Hyundai Witnesses Growth as Other Automakers Falter in 2009

Although 2009 has proved to be an annus horribilis for many of the top-10 selling automakers, which have seen sales sink or barely maintain earlier levels, the Hyundai Automotive Group and its Hyundai and Kia brands have marked themselves out to be one of the few high points of the year. As the year comes to a close, IHS Global Insight expects that the South Korean automaker will increase its total global sales by around 9% year-on-year (y/y) to around 4.9 million units, just nudging past Ford to snatch fourth position in the rankings. This gain in vehicle sales during the decline has allowed it to capture an increase in global market share and this now stands at around 7.5% compared to the 6.5% seen just a year ago. A large part of this growth has stemmed from the Hyundai brand, which has seen sales increase by over 14% y/y to 3.0 million units. However, although its sibling Kia has seen sales increase by just 2.3% y/y to almost 1.9 million units, it has proved its mettle by expanding on the gains that it made during 2008, when sales increased by almost 7% y/y.

There are several reasons for this increase. Firstly, the company has seen a great deal of benefit from the market stimulus packages that various governments have put in place to support demand. Hyundai's brands have seen sales surge in Western Europe, where the German, French, Italian, Spanish, and U.K. governments, amongst others, have put in place scrapping schemes to rid their roads of older, polluting passenger cars. Through 2009 sales have risen by around 20% to over 520,000 units. This has been due in no small part to the i10 A segment and i20 B segment models that are being imported from India and provides customers with a low-emission vehicle at a reasonable price point, particularly when taking into account the savings offered by the schemes themselves. Its domestic sales have also benefited from the South Korean government's own scheme and where the automaker dominates the market.

Hyundai models have also proven to be popular in the U.S. market, where the short-term "cash for clunkers" scheme and a great deal of expenditure on incentives have allowed it to make gains and snatch further market share during the downturn. According to reports, the automaker has increased its spend in this direction by around 40% during the course of the year. It has been able to maintain this level partly as a result of the weakness of the South Korean won compared to the U.S. dollar, which has allowed the automaker to be more aggressive than before. It has also allied this with some strong marketing, the most notable being the Hyundai brand's "Hyundai Assurance Program", which allows customers to purchase a car but return it if they lose their job within a certain amount of time, which has created interest despite the recession. In a market that has tumbled by a further 22% in 2009, it has seen a gain of around 11%, although much of this has in the main been a reinstatement of earlier losses recorded in 2008, but still a strong performance in light of the economic conditions

However, it has been its exposure to the Indian and Chinese markets that has proven to be a significant winner. Hyundai has consolidated its position as the largest non-indigenous automaker and has taken full advantage of the gains that have been on offer during the second half of the year. Prior to this it had launched the i10 and i20, which widened its brand appeal to a market that is dominated by entry-level models. Sales have risen by some 20% y/y during 2009, but this pales in significance when compared with its Chinese sales. This is a country where many of those with exposure have been able to at least partly offset the declines seen elsewhere around the world during the past year, although this has only added to Hyundai's successes. The gains seen in the market as a result of the Chinese government's decision to reduce sales tax on vehicles below 1,600 cc amongst other incentives, as well as surging consumer confidence, have lifted Hyundai's combined vehicle sales by around 75% y/y during the year, with total sales expected to be over 850,000 units.

Hyundai and Kia's position in these markets has not only been bolstered by stimulus and marketing campaigns, but the effort that it has put into its model range over the past two to three years. Many of the main models have been replaced in its most important segments, with not only the Hyundai i10 and i20 as already mentioned, but also the introduction of the C1 segment i30, while Kia has the C1 segment C'eed family and Forte. It is also increasingly targeting vehicles for its larger markets, with particular success being seen by the Hyundai Elantra Yuedong, which has led its recent upswing in the Chinese market. There has also been some success seen from its efforts to expand its product line-up into new areas such as it has with the Kia Soul and Borrego sports-utility vehicles (SUVs), and the Hyundai Genesis premium sedan and coupé models.

Outlook and Implications

One of the main benefits that Hyundai has seen from the gains that it has made this year has been to its financial bottom line. By the end of the first half of 2009, Hyundai and Kia had both confounded other automakers that had posted losses, by announcing gains in profitability, although this was partly as a result of the weakness of the South Korean won compared to other global currencies that made products even more competitive than usual. However, by the time the full extent of market support measures had taken hold in the various markets in which they were made available during the third quarter, each had seen a surge in volumes, revenues, and profitability. There were also additional benefits that came from the weakness of the domestic currency as the low-base effects of the damaging strikes that hit the company's domestic operations in the same period a year before.

The question now remains whether Hyundai's brands can continue this momentum into the future. Certainly, the company will be hit by the fall in demand that is expected to take place in markets that have depended on government assistance for passenger car market support over the past 12 months. However, the company may well be helped by its marketing initiatives and activities to increase brand awareness, as well as word-of-mouth recommendations by new customers that it has reached during this time. IHS Global Insight believes that the auto-making group will see a small slip in its sales to 4.8 million units, which will see it slip back to fifth in the global ranking behind Ford, as the Hyundai brand falls back a little. Although it is expected that it will consolidate its position in North America and particularly the United States, the structural weaknesses in Western Europe and South Korea as market incentives are withdrawn, will prove to be a failing. This will not be helped by the increasing competitive pressures in China and India, where declines will also be seen.

However, beyond this, the group is expected to see its global unit sales rise by more than 5% per year between 2011 and 2013, with slower growth after this point. This growth will be underpinned by several steps. One of these will be its ongoing product replacement and introduction initiative. Towards the end of 2009 this began with the announcement of the latest generation mid-sized sedans, the Hyundai Sonata and Kia K7/Cadenza, the Hyundai iX35/Tucson and Kia Sorento SUV, and the Kia Venga multi-purpose vehicle (MPV). It is now also launching alternative powertrain vehicles, with liquid petroleum gas (LPG)-electric hybrid Kia Forte and Hyundai Avante, which will then be followed by gasoline (petrol)-electric hybrid Sonatas in 2010. This will be expanded to include plug-in hybrid electric vehicles (PHEV) and hydrogen fuel-cell vehicles beyond then, which will be supported by a research and development budget up until 2013 of 4.1 trillion won (US$3.42 billion) aimed at eco-friendly projects. There will also be investments to expand its manufacturing base, including the opening of Kia's facility in the United States, expansion of Hyundai's manufacturing in Turkey to include the i20, and expansion in China of both passenger cars and trucks. However, one of the setbacks to its plans could be its labour relations in South Korea, where strike action has been prevalent in the past, although recently there has been something of an easing in tensions which, if they can be continued, could promote further investment in production domestically.