Issue: Hyundai sales lag in spite of high quality, reasonable prices
Commentary by: David Vinjamuri

Last month at the Jacob Javitz center in New York, Hyundai introduced the Genesis sedan.  This $35,000 sport sedan is an ambitious and impressive challenger to such auto industry heavyweights as BMW, Infiniti and Lexus.

More impressive than the styling of this new car (which looks far less like the odd panoply of competing design themes that defined the Hyundais of the 1980’s) is the expected quality.  In fact, in 2006, J.D. Power’s rated Hyundai #3 in initial quality - above both Toyota (#4) and Honda (#6).  In addition, Hyundai models in the past several years have been regularly recommended by Consumer Reports for reliability as well as value.

In spite of this good news, Hyundai is in a pickle.  BusinessWeek reports that “last year the Korean automaker’s earnings fell 34% … and its operating margin was halved … Hyundai’s sales bank [of unsold cars] has gone largely unnoticed.”    The appreciation of the Korean won against the dollar has neutralized much of Hyundai’s pricing advantage and the brand is under pressure to sustain premium pricing.

Hyundai’s marketing chief, Steve Wilhite (COO of Hyundai Motors America) is struggling to find a recipe to make Hyundai a premium brand.  The current plan of the company lies with an upcoming advertising campaign intended to position the brand as the choice for rational, clear-headed buyers unaffected by marketing hype.

This plan might or might not work in the long-run, but it is an expensive and unlikely way to solve the brand’s woes.  Wilhite’s thinking is one-dimensional, and his impressive resume (helping to lead turnarounds at Volkswagen, Apple and Nissan) points to the reason - he has primarily worked in single-brand environments.

Faced with the same challenge, a packaged-goods marketer might think differently.  Instead of trying to reinvent a failing brand with a stable of good products, why not create a new brand for those good products.

Hyundai consumer research seems to bear this out.  As Businessweek points out, consumers exposed to concepts for new Hyundai models were actually less likely to express purchase interest than when the concepts had no brand attached.  Instead of being a sail for the brand, the Hyundai name is currently an anchor.

Of course, there are good examples of brands which have repositioned themselves in the automotive industry - and Mr. Wilhite has worked on two of them.  Volkswagen was in a brand netherworld before re-emerging with the “Drivers Wanted” campaign and the New Beetle.  Nissan was virtually a commodity when Wilhite helped reinvigorate the brand.

Unfortunately for Mr. Wilhite, both of those brands had underlying heritage which made refreshing the brand more achievable.  Nissan was beloved of a generation of drivers who remembered it bringing real sports cars to the masses with the 240Z - and these drivers were now of an age and family size to require a Maxima.   Volkswagen captured the hearts of the masses with the original Beatle.  Repositioning it as the brand that cared about drivers was more like reintroducing the original concept than arguing with consumers.  (Nissan does of course have a second brand, Infiniti, but more on that later.)

Hyundai’s problem is that it has no brand heritage to look back on.  Hyundai came into the U.S. market much as Yugo did - as a cheap car, cheaply made.  The early Hyundai Accent was a dreadful tinny little car that did not engender much love.

To be fair, there are at least two examples of automakers with questionable initial offerings and poor brand reputations turning into automotive powerhouses - Toyota and Honda.  The first Hondas were also tinpots known more for their propensity to rust than anything else.  Toyotas had a similarly undistinguised brand as an inexpensive Japanese car.

These brands, however, were saved by a divine intervention that Hyundai and Mr. Wilhite can hardly hope for - the OPEC oil crisis of the seventies which forced consumers to re-consider small cars.

These same two companies do offer a more useful model of dealing with entrenched consumer opinions about their automobiles, however, with their Lexus and Acura brands.  Both Toyota and Honda (along with Nissan) faced the difficult question of how to move upscale as their consumers aged.  They also saw a brand opportunity as no domestic or foreign carmaker was able to deliver “reliable luxury” to the U.S. consumer.  They understood that their brand names did not connote luxury to U.S. consumers and might never do so.  So they chose to build new brands at huge expense.  It was an investment well worth making.

For Hyundai, rebranding would be well worth the effort.  Merely renaming the company and the dealerships would be difficult, and consumers might see through the effort.  It might be smarter altogether to launch a new brand and begin to put updated versions of the smartly designed, reliable and clever new cars into this brand.  Over time, the Hyundai name could be retired.

This begs the question of dealer networks.  The U.S. auto market is, unhelpfully for consumers, largely driven by distribution issues.  Most dealerships still distribute only a single brand and consumers are reduced to driving all over town to shop for a new automobile. (Imagine doing the same thing to shop for a dishwasher and the absurdity becomes clearer.)  This is justified by the service end of the business, but at the end of the day it does no favors to anyone.

Hyundai should look at partnering with another car manufacturer needing to penetrate the U.S. market.  This model is already common at the high end where brands like Aston Martin, Ferrari and Lotus lack the sales volume to support independent dealer networks.  Renault might make a good partner as it is gearing up for a re-entry into this market.

There are reams of data to support the fact that consumers don’t like to be argued with.  The path Hyundai is pursuing with rebranding will be expensive and might fail.  Which would be a shame, because the automaker is finally producing some vehicles worth considering.

This entry was posted on Sunday, May 13th, 2007 at 12:04 pm and is filed under commentary, Press, Hyundai. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.