota,” shrugging off its image in the United States as a budget producer and looking to move into the more profitable luxury car segment.

The Genesis looks like the first step in that strategy, taking aim at models from Lexus, Cadillac, Infiniti, Mercedes-Benz and BMW, which it likely will undercut on price.

“This looks like a very good product, but my question is, will you really buy a Hyundai if you’re looking for a luxury vehicle?” said Jack Nerad, executive market analyst for Kelley Blue Book, which tracks the automotive industry.

“But I don’t want to underestimate Hyundai,” he added. “Similar things could have been said about brands like Infiniti and Acura 20 years ago, and back then the line was, who would believe a luxury car from the Japanese? People underestimated their ability to play in the segment.”

The difference between Hyundai and Toyota, Nissan and Honda is that each of the latter three started a new sales channel (Lexus, Infiniti and Acura) to cater to the luxury buyer, Nerad said.

“To spin imagery around luxury — that would have been a stretch for the Toyota, Honda and Nissan brands, and I think it’s also going to be a stretch for the Hyundai brand,” he said. “You can only stretch a brand so far in terms of what it means to people. It may say good value, but that doesn’t mean that’s a priority when you move into the luxury end of the spectrum.”

With U.S. auto sales expected to be stagnant this year and the economy struggling, Hyundai faces a difficult road.

For now, Hyundai appears to be holding its own. The Korean automaker sold its millionth Sonata in December and posted 145 percent growth in U.S. sales for its flagship sedan, the best result of any vehicle in the market, according to figures from Autodata.

Hyundai’s strong sales performance in December came as Detroit’s automakers reported a lackluster sales month amid the worst U.S. sales slump in nearly a decade.

The Sonata has steadily gained share in the past five years, growing from 2.2 percent of the midsized car segment in 2002 to 5.6 percent last year, according to Jesse Toprak, executive director of industry analysis at automotive Web site Edmunds.com.

“The type of market we’ve had over the last few years has been good for them — people have been looking for smaller, cheaper more gas-efficient vehicles," he said. "I would have expected more robust growth, but they were able to grow over the last few years in a shrinking market, so it’s good news for them.”

Toprak said December’s Sonata sales jump looked “suspiciously high” and may have been boosted in part by incentives and low-profit sales of cars to rental fleets. Hyundai Sonata sales incentives hit a record of $4,218 per vehicle in December, he said.

“You tend to see car sales rise systematically — it takes time, and you tend to see a buildup in numbers,” he said. “But Sonata’s numbers more than doubled from the December before, so how do you explain people rushing out and buying twice as many Sonatas? This tells me that it’s highly unlikely that this is consumer demand on its own that’s driving up sales.”

Hyundai’s desire to shed its bargain-basement image, which comes from its lower cost compared to other midsized sedans, may be fueled by concerns about Chinese automakers coming to the U.S. market, as they are likely to sell on price rather than quality, according to Nerad.

“The Koreans still have a lot of potential growth here in the United States, but they could find themselves stuck if they depend too much on the low end of the marketplace and Chinese built cars undercut them in terms of price,” he said. “This may be one of the reasons why they’re looking to go upmarket."

Major automakers have essentially left the sub-$10,000 market in the United States open to competition, notes Edmunds.com’s Toprak.

“Even the Korean automakers are above this price point — the cheapest Hyundai goes for over $11,000,” he said. “So this is a little market that can be captured by the Chinese automakers, and the reason why it’s open to them is most other automakers don’t think they can make money in that price range, or they don’t want to put their name on a product that cheap. But Chinese automakers could probably make money in that segment because of the cheap cost of car production in China.”

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