If History Only Repeats

In 1975, Peter Butterfield, a 22-year-old dealership field representative on his rounds for Ford Motor Co., spotted a small boxy blue car in a service stall at a rural Indiana Ford store.

“What's that?” he asked a service technician.

“That's a Honda,” said the technician. “They mostly sell motorcycles. I don't know why they're now trying to sell cars in this country.”

Looking back, Butterfield understands why — and how — Honda went on to become a major automotive force in the U.S., hitting sales of 250,000 vehicles by 1978, its eighth year as an importer, and selling nearly 1.5 million a year now.

Butterfield has studied that strategy and wants to use it to similarly transform Kia Motors America Inc., where the former Ford veteran is in his first year as chief operating officer.

“I believe Kia will be a tier one company in the future,” he says of a company that was bankrupt four years ago.

Butterfield has tracked how Honda and Toyota as well as Japanese electronics firms such as Sony entered the U.S. market and subsequently became wildly successful.

He says they did so using a business plan including these strategies:

Kia is beyond the initial stages of that evolution from a bit player to a major player. The Korean automaker entered the U.S. market in 1994 with the cheap Sephia compact car. It expects to sell 250,000 vehicles here in 2002 with a vehicle lineup that now stands at seven.

“We did $4 billion in revenue this year in America,” says Butterfield. “What blows me away is that until three or four years ago, we weren't selling cars in the Midwest.”

Kia's latest entry in the U.S. market is the Sorento, a mid-size SUV. It aims to compete with the likes of the Jeep Grand Cherokee, the Nissan Pathfinder and the Toyota Highlander.

The Sorento shares similar attributes with its competitors — including a V6 engine, 4-wheel drive and overall SUV ruggedness. But its price is about $6,000 less. The Sorento LX model is under $20,000. The average transaction price will be an estimated $25,000.

Butterfield says that at this point Kia must price below its competitors “or we wouldn't be credible — we have to price vehicles closer to brand value, and then raise the value.”

And then, in turn, raise prices to correspond to public perceptions of the enhanced brand value.

“As time goes by, as the dealer body gives us more attention and exclusivity, the brand value will come up and so will the prices,” says Butterfield.

The Sorento hits U.S. showrooms late this month. Kia expects to sell at least 50,000 units a year here. The vehicle may be hard to get if sales in its native Korea are an indication. Since its introduction there in January, it's become Korea's best selling Kia with a four-month backlog of retail orders.

“We expect to see the same phenomenon here, but we'll be competing with Korea for supply,” says Butterfield. “We're struggling for that because we expect it to be a smash here.”

Before the Sorento, Kia introduced the Spectra in 2000, the Optima and Rio in 2001 and the Sedona minivan earlier this year.

All are priced below the competition, all are upgrades compared to previous Kia products. The Sorento is larger and more powerful than the compact Sportage, Kia's first SUV in the U.S. market.

“We're at a stage in our evolution where our brand familiarity is low,” says Butterfield. “It takes time to build and get brand recognition in such a large market. Few people know we have seven vehicles. The Sorento signifies that Kia can compete in the largest segments.”

The company's “theme” is that Kia is not just a manufacturer of low-cost entry-level vehicles, but also “a car company to be reckoned with,” says its COO.

He adds, “I'm not pretentiously saying we're competing with Honda and Toyota, but we are a young company that's moving into the mainstream.”

The U.S. may be the world's biggest market, but it's also arguably the toughest, notes Butterfield.

“If you're not building high-quality vehicles within five to seven years of entering the U.S. market, you can't make it,” he says. “That's not a new business model.”

Key to the Kia strategy is establishing a dealer distribution network. That's hard for a new entrant. Butterfield says it usually means initially getting established dealers with other franchises to take on yours too, and at first “it's a roll of the dice for them.”

But as the quality of the vehicles grows, so should the quality of the distribution network, he says. Kia is working on that.

“We're upgrading the dealer body as we speak,” he says.

There are about 620 Kia dealers in the U.S. They're in every state but North Dakota. Of Kia outlets, 75% of them are “dualed” dealerships, 25% exclusive Kia stores.

Butterfield, who's held an array of sales and service field rep jobs while at Ford, wants to switch that ratio around.

“Having 75% ‘dualed’ and 25% exclusive is a big problem,” he says. “If a retailer has us and a half-dozen other franchises, we don't get the attention we need.”

He predicts that in three to five years 75% of Kia volume will be delivered through exclusive dealers.

Of about 25 new Kia dealerships that opened this year, 85% are exclusive to the brand.

One of the newest is Spokane (WA) Kia, a $2.5 million facility that opened this summer. It sold 134 vehicles last month and expects to sell 150 this month, says Scott See, a 22-year-old salesman who made $11,000 in July.

It's dealer principal Sid Kane's second Kia dealership in Washington. He's currently building a third.

“It's picking up because of the low pricing, the generous warranty and the expanded lineup,” says See. “We should have built a bigger lot here because it's not big enough for the volume we're doing.”

How many Kia dealers does Butterfield foresee five or 10 years from now? About the same number as today. But he envisions them each owning more than one store, such as Kane does.

“We could probably grow faster if we added 200 dealers next year, but I'm not going to do that,” says Butterfield. “I want to expand the number of stores but not the number of dealers owning them. I want profitable, well-capitalized dealers who may own four or five Kia stores. But I want to keep the number of dealers at 620.”

Butterfield is a Chicago native. His father was an ad salesman for Time-Life. His parents divorced when he was a boy. His mother ended up teaching disabled children.

He attended the University of Utah because of its proximity to ski resorts. He started in the mailroom at Ford. Earlier on, he became a student of brand management.

“From my perspective, it's all about brand that you build through delivery of a quality product,” he says. “You don't do it with smoke and mirrors. You do it by delivering on your promises.”

Expect to see 10-12 Kia models in its lineup before long, including a flagship.

“We need an image vehicle,” says Butterfield, taking yet another page from the brand book.

History doesn't really repeat itself, but it rhymes a lot. Kia's blueprint for the U.S. market worked for Honda and Toyota during different times and circumstances. For Kia to join the major league today means it must compete with some big boys — especially well-established Honda and Toyota.

It won't be easy beating, or even tying, those two Japanese auto makers at their own game — in a country where both now operate five auto plants (soon to be six when a Honda plant opens in Alabama). Kia has no U.S. factories.

Butterfield describes himself as a “blue-collar executive” who likes his managers of the same ilk.

“It's important to have some fun in this business and not be full of yourself,” he says. “We're not making nuclear weapons. We're making cars — and they're fun.”

He particularly admires top managers at American Honda, saying they are less stodgy than some of their industry counterparts.

One of them is Thomas Elliot, who joined the then fledging American Honda right out of college 32 years ago. He's now its executive vice president.

“It was a little easier to enter the U.S. market then opposed to now,” Elliot says, referring to Kia's plans to replicate Honda's success. “Honda's motorcycle business in the 1960s was our foot in the door. We had a decade of buyers before we came in with our first car in 1970.”

Auto analyst James Hall of Auto Pacific Inc. says Honda and Toyota are concerned about Kia.

“Can Kia take Honda's and Toyota's game plan in the U.S. and get it right?” asks Hall. “We'll see. Times have changed since Honda and Toyota did it. But a lot is the same.”