The little Hyundai Pony, the first South Korean car to enter the North American market, is nothing fancy. A bit like a Chevrolet Chevette or a Toyota Tercel. Its passenger compartment is cramped and the car offers nothing new technologically. It comes from a small country that has a small auto industry, and few can correctly pronounce its brand name (Hun-day).
Hardly the makings for a big hit in today's car market, already overcrowded with subcompact models, right?
Wrong. It is cheap and seemingly reliable; at the bargain-basement end of the car market, that's all that really matters.
In Canada, in fact, Hyundai is already a certified success, a Cabbage Patch doll with wheels. In less than two years on the Canadian market and with only two models in its lineup (the Pony and the slightly larger Stellar), Hyundai has become that nation's No. 1 imported car, stealing the title from Japan's Honda earlier this year.
With its sales in Canada still growing, no one there seems to know how far Hyundai will go. After selling just over 25,000 cars in Canada in 1984, Hyundai's 1985 sales through November surpassed 74,000, and should easily break 80,000 for the full year. Already, Hyundai accounts for 21.2% of all the imported cars sold in Canada, and commands an impressive 4.6% of the total Canadian car market.
Meanwhile, it has announced plans to open a Canadian assembly plant by 1988, signaling its intent to be in North America for the long haul.
The overwhelming popularity of Hyundai in Canada surprised everyone, even Hyundai officials such as John Wright. He started out as Hyundai's national sales manager for Canada, but when the car's popularity took off, he quit to open his own dealership in a Toronto suburb last September.
Now, although his showroom is still being built and he's operating out of a trailer on the construction site, Wright says he is already selling 50 Hyundais a month. "We're growing at an incredible pace," he adds.
"We were all as surprised as anybody in the beginning," says Norman Gibbons, chief operating officer for Hyundai in Canada. "Nobody in their right mind would have expected Hyundai to become the No. 1 import in Canada in two years," adds Max Jamiesson, executive vice president and chief operating officer of Hyundai Motor America, Hyundai's new U.S. sales arm based in Garden Grove, Calif.
No Surprise to Anyone
But after bloodying the established auto companies in Canada, Hyundai won't surprise anyone when it moves south early next year.
In what is likely to be the first trickle of a flood of inexpensive small cars into the United States from at least three South Korean auto makers over the next few years, Hyundai will introduce an updated, front-wheel-drive version of the rear-drive Pony, called the Excel, at 167 dealers in 31 states on Feb. 15.
It will follow with the Stellar in 1987, and later it may expand its U.S. lineup with a light pickup truck, a mini-van, a two-seat sporty car, and possibly an executive-style sedan.
And if Hyundai's performance in the U.S. market comes anywhere near its Canadian success, the Koreans will spark an intensified battle in the overcrowded subcompact market, making it even more difficult for the few remaining American-built small cars to survive.
But the Koreans could also threaten the big Japanese auto makers, who have been challenged for price leadership in the American subcompact market since they entered it themselves nearly 30 years ago.
At least a few Japanese industry officials still bravely predict that they won't fall prey to the Koreans in the same way that the domestics have given in to them in the small car market.
"Hyundai will be competitive, and very possibly could cause greater price competition, but we are not going to abandon that entry-level (subcompact) market," insists Cliff Schmillen, senior vice president for U.S. sales at Honda. "And I don't think it's going to affect our sales at all."
But analysts believe that may be wishful thinking.
Only Kidding Themselves
"Some of the Japanese like to say they are not concerned, but they are only kidding themselves," notes Donald DeScenza, an auto industry analyst with Nomura Securities, a Japanese-owned brokerage firm.
But more and more Japanese industry officials are starting to agree, and now concede that they are getting worried.
"We think it will become very, very competitive at the low end of the market with the Koreans coming in," says Jerry Giaquinta, a spokesman for Toyota's U.S. sales operation. "It's going to be a real shoot-out."
In fact, since the Japanese are so dominant in the subcompact market, they have the most to lose to the Koreans, analysts say.
