Here Come the KOREANS . . . Again

Hyundai leads the comeback It was a scene right out of the TV show M superscript *A superscript *S superscript *H. Whirring helicopters swarming in formation over the hardscrabble mountains of South Korea. Up and over one last rise and the landscape suddenly plunges away in a dizzying rush to the sea. Below lay an enormous harbor filled with gleaming cargo ships of every description earmarked for every country in the world.

The choppers land, spilling out a bevy of international automotive journalists. They had come to Korea that March day in 1997 to report on Daewoo Motor Co. Ltd.'s new small cars to be launched in 85 countries, including the U.S. But first they were brought here to witness this massive shipbuilding facility, demonstrating the might of the Daewoo Group - then the country's No.2 chaebol - the Korean word for family-owned conglomerates.

The scene could have been a page out of competitor Hyundai Group's play book, largest of the country's top-10 major chaebol - holders all of the nation's crown jewels: a vast array of companies encompassing, in addition to shipbuilding, electronics, semiconductors, engineering, construction, financing, securities and automobile manufacturing. It was the last hurrah of Korea Inc. and the chaebol were having their way, albeit leveraged by massive debt.

No one could foresee then that little more than two years later, in November 1999, Daewoo founder Kim Woo- Choong, 62, would step down as group chairman, disgraced by the collapse of his business empire, which he founded 32 years before and now weighed down by $52 billion in loans. Mr. Kim was the first but not the last of Korea's business elite to be washed away by the tidal wave of sinking currencies engulfing the Asia/2Pacific region.

Fast forward to July 2000 when Daewoo Motor itself is up for grabs in an international auction that sees Ford Motor Co. as the single successful preliminary bidder. If it had followed the plan, Ford and Daewoo creditors would have sealed a deal by now.

Instead, Ford quit the deal late last month, saying it was withdrawing its bid to take over Daewoo Motor.

"We believe that a proposal was not possible that would be in the best interest of Daewoo and Ford and their respective shareholders," Ford Vice Chairman W. Wayne Booker said in a statement.

Buying Daewoo, with an annual capacity of 2.1 million vehicles, would have put Ford within striking distance of one day overtaking General Motors Corp. as the world's top-ranked automaker. Beyond that, Ford not only would have penetrated the notoriously difficult Korean market but also most of Asia/Pacific and Europe's small car markets.

Ford's surprize move paves the way for other bidders: General Motors Corp., Fiat SpA, DamilerChrysler AG and Hyundai Motor Co. Ltd.

Pandora's box is open and the unthinkable in the closely guarded Korean auto market has come to pass. The foreigners are filtering in. Fledgling Samsung Motors Inc. has been purchased by France's Renault SA, with which it intends to resume production of its SM5 sedans based on Nissan Motor Co. Ltd. technology.

Korea's No.1 Hyundai Motor Co. Ltd., which in 1997 bought bankrupted Kia Motors Corp., has spun off from its financially troubled parent and agreed to form an alliance with DaimlerChrysler AG. The first project is a commercial truck joint venture and, later, a global small car to be built with Mitsubishi Motors Corp. Left standing at the altar, GM is intently trolling for a Korean partner to call its own, and now appars to have the best shot at Daewoo.

Why, when Korean car companies historically have been badly mismanaged, and many nearly bankrupt or on the brink of implosion due to reckless expansion and cronyism, are leading global automakers clamoring to own them and North Americans rushing to buy their vehicles?

With apologies to political strategist James Carville - "It's the product, stupid." Where once Korean-made cars were ranked just below the Yugo on the top-10 list of shabby econo-boxes, today they are taking major markets by storm, none more than in North America. Although still economically priced and mostly relegated to basic transportation, Korean cars now are built with enough panache to earn a ranking on the value-minded shopper's new car list.

Hyundai's sales in the U.S., for example, have steadily been climbing and are expected to exceed 215,000 units this year, compared with nearly 165,000 in 1999 and 90,000 in 1998. Affordable price tags, generous powertrain warranties and improved quality have led to a surge in Korean car sales that has caught the North American auto industry with its small-car segment down. And the worse (at least from a domestic producer's perspective) is yet to come as Korean automakers assault U.S. shores with products aimed at the heart of the American auto industry: sport/utilities, minivans and - gulp! - luxury cars.

