Hyundai Revs Up

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Chung Mong Koo, chairman of South Korea's Hyundai Motor, carefully scrutinizes a newly designed gearshift lever for the automaker's Sonata sedan while his entire senior management team hovers around, anxiously awaiting his approval. The execs are justifiably edgy. Engineers added a plastic plate beneath the shifter to prevent spilled coffee and other flotsam from falling into the mechanism and gumming it up. It's a minor change, but no one is treating it that way, least of all Chung, a hard-nosed, detail-oriented boss with a penchant for micromanagement. ("He still makes the decision on how big a Christmas tree to put in the lobby," quips one former Hyundai executive.) After eyeballing the plastic plate from several angles, Chung demands, "Is this enough?" He's worried that the gizmo won't do its job. Finally, he nods his O.K., but reminds his executives: "We can't allow any defects to damage our cars."

Chung, 67, has spent six years hammering this zero-defects message into the heads of Hyundai's employees—and the result has been one of the most surprising turnabouts in automotive history. A few years ago, Hyundai, South Korea's largest car manufacturer, was a synonym for "shoddy." Seoul was the only place in the world where you were likely to see large numbers of its cars on the street. Today, the company's line of pleasantly stylish, relatively inexpensive and certifiably reliable sedans and sport-utility vehicles is tailgating the industry's best-known brands in several prime markets. In the U.S., where the Sonata offers a lower-priced alternative to Toyota's Camry and Honda's Accord, Hyundai's sales reached 419,000 cars last year—up 360% since 1998. In Europe, sales spurted 21% in 2004. In India, Hyundai's 17% share of the passenger-car market makes it the largest foreign automaker and the second biggest car company overall behind Maruti, a Suzuki subsidiary. Hyundai is beating competitors by modifying its small cars with ingenious features designed for Indian customers, such as elevated rooflines to provide more headroom for turban-wearing motorists.

Perhaps most surprising: in China's hotly contested emerging car market, Hyundai's joint venture with Beijing Automotive sold more cars than any other automaker in the first two months of this year. In fact, with a compounded annual revenue growth of 20% over the past five years, Hyundai has been the world's fastest-growing major automaker since 1999, according to Lehman Bros. Hyundai is "putting pressure on everybody," says Rob Hinchliffe, an auto analyst at UBS. Indeed, even Toyota vice chairman Fujio Cho has acknowledged the blur that is getting bigger in his rearview mirror. "Hyundai has quality and prices that have caught customers' attention, not to mention ours," he said at an auto conference in August.

It should be easy enough for Cho to recognize the secret of Hyundai's success. The South Korean company is following much the same formula that Toyota used decades ago to overcome its "cheap Asian import" stigma and become one of the world's most respected brands. When Hyundai first entered the U.S. market in 1986, its Excel sedan—an econobox with a $4,995 price tag—was an instant hit with frugal buyers. But customers soon discovered they were getting what they paid for: Excels were prone to quality-control problems and frequently needed parts replaced. Sales tanked, and Hyundai became a laughingstock. In 1998, Late Show TV host David Letterman listed his "Top 10 Hilarious Mischief Night Pranks to Play in Space"; No. 8 read: "Paste a 'Hyundai' logo on the main control panel." Says Brandon Yea, director of Hyundai's marketing-strategy team: "The Hyundai brand was worse than nothing."

But like Toyota, which overcame consumer prejudice in part by inventing kaizen, a manufacturing process and corporate mantra translated as "continuous improvement," Hyundai has rapidly built up regard for its products through an almost fanatical attention to Getting It Right. Consumer Reports magazine recently named the Sonata the most reliable car in the U.S. And Hyundai rose to second place in J.D. Power and Associates' 2004 survey of initial car quality, tied with Honda and trailing only Toyota. Six years ago, Hyundai ranked among the worst in terms of initial defects. The comeback "is astounding," says Chance Parker, executive director at J.D. Power in Westlake Village, California. "We really haven't documented that level of turnaround in that period of time. They've adopted a quality mentality they didn't have before."

The architect of Hyundai's rise is Chung, who was named chairman in 1998. Although his father, Chung Ju Yung, founded Hyundai Motor in 1967, it was clear the son would not get a free ride. Shortly before his appointment, the Korean economy had been slammed by the 1997 Asian financial crisis and Hyundai was forced to lay off 25% of its staff. Complicating matters, Hyundai agreed in 1998 to acquire South Korean rival Kia Motors, which had to be assimilated. Chung had little experience with the automotive industry—he had spent most of his career managing a smorgasbord of affiliates in the Hyundai conglomerate, including a steel company, a pipemaker, a shipping-container manufacturer, and Hyundai Motor's service business. When Chung began broadcasting his intention to turn Hyundai into a top-five automaker, few outside the company took him seriously. Hyundai, like many family-controlled Korean companies, was ultra-hierarchical and slow to change. Managers rarely cooperated with one another and division chiefs ran their operations as personal fiefdoms. "When a problem occurred, each division would blame other divisions," says Lee Hyun Soon, a senior executive in research and development.

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