"The Japanese basically own the low end of the market already, so the Koreans will steal sales mostly from them," predicts Vern Lacey, an auto industry economist at Chase Econometrics, an economic forecasting firm in Bala Cynwyd, Pa.
Hyundai has already targeted the customers of the Japanese auto makers, as well as used car buyers who can't afford other new cars, as its primary markets, and has established an ambitious goal of selling 100,000 passenger cars by the end of its first year in the United States.
"I don't think we can become the No. 1 importer in the United States in a couple of years like we did in Canada," Jamiesson says. "But it would be silly to say that's not a long-range goal for us."
The Koreans are coming at a time when the Japanese may be more vulnerable than ever in the U.S. market.
Because their passenger car shipments have been restricted by import quotas since 1981, the Japanese auto makers have been concentrating on selling larger, more expensive cars in this country to make up in price what they have lost in sales volume.
That strategy has meant repeated sticker price increases, price-gouging by dealers on cars in short supply, the addition of expensive equipment even on the smallest Japanese cars available in the United States, and generally less emphasis on supplying basic transportation to lower- and middle-income Americans.
Like the domestic auto makers before them, who effectively ceded the subcompact market to the imports in the early 1980s, the Japanese are moving away from their former base in the subcompact field, in order to win a bigger share of the more lucrative luxury, performance and full-size segments of the car market, where profits are bigger.
That opens the way for auto makers from developing countries such as Korea that are not yet restricted by quotas and which can produce small cars while paying wages that are only a fraction of what auto workers earn in the United States or even Japan.
"The domestics, the Europeans and the Japanese are all moving toward the upscale market, so there is a niche at the low end that is opening up for low-cost producers to serve," Jack Kirnan of Merrill Lynch Econometrics notes.
First to Take Advantage
Yugoslavia became the first to take advantage of the vacuum at the low-end of the U.S. car market. Earlier this year, its state-run auto industry introduced the Yugo to the American market.
With a base price of $3,990, the tiny hatchback now is the lowest-priced car in America by far, and while analysts believe that its quality doesn't measure up to that of the Koreans or other imports, car buyers have still joined waiting lists to buy them.
Yugo sales officials expect to sell 40,000 in their first full year in the United States and predict that sales will top 100,000 within three years.
But it is the fledgling Korean auto industry, controlled by a few huge conglomerates, which is moving most aggressively to exploit the opportunity in the United States. "It has been said that the domestics have vacated the low end of the market to the Japanese, and we go one step further to say the Japanese have vacated the low end of their market, as well," Jamiesson observes. "That is where we fit in."
Ironically, the Koreans are rapidly expanding their production capacity to export cars with the help of the American and Japanese auto makers themselves, all of whom want to ensure that they have access to a supply of Korean-built cars as the competition in the U.S. car market intensifies in the late 1980s.
Hyundai, for instance, by far the largest Korean auto company, is using technology and components developed by the Japanese, helping the Korean firm to produce cars at quality levels acceptable to Western consumers.
Aided by Another Firm
At the same time, its entry into the U.S. market is being aided by Mitsubishi Motors of Japan, which owns 15% of the Korean car maker. Hyundai's own U.S. distribution system will be supplemented by Mitsubishi, which plans to sell about 30,000 Hyundai-built cars through its U.S. dealer network beginning in 1987.
Daewoo Motors, meanwhile, the second largest Korean car company, has formed a joint venture with General Motors to build small cars (designed by Adam Opel, GM's West German subsidiary) in Korea for sale by Pontiac beginning in 1987, supplementing the subcompacts GM already imports from Japan.
The joint venture will have the capacity to build about 167,000 cars a year, with about half of its annual production targeted for Pontiac and the U.S. market.
Also beginning in 1987, Ford plans to import up to 85,000 mini-cars from Kia, a Korean truck maker which has just received permission from the Korean government to expand into car production. Kia is developing its new cars for the U.S. market jointly with Mazda of Japan, which in turn is 25% owned by Ford.
