Hyundai In High Gear

Since Hyundai broke into the U.S. auto market in 1986, the jokes have rolled off comics' tongues as fast as the company's unwanted cars have piled up in showrooms. How about Jay Leno's line--that the only consumers who benefit from high gasoline prices are Hyundai owners because every time they fill up, the car's value doubles. The tinny, troublesome autos had so many problems that dealers made repairs a profit center. Their unadvertised slogan: Hope You Understand Nothing's Drivable and Inexpensive. The notion that Korea was another Japan ready to challenge U.S. competitiveness evaporated in late-night laughter.

But it may be time to reconsider. Since 1999, the Hyundai Motor Corp. and its subsidiary, Kia Motors, have racked up sales increases of an astonishing 70%. In June, when the Big Three U.S. automakers saw their collective sales shrink 4%, Hyundai's rose 37%. The stylish new Santa Fe SUV is in such demand that there's up to a two-month wait for delivery. Both the Santa Fe and the Toyota Corolla-sized Elantra recently won top marks for front-end crash results from the Insurance Institute for Highway Safety, beating rivals like Toyota's RAV 4 and Ford's Escape. Consumer Reports rates the Elantra as favorably as the Honda Civic. Says Virginia dealer Don Reilly: "This is awesome for us."

Hyundai and Kia are defying a tradition that has put all their compatriots out of business except Daewoo, which is sputtering. As Korea lurched toward democracy and full-scale industrialization in the late 1980s, labor unrest worsened quality problems in carmaking and other industries. The Asian financial crisis struck another blow in 1997. Kia (then independent) went bust, to be absorbed by Hyundai. Daewoo, Korea's second largest automaker, filed for bankruptcy last year with estimated debts of $17 billion. Its fate now depends largely on whether General Motors can negotiate a takeover.

Hyundai fought its way back from the brink with a combination of Korean determination and American ingenuity. As labor woes subsided in the '90s, the company's managers started plowing money into manufacturing technology. Hyundai invested in design centers in California, Michigan, Germany and Japan. And, like other big automakers, Hyundai began to integrate its suppliers into the manufacturing process, which drove down costs--and mistakes. Last year Hyundai Motor all but cut ties to its eponymic parent, Korea's largest industrial conglomerate, which like many of its counterparts is mired in a web of debt and bad investments.

Yet it wasn't until Finbarr O'Neill came along that Hyundai started hitting on all cylinders. An unassuming New York City attorney who took over the company's U.S. operations in 1998, O'Neill walked into the top job the same year sales reached their nadir. "We knew our quality was better and styling was improving," he recalls. "But nobody was showing up." So O'Neill and Hyundai's dealers (those who were left) offered the industry's first 10-year, 100,000-mile warranty, called the Hyundai Challenge.

Showrooms started filling with new customers almost instantly. One attraction was the innovative, even offbeat styling of a couple of new models. The compact Santa Fe SUV was designed in the company's California studio to "cut through the clutter" of look-alike products, says O'Neill. The new XG300, a luxury sedan that at $25,000 is the most expensive car Hyundai has ever offered, also has a distinctive appearance.

More important, offerings from both Hyundai and Kia seem to have cleared the quality hurdles that were once so debilitating to each company. Reilly, who just opened a second dealership in Alexandria, Va., says warranty claims are down 50%. Meanwhile, according to AutoPacific, an industry consultancy, customer satisfaction is up: the organization has just ranked the Santa Fe as America's top compact SUV. Says AutoPacific president George Peterson: "This is a testament to the excellent progress Hyundai is making in product development."

Management's ultimate goal is to become one of the world's top five automakers. That will require finding another gear. But the joke quotient is certainly down, and as O'Neill points out, "that's a pretty good index of our progress."