Such was not the case in the Koreans' initial foray here. Daewoo was the first, forming an alliance with GM Korea in 1972, with GM gaining management control in 1978. Daewoo built the inexpensive Pontiac LeMans for the U.S. market; GM supplied the automaker with European Opel hand-me downs. The romance ended in 1992 after years of squabbling over product quality. The last straw was Daewoo's grand plan to sweep the globe with new production plants and sales networks. GM accused Daewoo of overreaching, and with good reason.

By 1995, Daewoo had made quick inroads into Eastern Europe, buying out car-makers in Uzbekistan and Romania and landing a 70% stake in Fabryka Samo-chodow Osobowych (FSO) in Warsaw, beating out former partner GM. Daewoo planned to invest $1.5 billion to assemble 220,000 cars and 150,000 vans within six years at FSO and related manufacturing operations in Lublin, Poland.

But 1996 saw Dae-woo lose out on potential business deals in Western Europe, first with Group Lotus and then with Steyr-Daimler-Puch AG, the Austrian vehicle-engineering group. Plus Poland's customs officials were refusing to let in Daewoo car parts duty free for assembly, even though they were supposed to be tax exempt. And to this day, things have yet to smooth out with partner OAO AvtoZAZ in the Ukraine.

Unfazed, Daewoo soon began selling the Nexia/Cielo and Espero passenger cars in Europe, establishing 1,300 dealers in the U.K., Germany, France, Spain, Italy and the Netherlands. It hoped to build more than 700,000 units by 2000 in central and eastern Europe and the former Soviet Union. With its presence solidly in place in India and other Asian markets, it was time to focus on the biggest prize - the U.S. market.

Unfortunately, a reputation for marginal quality and outdated technology still dogged the Korean auto industry. Hyundai admits it erred by entering the U.S. with cars spun off cheap low-tech platforms. It had hoped to mirror the Japanese U.S. arrival in the 1970s with their small inexpensive cars. The difference was that Japan's exports had good quality and technology and were soon followed with higher-tech successes, such as the Honda Accord and the Toyota Camry.

Hyundai in 1986 debuted the Excel (called the Pony in Canada) at $4,995, a price that 168,882 buyers found attractive. Other models followed, but a host of quality problems over the next decade plagued the automaker. By 1995, Elantra/Accent sales of 47,908 represented a drop of 72% from 1986 levels.

The root cause can be traced to a decision made by Hyundai Group founder Chung Ju-Yung in 1989. To circumvent rising Big Three anxieties about import cars from Japan and Korea, and possible U.S. government measures to stop the onslaught, Mr. Chung that year set up a plant in Bromont, Quebec, Canada.

What seemed a good idea turned out to be a terrible business venture. Part of this, Hyundai officials now admit, had to do with the green Canadian labor force that it put in place, plus management's lack of skill in dealing with North American workers. But the lion's share of blame, they say, belonged to the fiery tempered labor force in Korea.

While Bromont produced the bodies and assembled the finished cars, the entire drivetrain was imported from Korea in kit form. With constant labor unrest in Korea in that era, Hyundai officials claim product quality dropped drastically. The kits contained many substandard parts and assemblies, which went into the cars. At the same time, Korean-made import cars were arriving with their own quality problems.

Hyundai franchised dealers soon began folding their tents. Customers with quality problems had trouble finding a dealer to fix them, and Hyundai's North American experience quickly became a nightmare. The Bromont plant was mothballed, its assembly line and equipment shipped from Canada to a new Hyundai car plant in India, which today is the most productive plant with the best quality record of all of Hyundai's overseas facilities.

Mr. Chung was adamant that Hyundai stay in North America, deciding on an import and low-pricing strategy. "We really had to bite the bullet and we did," says Lee Chung-Goo, who heads up Hyundai's R&D effort.

"The pricing strategy was letting us hold in North America while we went all out to improve product and process quality. We (also) worked closely with specialists outside Korea in our centers in California, Michigan, Japan and Germany to capture the latest trends and to get technical feedback about the cars we had on the market within their regions."

Hyundai also brought its key suppliers into the product-development picture, giving them major assignments at the beginning of the new platform programs. "This let us work out supplier process problems early, before the car was launched," says Mr. Lee. "Our quality went up steadily, and the markets reflect this."

Kia, meanwhile, aware of Hyundai's problems, started in the U.S. in 1994 with a regional rollout of its Sephia subcompact. But problems soon befell that company. In 1995, Kia was forced to recall its Sportage sport/utility vehicle (SUV) for a defective axle that caused the rear wheels to fall off. Like Hyundai, Kia's quality, reputation and sales numbers have since recovered.

Samsung Group also had big plans to enter the U.S. - as soon as it set up its carmaking operations in Korea. The conglomerate announced in early 1996 that it planned to invest $13 billion in product development and tooling, with a goal to become one of the world's top-10 automobile manufactures by 2010. To save time, the new subsidiary, Samsung Motors Inc., formed a technical agreement with Nissan Motor Co. Ltd. to jointly develop a midsize 1.5L passenger car, to be based on the Nissan Maxima. Plans were to introduce the car in Korea in 1998 and in the U.S. in 2003.

Samsung was roundly criticized for its desire to drive global overcapacity to a higher level. Korea certainly didn't need another carmaker, but Samsung officials had a need to build another brand. It was an act of reckless expansion based on ego and not market demand. Although the SM5 sedans eventually turned out by Samsung were technologically superb, a bad decision was made worse when Korea's economy fell victim to the Asian financial meltdown of 1997.

Things were troublesome overseas as well. Western Europe, Korea's largest export market, was moving to curb the inflow of Korean vehicles. Europe-bound shipments in 1995 had surged about 120% from the prior year and accounted for nearly 40% of Korea's total vehicle exports that year. European countries began raising anti-dumping regulations and transfer-price issues.

Overall, Korean car exports rose about 47% in 1998 to 1.08 million units, breaking the 1 million-unit mark for the first time in 19 years. To circumvent the upcoming European barriers and maintain export momentum, Korea's top three automakers decided to set up local assembly operations in locations throughout the world. The move would enable them to supplant exports of completely built-up units from Korea with completely knocked-down exports to those facilities.

Back home, when Daewoo announced in late 1997 its intent to purchase 53.5% of ailing truck maker Ssangyong Motor Co. Ltd., the deal marked the first mandatory major industrial restructuring since the country received a promise of $55 billion in bailout loans from the International Monetary Fund.

The 1998 purchase also catapulted the automaker into the driver's seat as a formidable global player, ironically setting in motion the wheels of momentous change that eventually would put all of the country's carmakers into play, including Daewoo. Speculation soon centered on the likely takeover of Kia Motors, which had declared bankruptcy that summer. The announcement by Kia creditors of an international auction attracted major automakers throughout the world.

Losing out on acquiring Kia to Hyundai Motor in a process of questionable transparency was a bitter pill for Ford, but it served as a useful lesson. When Daewoo's turn came, Ford was ready. Along with its initial bid, rumored at $6.9 billion, Ford promised to pump up Daewoo and keep it in the Ford fold for long-term development.

Now Ford has turned its back and walked away from the pending deal, leaving GM as the most likely winner.

Unlike DaimlerChrysler, which now says it regards Daewoo Motor as too risky and in need of much restructuring, GM lost no time in expressing interest. "We regret that Daewoo Motor has lost valuable time while its condition continues to deteriorate," says Alan Perriton, executive in charge of business development for GM Asia/Pacific. "We need to better understand the situation, consult with our Fiat partner, and we'll be available to discuss the matter with the responsible Korean parties."

Regardless of who takes over Daewoo, the Korean carmaker will provide a low-cost base with a highly skilled workforce and advanced engineering that offers about 70% of the Korean industry's worldwide growth through 2025. While it's too early to know how Daewoo's 12 overseas plants will fit into a future partner's plans, some, like the operation in Poland, are very strong.

As the global auto industry marks how Daewoo creditors handle this momentous takeover, Daewoo says it will continue its aggressive push into the U.S., predicting sales to triple to 90,000 vehicles this year. Whether the company will sell through a U.S. partner's outlets remains unclear, but its linkup with a top global automaker is bound to have a positive impact on the Daewoo brand.

Foreign alliances will lend other Korean carmakers similar momentum. Renault, for example, plans to take the paltry production of Samsung's SM5 sedan at its Punsan plant up to 240,000 units from a dismal 2,000 by 2005. "Clearly, if the growth is there and costs are kept in check, we will then go for an expansion of the plant," Renault Chairman Louis Schweitzer says on a visit to the plant in June. When the ultimate goal of 500,000 units is reached, at least half will be exports, he says, but well before that either Renault or partner Nissan will develop a new platform.

A newly independent Hyundai Motor, hoping to nail down its alliance with DaimlerChrysler in which DC would take a 10% share in the company, announced last spring it was working on a deal to build 5 million small cars annually with DC and Mitsubishi, to be sold in global markets. The Korean automaker already is seeing a banner year in the lucrative Indian market, where it now holds a 17% share with a reported sales goal for this year of 70,000 to 100,000 units.

At the same time Hyundai is mulling the idea of building a factory in North America should annual sales reach 500,000. That could happen sooner than expected with the help of the newly launched Santa Fe midsize SUV that's expected to generate sales of 50,000 to 80,000 units annually. The vehicle most certainly will be a test of Korean staying power.

Kia Motors, which only three years ago collapsed under massive debt and now is expecting to post a hefty first-half profit, will introduce a slew of new products to major markets this year and is looking for sales in the U.S. to rise to 160,000 vehicles from last year's 134,000.

Bolstered by product success and renewed fortunes, Korean car companies are undertaking a marketing blitz in the U.S. that they hope finally will put to rest the image of Korean cars as symbols of inferior workmanship. While their cars have yet to achieve the status of a Camry or Accord, it is time to admit that the resurging Koreans have become a force to be reckoned with.

When Korean automakers first voyaged to the U.S. in the 1980s, not even their uncommonly low pricetags could help them overcome myriad quality problems and a cheap image. But after more than a decade of being the butt of a joke in the U.S. market, Korean carmakers now finally are getting a chance to do the laughing.

With skyrocketing sales and dominance of the lowest end of the market, the top two Korean makers, Hyundai Motor Co. Ltd. and its subsidiary Kia Motors Corp., have managed to combat their once-sketchy reputations and capture the eye of the thrifty-minded by undercutting the market and offering attractive warranty packages.

Hyundai's year-to-date U.S. sales through August totaled 170,620 units, up 59.9% over the same period in 1999. Kia's sales are up 13.7% year on year to 103,289 units. Daewoo Motor Co. Ltd. has seen its sales rise 163.7% this year, from 17,920 in January-August 1999, to 47,256. Though volumes still are negligible, Daewoo's climb is especially notable because of the automaker's financial struggles and pending buyout by a foreign automaker in South Korea.

Hyundai and Kia, in particular, aren't satisfied with success at the low end, where together the three Korean makers have, year-to-date, captured only 2.7% of U.S. light vehicle sales. The low-end vehicle segment where the Koreans have managed to grow much of their market share is on the decline. Now both automakers are tackling new segments of the market - where U.S. buyers, at the height of the nation's affluence, are going car shopping.

For Hyundai, the move is decisively up market. The automaker recently debuted the Santa Fe, a sport/utility vehcile (SUV) crossover that serves as the automaker's first "aspirational," or non-entry-level brand. Larger than the popular Toyota RAV-4 and Honda CR-V, the Santa Fe, built on a car platform, aims to be more like the upscale Lexus RX300. A main difference between the Santa Fe and other midsize SUVs is the cost: Hyundai's version will range from $17,000 to $23,000.

Also new to the market is Hyundai's XG 300, an upscale sedan larger than the Sonata and powered by a 3L V-6. It's priced at about $23,000.

Finbarr J. O'Neill, president and chief executive at Hyundai Motor America, says the XG 300 won't be a volume product for Hyundai, but it nonetheless will serve as its flagship vehicle. "I think at that price point it stretches the envelope of the image," Mr. O'Neill says. "There will be further evidence along the road if we're making the progress up into segments where we're less known as an entry-level competitor."

Mr. O'Neill says the automaker's U.S. ambitions include improving the image so that Hyundai eventually will become a credible mainstream alternative. Kia's tactic for U.S. expansion has been an all-out new product blitz. The past year has seen the debut of the Spectra 4-door hatchback and the Rio, which, with a base price of $8,595, is Kia's least-expensive entry yet.

The Optima, a new Kia flagship sedan, hits the market in November. Built on a jointly developed platform with corporate-parent Hyundai (its Sonata sits on the same platform), the Optima sports Kia's first V-6. Kia next plans to climb its way into the minivan market with the 3.5L V-6 Sedona, due out in late 2001 as an '02 model.

"We're going to go after the heart of Detroit - the heart of Chrysler, anyway," says Dick Macedo, executive vice president, marketing and sales at Kia Motors America.

The move into different market segments marks the first time the Korean automakers have been capable of posing a real threat to the Big Three. The domestic makers haven't felt the true effects of the Koreans' takeover of the low-end segment - traditionally dominated for the last two decades by the Japanese makers. "We're taking sales away from the domestics," says Mr. Macedo, specifically mentioning the Dodge Neon and Chevy Cavalier. He does say, however, that the Ford Focus has come in as "one hell of a competitor."

Though Kia sees Chevy as a competitor, Chevrolet marketing general manager Kurt Ritter doesn't necessarily feel the same, although he acknowledges the merits behind the Korean strategy. "The Koreans are relatively higher content and stay low priced," Mr. Ritter says.

Although Hyundai and Kia are going upscale, they have no intention of abandoning their high-content, low-price strategy. Mr. Macedo says labor rates in Korea, 60% of those in the U.S., contribute to the cost advantage. He adds that the Sedona minivan will be loaded with the "nice-to-haves" - making them comparably equipped to the competition at a lower price.

The automakers also have benefited from successful marketing campaigns, a concerted effort to rid themselves of the poor-quality albatross. These campaigns center around innovative warranty packages. Billed as "America's Best Warranty," Hyundai's package offers 10-year, 100,000-mile powertrain protection and 5-year, 60,000-mile limited new-vehicle protection. Kia's "Long Haul Warranty" is similar.

Kia salesmen, when asked about quality issues, now are trained to say, "You should stop worrying because it's under warranty, anyway," Mr. Macedo says.

The scramble up market is not guaranteed to be a cakewalk. All Korean makers are faced with the wild card of potential equity tie-ups. To complicate matters, Hyundai and Kia vie as competitors even though they operate under the same ownership structure, in which competitor DaimlerChrysler AG holds a 10% stake.

But America can rest assured that these auto-makers, successful because of their aggressive and innovative tactics, aren't planning to watch from the sidelines. In fact, reports say Hyundai is considering building a new plant in North America, most likely Mexico. That kind of a foothold should prove that, this time, the Koreans are here to stay.

Patrick Farrell, Daewoo Motor Co. Ltd. director of sales and marketing operations in the U.K., likes to compare Daewoo with Toyota Motor Corp.'s Lexus luxury division.

Lexus entered the U.S. market and did everything its competitors were doing at a better price, he says. Lexus became the smart buy, and sales boomed.

Daewoo, says Mr. Farrell, entered the European market as a smart buy and a value-centered brand. Now the company is waiting for the boom.

In fact, all Korean automakers are waiting for their boom and, in relative terms, it is happening - slowly but surely. In the very tight and ultra-competitive European market, the Koreans are gaining market share, while long-established automakers such as Ford Motor Co., BMW AG and Fiat SpA are painfully losing it.

But the value image has become a double-edged sword for Korean products, seen as low-end. Korean carmakers need to start honing their brand image in Europe if they truly want to compete with big players such as Volkswagen AG or Adam Opel AG.

They currently are not viewed as direct competitors for these brands but rather as challenging downmarket Japanese or Eastern European marques. Yet price-conscious consumers are buying the vehicles. All three automakers have a young range, and these new vehicles will help momentum in new sales and additional market share across Europe.

Hyundai Motor Co. Ltd. is the largest Korean automaker in Europe, with sales expected to top 230,000 units this year, up 6.5% over 1999. Daewoo is right behind, expecting 205,000 sales for 2000, up 4%. Kia Motors Corp., which has seen some difficulty in the market, only will sell about 75,000 units, but still a significant 20% over last year.

Hyundai's current offerings are a mixed bag of goods. Its main vehicle - the Accent small sedan - is not well-suited for markets such as Germany, France and the U.K., says Colin Couchman, auto analyst with Standard & Poor's DRI in the U.K. But it works for Greece, Spain and Portugal, where small cars are extremely popular.

The subcompact Atoz has seen poor sales due to its Japanese-like styling. But the new Atoz Prime - a softened version of the original - is expected to do better. Upmarket, a restyled Elantra sedan will pump up sales, as will the new Santa Fe sport/utility vehicle (SUV). The automaker also is expected to introduce a monospace and full-size multipurpose vehicle (MPV) in the coming years.

Observers tend to agree that Daewoo is the most impressive Korean automaker in Europe. The automaker has carved out a solid share of the market in a very short time thanks to the subcompact Matiz. "It's actually got Fiat quite worried," Mr. Couchman says.

Daewoo's Mr. Farrell agrees. The Matiz has seen a fantastic reaction since its launch, he says. "In that sort of sub-segment, style is everything," Mr. Farrell says. "It's a very attractive car."

Daewoo also has the most complete range. Its trio of cars - the Lanos, Nubira and Leganza - are well-suited for Northern Europe, while the Matiz is perfect for Southern Europe. The new Tacuma, already on sale in certain European markets, will be Daewoo's attempt to tap into the very important monospace market.

Buyers can expect more from Daewoo, including an all-important B-segment car in 2002. The automaker also could use an inexpensive coupe to round out the range, Mr. Farrell admits.

"Hopefully, in the future, you can buy an exciting product from Daewoo," he says.

Kia, meanwhile, needs more to help its European operations, which were going well until the Asian economy crashed and Kia scaled back. Now playing catch-up, the automaker has cut prices in the U.K. and Germany. It also brought in the Shuma small-sedan to compete with the best-selling Renault Megane and VW Golf.

Next on its list are the Joice and Carnival MPVs and the Rio small car. The two MPVs will help but won't sell volumes, while the small Rio should post good numbers, Mr. Couchman says. Still, it's a tough market and Kia doesn't have the products or money to compete. "We don't expect great things from Kia," he says.

Kia also lags behind in Eastern Europe, where Korean automakers, especially Daewoo, have made great strides in the last several years. It's here that the Koreans have concentrated on setting up plants to build and sell local products.

The strategy has worked for Daewoo, which in 1999 was the market leader in Bulgaria and Macedonia; No.2 in Poland, Romania and Slovakia; No.3 in Slovenia; No.5 in Hungary and Croatia; and No.6 in the Czech Republic. But Daewoo is weak in the Baltics where Hyundai is strong, and ranks No.3 in Lithuania and No.7 in Estonia.

Daewoo also leads in local production. In the 1990s, its plans were quite ambitious. There was hardly a Eastern European car manufacturer that was not visited by a Daewoo delegation looking for a deal.

The results are varied. The Polish company Daewoo-FSO Motor SA is Daewoo's most successful automotive operation in Eastern Europe. The Uzbek plant, UzDaewooAvto, has yet to come up to speed, but plays an important role as an export base for Russia.

Daewoo Automobile Romania SA and the Ukraine's ZAO AvtoZAZ-Daewoo are far behind what Daewoo had forecast. The Korean company obviously overestimated its potential in these markets.

Hyundai's and Kia's projects for the region never passed the planning stage.

Farther east, the situation is more delicate. Assembly activities in Russia have been affected by the economic crisis in both Russia and Korea. AO Avtotor plans to assemble only about 2,000 Kia vehicles from kits this year. Valery Sokolov, general manager of Avtotor, says the assembly will be expanded to complete-knock-down assembly of the Sportage SUV in the first quarter of 2001. The number of units will remain low.

At FPG Doninvest, a company that has been assembling Daewoo cars in southern Russia for several years, assembly kits in stock will be used, says Doninvest spokesman Aleksey Baranov, but future projects are uncertain. Over the last several years, three different companies have started assembling Hyundai cars in Russia, but all have stopped work, at least for now.