Hyundai Quality Now Rivals Top Japanese Brands

Summary

Five years ago, a joke making the rounds in the auto industry and among car buyers was: How do you double the value of a Hyundai? Fill the gas tank. That punch line no longer works. The South Korean automaker has turned its quality problems around and is working on burnishing its reputation.

Helping is a string of improved rankings in influential quality surveys and reports. Today could bring the best news yet. The J.D. Power and Associates Initial Quality Survey (IQS) comes out, and people both in and out of Hyundai expect another leap up in the brand rankings. In fact, there are suggestions that Hyundai could even beat the vaunted Toyota brand.

Joe Ivers of J.D. Power wouldn’t say whether Hyundai will pass Toyota today. But he did note that Hyundai has been the most improved automaker in the survey since 1998.

(People both in and out of Hyundai expected another leap up in the brand rankings….)

"It would be amazing. We look at Toyota and Honda all the time as a model for how to achieve our quality and sales goals," says Bob Cosmai, head of Hyundai Motor America.

He admits he saw vast improvement in Hyundai’s performance in a confidential midterm report he got from Power six months ago — about the time he took over as U.S. CEO — although he wouldn’t say whether Hyundai was ahead of Toyota then. In last year’s IQS, the Toyota brand ranked ninth out of 36 brands, Hyundai 23rd. Toyota’s luxury Lexus brand ranked first and likely will remain at the top this year.

"Quality has not been a big story for Hyundai the last few years," says marketing consultant Charlie Hughes, former head of Mazda North America. "But if in this next wave of surveys they tie or top a brand the caliber of Toyota, it becomes a huge story, not just for Hyundai but the industry."

The Power IQS ranking is based on problems reported by car buyers in the first 90 days of ownership. It is closely watched by car buyers as a predictor of quality. Improving that score could mean hundreds of millions of dollars in additional profit for Hyundai. Buyers may be more willing to take a chance on a brand they were joking about not so long ago. And Hyundai may be able to pull back a bit on profit-eating sales incentives.

The timing for turning the corner on quality couldn’t be better. Hyundai is preparing to begin building its two top models — the Santa Fe sport-utility vehicle and Sonata sedan — in its first U.S. plant next year. The plant, in Alabama, eventually will produce 300,000 vehicles a year, but Hyundai sold just 183,000 of those vehicles last year. Good news on the IQS could boost sales of both and draw in more buyers like Bill and Christine Miller of Darien, Ill.

The Millers bought a 2004 Santa Fe last fall. "We had read good things about Hyundai, but what really convinced us was several of our friends who had Santa Fes were very pleased and satisfied," Bill Miller says.

Serious about quality

Few in or out of Hyundai could have imagined a quality turnaround in 1998 when the automaker stood as a symbol of shoddy workmanship. Hyundai sold just 90,217 cars in the USA that year. Dealers were abandoning franchises. Engines in the company’s top-selling model, the budget-priced Excel sub-compact, had been failing. Rusting bumpers and doors were common. Electrical systems broke down. Air conditioners blew hot, when they blew at all.

A year later, the automaker got serious about quality as it split away from the South Korean Hyundai group of non-auto companies. Cosmai says Chairman Chung Mong Koo recognized that the only way North America and Europe would take Hyundai seriously was if quality improved to a level near that of Japanese brands.

Specifically, Hyundai has:

• Dramatically improved the electrical systems in its vehicles. It was Hyundai’s biggest area of complaints a decade ago. Changes in suppliers and revamped designs have cut down on the problems, which plagued Excel in Hyundai’s early days, say Hyundai executives and Consumer Reports magazine.

• Redesigned automatic transmissions to be smoother and quieter. This area could get better as Hyundai, which is 10.5% owned by DaimlerChrysler, swaps more learning with Mercedes-Benz engineers, who excel in transmission design and manufacturing.

• Invested in body integrity. David Champion of Consumer Reports says Hyundais now have far fewer squeaks, rattles and clanks after three to four years of ownership, ranking with the industry’s best. Hyundai says cabins are quieter, brake noise has been reduced, and ride and handling scores are up because suspension tuning has produced stiffer, Japanese-like rides.

Perhaps as important as any of the changes, Hyundai Motor America began offering in 1998 a 10-year/100,000-mile warranty, designed to alleviate buyers’ quality fears.

Hyundai executives and outside observers give Chung much of the credit for turning Hyundai around — including 400,000 sales in the USA last year. University of Oregon professor Richard Steers, author of Made in Korea: Chung Ju Yung and the Rise of Hyundai, says Chung Mong Koo, Chung Ju Yung’s son, got rid of his father’s cronies, who had treated the company like their own bank account, and focused on expansion outside South Korea, where quality is vital to sales.

Chung "believes there will only be a handful of independent car companies at decade’s end and is intent on making sure Hyundai is one of them," Steers says. Chung instituted quarterly quality meetings that bring together executives from around the world. These are "hot" meetings where quality issues — either in design or manufacturing — are attacked, and solutions are quickly instituted, Cosmai says. Chung nearly always attends.
That’s been a sea change in Hyundai’s culture. J.D. Power Chairman Dave Power — who began visiting South Korea in the early 1980s when Hyundai was plotting its entry into the U.S. market — says it had a different mindset from Japanese companies that had focused on quality and probed consumer tastes after their initial foray into the USA in the 1960s was met with derision.

"Hyundai used to tell us that with a lower price, you don’t need higher quality. Hyundai had, and still has, 70% market share in Korea, so it didn’t have the motivation to improve quality," Power says.

Moving up in rankings

Joe Ivers of J.D. Power wouldn’t say whether Hyundai will pass Toyota today. But he did note that Hyundai has been the most improved automaker in the survey since 1998.

The IQS is based on problems reported per 100 vehicles. In 1998, more than 100 problems per 100 vehicles separated Hyundai from Toyota. Last year, just 22 problems per 100 vehicles separated them.

Hyundai is improving in other quality rankings, too. In Strategic Vision’s 2003 Total Quality Survey, which measures how happy customers are with their vehicles, Santa Fe topped small SUVs, including Toyota RAV4, Honda CRV and Jeep Liberty. This year’s survey is due out in a few weeks, and auto consultant Dan Gorrell of Strategic Vision says Hyundai models again made big improvements.

Strategic Vision’s most recent vehicle-buyer survey also shows that just 24% of Hyundai owners reported any problems at all in the first three months of ownership, vs. 38% in 2000. That’s better than the industry average of 27%, and neck and neck with 23% of Toyota owners reporting problems. Honda leads the industry, with just 19% reporting problems.

And Hyundai tied Honda last year in Consumer Reports’ reliability score based on reader surveys.

People in and out of Hyundai say that for a while, its quality has been better than its image.

"Things were bad, as far as our reputation goes," says Cosmai, who came to Hyundai in 1999 from a job running sales for Honda’s Acura luxury division. "But coming from Honda, I knew quickly the cars were better than people thought."

Gorrell isn’t surprised by Hyundai’s improved scores. It has been "over-delivering on quality compared with what many customers expect."
Santa Fe owner Miller says he wasn’t much concerned about Hyundai’s reputation when he bought the SUV. "I figured if anything happened, the 10-year warranty (supplied by Hyundai Motor America) would probably cover us," says Miller, who previously owned a Saturn.

Hyundai dealer Brad Benson says one of his barometers of success is the type of customers who come to his Monmouth Junction, N.J., dealership. "The credit rating, demographics and income of our Hyundai buyers are the same as Toyota and Honda," he says. "We’ve got Princeton professors buying Hyundais."

Santa Fe makes a splash

A big moment for Hyundai was the introduction of the Santa Fe in 2000. Not only did it give the automaker entrée into the hot SUV market, but Hyundai cooked up Santa Fe specifically for American tastes.

"Santa Fe came out of our then-new California design studio, and its clear directive was to come up with a design that bubbled up from Americans, as opposed to having either a European or Korean concept of what North Americans would like," says former Hyundai chief Finbarr O’Neill, who now runs Mitsubishi Motors in the USA.

Jim Hossack, now with industry consultant AutoPacific, worked on the development of Santa Fe while at Hyundai and calls the vehicle a "watershed" for the automaker. "Every vehicle before that was developed for the Korean market by Korean engineers. They had so little exposure to the world or car industry outside Korea that the design and standard-of-build quality we insisted on for the U.S. has carried through the organization." Hossack says his team emphasized minimizing "things gone wrong," which was a new way of thinking at Hyundai.

Tom Libby of the Power Information Network says there is little question that Hyundai’s credibility is rising. Fifty-two percent of Hyundai buyers this year are coming from its own buyer base. That’s ahead of Toyota’s 50% loyalty rate.

Hyundai’s buyers are also increasingly coming from Toyota, 5.5% vs. 4.7% three years ago, Libby says.

How good has Hyundai’s quality become? Good enough that DaimlerChrysler is planning to put a Hyundai-designed four-cylinder engine into Chryslers, Jeeps and even Mercedes-Benz Smart brand cars. Mitsubishi is using the engine as well.

Hossack says Hyundai doesn’t need to top quality rankings to sell more vehicles. "Achieving industry average would do it for Hyundai, and by and large I think they are there. They don’t have to beat Toyota."

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