The Hyundai Success Story (Hyundai Repeats History)
MiBiz • January 9, 2006
by Jim Gillette
It’s time for our annual look at investment returns for the world’s automakers. Given the dismal headlines concerning General Motors and Ford, it seems that many in the media have pegged the auto industry as one of the worst losers in terms of stock performance. The accompanying table illustrates, however, that companies headquartered outside of the US seem to have been doing well.
The clear winner, Hyundai, would have rewarded a US investor a ten-fold return on their investment over a five-year period ended in mid-December: something Peter Lynch, former manager of the Fidelity Magellan Fund, would call a “ten-bagger.” There is, of course, some luck in timing the initial purchase.
There is no question that Hyundai and its Kia subsidiary are doing well with vehicle sales. According to CSM Worldwide forecast analysts, by 2011, Hyundai will have passed DaimlerChrysler, Honda, and Nissan to take 7% of the global light vehicle market. What is especially interesting is that Hyundai appears to be following a strategy similar to that of the Japanese automakers when they entered the US market several decades ago.
Following its near disastrous North America experience of the 1980s, Hyundai had not been considered by many to be a serious contender. Sales took a dive shortly after insurmountable quality problems plagued the first vehicles sold here in the late 1980s. The Sonata plant in Canada was closed and the production equipment dismantled not too far into its brief life.
Interestingly, Hyundai’s experience was comparable to Toyota, which had serious durability problems with the first cars it shipped to the US during the 1950s. Toyota chose to pull out of this market in 1958 and go back to the drawing board. The company returned in the early 1960s with products much more suited to the requirements of US drivers.
Also comparable to Hyundai, Toyota and another Japanese company, Honda, spent the first few years in this market going after the “low-end” buyers; in effect “sneaking up” on the incumbent market leaders of GM, Ford, and Chrysler. Honda hadn’t even build it’s first car for public sale until 1963 and their cars weren’t available in the US until 1970 and was not viewed as a viable threat. After all, it was just a motorbike company.
Of course, the big events that propelled Japanese cars into huge market share territory were the two oil shocks of the 1970s. The Big Three had pretty much moved on to larger, more expensive metal. Small, fuel-efficient vehicles made by the Big Three were an unqualified disaster. Who can forget the Chevy Corvair? Moving into the 70s, such names as Vega, Pinto, Duster, and Chevette will live in infamy for their lousy quality and poor durability.
The oil shocks were an enabling factor for the Japanese carmakers, but at the same the sizable baby boom generation was reaching car-buying age. Volkswagen had made great inroads with the younger set in the 1960s, but lost a great favor in early 70s when the Rabbit proved to be an unworthy successor to the classic entry-level Beetle whose air-cooled engine was forced out of the US by new emissions regulations.
As has been pointed out by chroniclers of innovation, Clayton Christensen of Harvard in particular, new entrants into relatively mature product markets are usually most successful when they capably produce products targeted at entry-level buyers. Incumbent producers tend to continually push their offerings upscale seeking higher margins from more differentiated products by selling to customer segments that are less price sensitive.
Organizational structures evolve into staid, high-cost behemoths that no longer possess the agility to meet the needs of entry-level buyers profitably. Sound familiar?
Hyundai now has its first auto plant operating in the US and is well along with its plans for a second. Over the next five years the company will build a second plant here, launch new truck products, and, perhaps, push into the luxury market. While the story sounds a lot like that of the Japanese carmakers, this time it is not only the Big Three that have a formidable competitor at their heels.