Not to be outdone by its larger cross-town rivals, Chrysler, which already imports its smallest subcompacts from Mitsubishi in Japan, has been seeking to produce cars in Korea with Samsung, another big Korean firm which already has agreed to produce parts for Chrysler cars.
If the Korean government agrees, the two could be jointly producing up to 100,000 cars for the U.S. market by the end of the decade.
With so many Korean cars being sold through domestic dealerships, the U.S. auto companies aren't likely to be hurt financially by the Koreans' entry into the market.
But their American auto workers will be, especially after the Koreans bring intense competition to the subcompact market, forcing Detroit to consider dropping the last of its unprofitable, U.S.-built small cars, such as the Chevette, Ford Escort and Dodge Omni.
"The domestics can't compete with the Japanese, let alone the Koreans," says Kirnan of Merrill Lynch. In fact, cars from Korea, along with Japanese subcompacts already imported by the Big Three, eventually will be the direct replacements for the last of the all-American subcompacts.
But while they remain on the market, those U.S.-built subcompacts, already battered by the Japanese, will find the cost and price advantages enjoyed by Hyundai and the rest of the Koreans hard to match.
With an expected base sticker of about $5,500, the Hyundai Excel will be one of the least-expensive small cars on the market, and price-competitive with the cheapest Japanese-built offerings, such as the Nissan Sentra, Toyota Tercel and Chevrolet Sprint.
(The prices on Korean cars like the Excel will be so low, some analysts believe, that the Koreans will actually expand the new car market by making it possible for low-income buyers to switch from used cars.)
At the same time, preliminary consumer research also seems to indicate that American car buyers don't have any negative impressions about the quality of Korean products, and those that have been shown Hyundai's cars seem to find them acceptable, according to David Power, head of J. D. Power & Associates, a consumer research firm which specializes in the automotive market.
"Consumers' expectations about Korean-built cars seem to be that the cars are probably not quite as good as Japanese, but not far behind, either," Power says.
Should Be Willing to Switch
"They figure the Koreans are over there nearby Japan and must have learned something from the Japanese." As a result, Americans should be willing to switch from Japanese cars to Korean models, for the right price, Power adds.
(To add further to its acceptance in the United States, Hyundai is Americanizing the pronunciation of its very foreign-sounding name. Although Hyundai is pronounced Hun-da in Korea, the firm's U.S. marketing researchers have decided to tell Americans that the firm is called 'Hunday, as in Sunday,' Jamiesson says.)
One sign that Hyundai has a chance of sweeping the United States as well as Canada has come from the nation's car dealers, who have been tripping over each other in their efforts to get Hyundai franchises.
So far, the Korean auto maker has received 4,000 applications for dealerships, enabling it to pick and choose from among the most successful and established car dealers in the country to form the nucleus of its distribution system.
The demand for franchises has also enabled Hyundai to insist that each dealer build a separate showroom and service facility exclusively for Hyundai, insuring that its cars don't get lost inside Toyota or Chevrolet dealerships.
"I wouldn't be spending the millions and millions of dollars (on new showrooms) that they asked me to if I didn't think this was a sure deal," says John Eagle, president of the Eagle Cos., which is adding Hyundai dealerships in Houston and Dallas to the broad range of import and domestic dealerships it already owns in Texas.
"At the price the Hyundai will come in at, the only competition will be the Yugo, and frankly, I don't think that is any competition at all," Eagle adds.
Competition With Koreans
Clearly, that is bad news for the Japanese, who may be forced to hold the line on small car prices to compete with the Koreans just as the increasing value of the Japanese yen against the U.S. dollar is putting pressure on their costs.
"I don't think they will do as well as they did in Canada, because the United States is a more upscale market, with different demographics," insists Chuck King, head of Nissan's U.S. sales arm.
"But with the Koreans coming in, that basic small car market is going to become a hell of a lot more competitive. You're going to have a lot more entries, and not much larger sales volume in the low end, and that is going to make it very difficult."