How Hyundai and Kia Will Raise Image, Prices in Europe

Hyundai Europe’s new president spoke about sales records, the brand’s leadership in the fledgling market for fuel cell cars and the upcoming launch of Hyundai’s performance subbrand. Interspersed through his speech were uplifting words such as “momentum” and “sustainable growth.”

Flanking him on each side were the i20 subcompact hatchback that will compete in the World Rally Championship next year and the futuristic Hyundai N 2025 Vision Gran Turismo racing concept -- both expressions of a new, more emotionally charged Hyundai.

Kim’s message was simple: “We aim to become the leading Asian car brand in Europe.” What Kim forgot to mention, however, was Hyundai’s discreet decision to quietly abandon his predecessor’s ambitious target of a 5 percent market share. Nissan, currently the brand to beat among Asian marques in Europe, has a 4 percent market share, leaving it comfortably ahead of Hyundai’s 3.3 percent. Including sibling brand, Kia, the two Korean automakers have a 6 percent share of the European market. Their global combined volumes amounted to nearly 8 million cars last year, making them the world’s fifth-largest carmaker. Hyundai and Kia, however, have made it clear that while they share platforms and technology they want to be viewed as individual brands, not a pair.

Although both brands are on track to sell a record number of cars in Europe this year, they are only treading water as each grows in step with the overall market. To graduate to the next level, they need to be perceived as more aspirational – one reason why Hyundai plans to transform its Genesis and Equus upmarket cars into a luxury brand encompassing six models that may come to Europe before the end of the decade. Kia also is determined to get customers to spend more by adding high-performance models such as the Optima GT, which goes on sale in Europe next year.

“We can’t achieve what we want to achieve by trying to be cheap,” Kia Europe Chief Operating Officer Michael Cole told Automotive News Europe. “I don’t think we are a budget brand and I think our transaction prices show that, but for some people we still are.”

‘Serious competitors’

Both brands have been hugely successful winning sales from other carmakers over the past decade by offering a lot of car for relatively little money. Potential customer concerns that the low price comes at the expense of reliability and quality are eased by Hyundai’s five-year unlimited warranty and Kia’s seven-year limited-mileage warranty. Most automakers competing in Europe offer a warranty of two to three years.

“They are more-than-serious competitors. If you are asking me whether I am looking at Hyundai and Kia, I would say, ‘Of course’,” Guillaume Cartier, Nissan Europe senior vice president of sales and marketing, told ANE. Even Volkswagen’s perfectionist ex-CEO, Martin Winterkorn, famously berated his engineers and designers after finding “nothing clanks” when fiddling with the steering wheel of a Hyundai during an inspection of the competition at the 2011 Frankfurt auto show.

When Europe-based Hyundai and Kia executives are asked about their visions for the brands in the future they tell a similar story. Both want their brands to offer sporty, modern, innovative, design-oriented cars that are fun to drive, reliable and affordable.

Hyundai recently strengthened its design department by hiring former Lamborghini, Seat and Bentley chief stylist Luc Donckerwolke. The Belgian, who has been put in charge of creating Hyundai’s future look, is expected to eventually succeed Peter Schreyer as the group’s next head of design for both brands.

With ride and handling consistently listed as weak points, the group has made some key changes, such as luring Albert Biermann, former vice president for engineering at BMW’s high-performance M unit, to lead development of sportier Hyundai and Kia models. In addition, Hyundai set up a test center on the border of Germany’s ultra-demanding Nordschleife racetrack, joined the WRC and plans to have an N high-performance car in European showrooms within two years. It has also rejuvenated the bulk of its lineup, refreshing or revamping 80 percent of its model range this year alone, leaving the Hyundai i10 minicar that debuted in late 2013 as the oldest model in the portfolio.

Meanwhile, Kia is launching the fourth generation of its best-selling Sportage compact SUV, mulling an entry into the midsize wagon segment and venturing deeper into the fleet market. It hopes these upgrades will boost European sales from an estimated 385,000 this year to 500,000 by 2020, a target analysts doubt can be reached (see chart below).

 Several setbacks

The ride hasn’t always been smooth for Hyundai and Kia in Europe. They came under intense political scrutiny three years ago when former French Industry Minister Arnaud Montebourg, in an effort to protect domestic carmakers, branded the two as trade dumpers and pushed for the EU to take action. This even sparked tension between the sister brands as Hyundai felt it faced the brunt of an anti-Korean campaign, while the backlash never really hit Kia despite its substantially larger share of imports. “The spotlight wasn’t on Kia so much. Montebourg really targeted Hyundai as the parent,” said one person familiar with the situation. This came despite Hyundai sourcing roughly 80 percent of the cars it sold in Europe from its factories in the Czech Republic and Turkey at the time. Today that number is 90 percent. Kia, which has one European plant, in Slovakia, relies much more heavily on imports out of Korea.

Overseas markets are becoming more important for the automakers as they face domestic trouble, including rising labor costs, strikes and the appreciation of the won against the euro. These and other challenges have put the automakers in cost-cutting mode at home.

‘100 percent utilization’

Despite these challenges, one thing neither brand plans to do is cooperate more closely than they already do. The “red” and the “blue” halves – as staff at Kia and Hyundai refer to themselves, respectively, in a nod to their corporate colors – have virtually no contact once vehicles go beyond the development stage. Not even cars that share the same underpinnings run off of one assembly line, a fairly common practice in the industry. “People who work for Hyundai should have their heart beat for Hyundai,” Thomas Schmid, who is Hyundai Europe’s chief operating officer, told ANE. “Why do we need more synergies when our factories are already running at 100 percent utilization?”

The desire to be separate extends to their leadership teams. “At sales and marketing they don’t allow personnel changes between Hyundai and Kia,” said one of the automaker’s managers, who asked to remain anonymous. “But I think we have to work in that direction in the future because it is better for people’s development,” said the source, who said the strict separation of staff could be self-defeating for the companies.

The biggest challenge in Europe for both, however, is establishing an identity that clicks with consumers and gives them a reason to stick with the brands, especially as the two try to gradually lift transaction values. Analysts fear that many price-oriented car buyers might abandon Hyundai and Kia the second time around in favor of a better deal from the lower-cost rival.

While so-called “value-for-money” was once viewed positively throughout the organization, some managers at Hyundai and Kia now feel the reputation reinforces perceptions that their cars are cheap and they worry these migratory customers are poor ambassadors for the two Korean brands.

“Their cars tend to be bought by people who treat cars a little bit like white goods, where the product is a value proposition. That’s why they are the market leaders in terms of warranties -- it’s a great USP [unique selling point],” IHS Automotive analyst Tim Urquhart said.

The two need to lift prices as their cost advantage is in some ways eroding, making it easier for younger budget brands such as Renault’s no-frills Dacia marque to become more firmly established in Europe.

Whether the effort to appeal to customers on a more emotional level and to gain a following among driving enthusiasts will succeed remains uncertain. “It will be tricky. Are Hyundai and Kia customers really bothered about driving dynamics? Do they want a stiff-riding, sharp-handling 3 series-style vehicle?” Urquhart asked. “By going down that route, the two could end up accidentally upsetting the customer base they already established.”