Saturday, February 28, 2009

Is Hyundai's Black Ink a Trend?

U.S. car sales plunged to a 27-year low in January, dragging down Detroit's Shrunken Three and even mighty Toyota Motor (TM). But one automaker has bucked the trend: Hyundai Motor. The Korean company, whose name was once synonymous with cheap, logged a 14% sales gain in what was a dismal month for almost every other carmaker.

It's too soon to say whether that marks the start of a trend that could see Hyundai emerge from the shadow of its larger Japanese rivals, Toyota and Honda Motor (HMC). For one thing, the jump owes much to Hyundai's 22% drop in sales in January 2008. And the company has piled on the discounts. Incentives on its Sonata sedan, Santa Fe SUV, and other models average $2,611 per vehicle—about triple those of a year ago. Faced with bloated inventory at its single U.S. factory in Montgomery, Ala., Hyundai has scaled back production there and is unloading cars on rental-car agencies: Nearly 30% of the 24,500 vehicles it sold in January went to such fleet buyers at virtually no profit.

Hyundai can afford to sell its cars on the cheap, at least for a while. Its balance sheet is far healthier than those of its Detroit peers. And it's getting a big lift from the weak won. The Korean currency has dropped by nearly a third against the dollar in the past year, so Hyundai pockets more cash from each car it sells in the U.S. Toyota and Honda, on the other hand, are seeing their earnings wiped out by a yen that is hovering at a 13-year high. Brokerage Korea Investment & Securities figures more than half of Hyundai's projected $1.5 billion profit in 2009 will come from the favorable exchange rate. "The currency swing has been a godsend for Hyundai," says Park Kyung Min, chief executive of Seoul fund manager Hangaram Investment Management.

The Korean automaker is plowing a good chunk of that windfall into marketing. On Jan. 3 it kicked off a program that lets customers who finance their purchase return the car and have the loan canceled with no hit to their credit rating. Detroit is taking notice. "We may all have to get more creative than we have been to deal with low consumer confidence," says Ford Motor's (F) marketing chief, James Farley.

To lure more Americans into its showrooms, Hyundai is spending heavily to buy its way into their living rooms. The carmaker forked over millions of dollars for three Super Bowl spots, including a pair extolling its new Genesis, which captured the prestigious North American Car of the Year award at this year's Detroit auto show. It has also shelled out to share airtime with Hollywood's glitterati: The carmaker bought TV time during the Academy Awards after Ford and General Motors (GM) pulled out. "It's important to keep our foot on the gas even in a down economy," says Joel Ewanick, Hyundai's U.S. marketing boss.

The aggressive push, though, could backfire on Hyundai. If it doesn't pare back fleet sales, the carmaker could dent the resale value of its autos, because rental vehicles typically end up on used-car lots within two years. And the expensive marketing will erode margins once Korea's won starts to strengthen again. It will take more than a single month of industry-beating numbers to prove that Hyundai has its formula right.


No comments: