Hyundai, Kia Freeze Global Capacity Expansion

SEOUL – When Hyundai Motor Group Chairman Chung Mong-koo met with his senior officers from Hyundai and Kia at the beginning of the year, he had some important policy news for them.

Both South Korean auto makers were told to put their capacity expansion plans on hold, and to focus on attaining still-higher product quality and further uplifting the Hyundai brand.

Frank Ahrens, global spokesman for the Hyundai unit, tells WardsAuto that the new 150,000-unit plant the auto maker opened last year in Brazil, as well as its third plant in China, mark the end of the brick-and-mortar investments.

“We are still studying possible expansion, but for the next 2-year period the focus is on quality and brand improvement,” Ahrens says in an interview. He notes quality is easy to measure quantitatively, but the second is a “soft science” that often relies on outside brand-rating agencies.

Hyundai is not pulling in its horns with respect to expansion for budgetary reasons; the auto maker in fact is in very good financial shape, Ahrens says.

Sales are rising in all major markets, with South Korea being an exception. In the year’s first half, the brand’s domestic car sales were down, while SUV deliveries rose. Analysts see this as confirmation that the country’s market has matured and is saturated.

They also believe free-trade agreements with the U.S. and the European Union have caused import vehicle sales to flourish at the expense of both Hyundai and Kia, which still dominate the market.

Some analysts are scratching their heads about Chung's decision to lock in present capacity, despite high demand. Indeed, Hyundai America CEO and President John Krafcik has been quite vocal about how demand for Hyundai products in the U.S. exceeds supply.

HMA has added a third shift at its Alabama plant to relieve the shortage. The additional 30,000 builds top out annual capacity at 330,000 units, and the plant is running full-tilt.

Ahrens says the situation Krafcik describes in the U.S. is the same worldwide. Hyundai and Kia are facing strong demand globally, and sales growth is constrained only by supply.

“We will be able to organically add to capacity by tweaking existing facilities, as Hyundai America did, but there will be no new plants,” Ahrens says flatly.

Chung spent a dozen years building Hyundai and Kia quality to the present high level. He wants to ensure the brands don’t fall victim to knee-jerk expansion that could dilute their favorable ratings if things were too rushed, analysts note.

Instead, Chung wants to move both brands upmarket, with upper-tier models competing on an equal footing with the likes of BMW, Mercedes-Benz and others. He wants to build more upscale vehicles with higher margins and strong customer loyalty across the global market.

Ahrens notes this already is happening in the Middle East, especially with Hyundai’s Equus flagship luxury sedan sold in the region as the Centennial. “We are doing quite well in markets like Dubai, where the same customers who order our Equus also buy Maybachs and Bentleys.”

The Middle East region is Hyundai’s fourth-largest market and is growing steadily, with 2012 sales of roughly 300,000 units, following China (900,000), the U.S. (700,000) and South Korea (600,000).

Hyundai also is the top-selling brand in Israel.

This past week, high-level government delegations from 26 nations visited South Korea to participate in ceremonies marking the 60th anniversary of the end of the Korean War. Heads of the missions were driven from the airport to their hotels in chauffeured Equus limousines.

Hyundai’s new quality- and brand-enhancement quest will mark an important milestone in January, when its all-new Genesis luxury sedan is unveiled at the North American International Auto Show in Detroit. A sales launch will follow soon after.

“The new Genesis will be a brand-changer for us,” Ahrens says. “It may sound trite, but it’s a revolution; a whole different car, from design to driveability. I’ve seen it and I’ve driven it, and it will be a head-turner – a competitive luxury sedan at a better price.

“It will really step up the game, shake up some expectations.”

WardsAuto/AutomotiveCompass data forecasts a Hyundai luxury-range expansion in the U.S., with a BMW 3-Series competitor on tap for “15.

For 2013, Hyundai has set modest global sales goals, but anticipates major growth in quality and brand image. Global vehicle deliveries are targeted at 4.6 million units, an increase of roughly 6% over 2012.

That target uses up virtually all of Hyundai's existing production capacity.

There will be some tweaking to increase production, and the third China plant and the new facility in Brazil are still ramping up, but capacity will be pretty much locked at roughly 5 million units for the next two years:

The focus on improved quality and higher brand rankings is forcing Hyundai to modify its marketing strategy and to upgrade dealerships, analysts note.

Hyundai's Dubai headquarters in the Middle East has launched a campaign to establish luxury- level dealerships comparable to those operated by premium-class competitors. The belief is that you can't compete with Bentley or other top-shelf marques if your stores aren't up to their level.

In South Korea, dealerships also are being expanded and upgraded to give them the look of quality, not just efficiency. Some of the changes here are quite novel and are working.

One retailer features an art gallery exhibiting paintings and sculptures by artists from the region. The innovation has tremendously increased walk-in traffic.

At an elite coffee shop in Seoul’s upscale Gangnam District, Hyundai shows off two of its latest new models and will change them periodically to maintain affluent young customers’ interest.

Analysts agree Hyundai is running full-tilt and its new focus is credible, if unorthodox.