ON THE LINE: Hyundai's new Alabama plant
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In the short run, Chung's obsession with quality can be costly. Last year, he delayed the launch of a new Sonata in Korea for two months while engineers cleaned up 50 minor defects. In 2003, he asked Lee, the senior R&D executive, to get rid of an annoying noise made by grinding gears in the transmissions of Kia Amanti sedans. Lee worried that he'd have to shut down production entirely to work on the problem. "I told him that we'd lose two months of sales," he recalls. "The chairman said: 'If it's for quality, it's O.K.'"
Of course, quality isn't everything. Chung has also ramped up efforts to ensure Hyundai is competitive in technology and styling. Hyundai's R&D budget has expanded 110% since 1999, to $1.6 billion this year. Hyundai invested $200 million to open or expand research-and-design centers in California, Michigan and near Frankfurt, Germany; a $60 million proving ground in California's Mojave Desert opened in January. In South Korea, Chung expanded his R&D headquarters, adding a new design center last year complete with a 3-D cinema for viewing virtual models of new cars. Lee says Chung visited his office recently and asked: "Do you have enough money?" Lee, with a wry smile, says he told his boss he didn't. Chung immediately offered several hundred million dollars. "I have an unlimited account," Lee says.
Meanwhile, Hyundai has also needed to be innovative to woo reluctant customers back to its dealerships. In 1998, the company began offering a 10-year warranty, at the time the best in the industry, to rebuild confidence in its cars. And to compete with bigger brands, Hyundai loaded up its models with special features that many of its rivals sell only as expensive extras. A 2006 Sonata for the U.S. market comes with six air bags (most competitors offer only four as the standard), a six-speaker CD and MP3 player, and an advanced antilock-braking system — all for less than $20,000.
With some of its biggest rivals in disarray, Hyundai sees an enticing opportunity to build on its progress overseas. Chung is moving Hyundai's product line away from its traditional small cars into larger, higher-profit vehicles. In October, Hyundai unveiled a small sport-utility vehicle, the Tucson, and later this year, the company will launch a new high-end sedan for the U.S. market, the Azera. In addition, the company is opening manufacturing plants around the world that should help it penetrate key markets. Hyundai is investing $600 million in a factory in the southern Indian city of Madras; due to open in 2007, the plant will be Hyundai's second in the country. And in May, Hyundai opened its first U.S. factory. The $1.2 billion plant in Montgomery, Alabama, will produce 150,000 Sonatas this year, and next year will start making the Santa Fe, Hyundai's popular suv.
Even with its recent success, Hyundai's market position remains insecure. "They're not out of the woods yet," says J.D. Power's Parker. Dwindling profit margins are another problem. The average Hyundai car retails for 10-15% less than a comparable Toyota or Honda in the U.S., but with rising labor costs and a weaker dollar, Hyundai must persuade customers to pay more so that profits keep growing. Last year, Hyundai's earnings edged up a mere 2%, while sales grew 10%. Zayong Koo, an auto analyst at Lehman Bros. in Seoul, says it could take several years before Hyundai achieves this crucial pricing power: "They need to show a track record of good-quality cars in order for them to take that next step and raise pricing."
After all, the company is still only the world's seventh largest carmaker, with 3.3 million vehicles sold globally — and that includes sales by its Kia subsidiary. But Chung has grand ambitions. "We will make ourselves an invincible competitor," he says. Hyundai's larger rivals should mark those words whenever they check their rearview mirrors for overtaking traffic.