Are Korean automakers winning the right way in Europe?
Hyundai, Kia dispute claims of dumping, say sales gains come from design and value
While struggling European carmakers reduce production and consider plant closures, Hyundai and affiliate Kia are reporting record sales. In a European car market that shrank 7.2 percent in the first nine months, Hyundai's vehicle sales rose 9.6 percent and Kia's by 20.5 percent, according to data from European auto industry association ACEA.
The Korean brands attribute buoyant sales to their lean organizations and modestly priced, desirable new cars such as the Hyundai i30 compact hatchback, the Hyundai ix35 compact SUV, the Kia Rio subcompact and the Kia Sportage compact SUV.
But ACEA Chairman Sergio Marchionne and other European auto executives have complained that the EU's new trade agreement with South Korea allowed Hyundai and Kia to gain significant market share.
"We must determine whether the free trade deal with South Korea is providing all the benefits expected at the time of its signing," Marchionne said at the Paris auto show in September.
Charges of 'dumping'
EU tariffs on imported South Korean cars fell to 6.6 percent for small cars and 4 percent for larger cars, down from 10 percent before the agreement. Tariffs will be eliminated in 2015.
Since the trade treaty took effect in July 2011, imports of Korean-made vehicles to Europe have risen substantially, Marchionne said. "I think it is almost a miracle, since the European market has been down for the past five years, while their [South Korean] imports have increased disproportionately compared to our exports in Korea," Marchionne said.
A French minister even accused the two Korean automakers of "dumping" — that is, selling cars in Europe at below-market prices. "The two brands, Hyundai and Kia, are competing with our manufacturers in unacceptable conditions of dumping," French Industry Minister Arnaud Montebourg told Socialist party members in August.
European automakers also claim that Hyundai and Kia profit unfairly from a weak Korean currency, and that they buy cheap parts from Vietnam and China.
More cars from Korea
In the first eight months, sales of Kia models imported from Korea jumped 68 percent to 108,773 units.
Kia's strategy is straightforward: It imports small cars such as the Rio and Picanto from Korea, and builds larger vehicles like the Sportage, Cee'd and Venga in Slovakia.
In the first eight months, imports accounted for 54 percent of Kia's sales in Europe, up from 46 percent a year earlier.
Kia has relied on Korean-built vehicles to boost sales this year as its Slovakian plant retooled for the model changeover of the Cee'd. But its sister company Hyundai is less reliant on imports.
Hyundai imports only the i40 mid-sized car, Santa Fe large SUV and Veloster coupe from its home country.
European sales of those models jumped 249 percent in the first eight months, but their combined volume was still only 32,105 units, or 10 percent of Hyundai's European total, according to market researcher JATO Dynamics.
The company also imports its i10 minicar from India, which generates an additional 15 percent of European sales.
Hyundai builds most of its European lineup -- the i20 subcompact, ix20 small minivan, i30 compact and ix35 medium SUV -- in the Czech Republic and Turkey, where wages are low.
Together, these models add up to three-fourths of Hyundai's European sales volume.
In fact, Hyundai might argue that it produces a considerably higher percentage of its cars in Europe than Chevrolet.
Through August, Chevy's sales in Europe totaled 139,230 units, up 6.5 percent. And nearly 99 percent of those sales were generated by Korean imports. By contrast, European sales of the Canadian-built Chevy Camaro totaled only 1,708 units, according to JATO data.
The Czech-built Hyundai i30 is Europe’s top-selling Korean car.
Tough times for rivals
The rise of the Korean brands comes at the worst time for Europe's mass-market automakers, which are losing market share at both ends of the price spectrum.
While Hyundai, Kia and Dacia gain in the low-priced segments, German luxury brands are encroaching at the high end.
In 2002, Citroen, Fiat, Ford, Opel/Vauxhall, Peugeot, Renault, Seat and Skoda accounted for 54.6 percent of sales in Europe. In the first eight months of 2012, their combined share has declined to 43.3 percent, according to ACEA data.
What happened to all that market share? At the high end, premium brands increased their European market share to 20.2 percent this year, up from 17.0 percent a decade ago.
And at the low end, Hyundai and Kia grabbed 4 percentage points of market share, while Renault's no-frills Dacia brand claimed 1.8 percent of Europe's market, up from zero a decade ago.
The only mass-market European brands that bucked this trend were Volkswagen and Czech sister brand Skoda. VW brand grew its market share to 12.8 percent this year, up from 10.3 percent 10 years ago. Skoda's share has rise to 3.9 percent from 1.7 percent during the same period.
Hyundai and Kia executives have told Automotive News Europe that they are attracting customers who formerly owned cars built by Opel, Renault and Ford.
But the two companies downplay the effect of Europe's trade agreement, noting that rival automakers also are importing Korean-made vehicles.
"Hyundai and Kia roughly represent half of the Korean import to the European Union, while Chevrolet and Renault cover the other half," said Benny Oeyen, Kia Europe's vice president of marketing and product planning.
Low prices or good product?
Some industry observers have claimed that Korean automakers gained market share simply by offering low prices. But this view may be a bit oversimplified, according to the New Car Buyer Survey.
The survey — a confidential, syndicated research commissioned by European automakers -- concluded that price was a top priority last year for consumers who purchased a Dacia or Hyundai.
It was the No. 2 priority for Chevrolet buyers, and only the third priority for Kia purchasers.
But that was last year. According to this year's survey, exterior styling was the top reason for buying a Hyundai, followed by price and value for money, said Mark Hall, the marketing director for Hyundai Europe.
Likewise, exterior styling was a top motivation for Kia buyers, followed by maintenance cost and price.
This reflects the Korean automaker's effort to put more pizzazz into vehicle design, said Kia global design director Peter Schreyer.
"Five to six years ago, Kia cars design-wise were simply boring," said Schreyer, referring to the first-generation Cee'd, which was launched in 2006.
Now, Kia has become a design benchmark for several automakers.
But what about pricing? Are Hyundai and Kia undercutting the prices of their European rivals? Kia's Oeyen says no.
"Adjusted for equipment, our list prices are from 3 to 5 percent lower than our direct competitors but, as we offer lower incentives, our transaction prices are basically on par," Oeyen said.
Hyundai's Hall goes even further. Adjusting for equipment, Hyundai's list prices are 2 to 5 percent below European automakers.
But Hyundai's incentives generally are much lower than other automakers. So the transaction price for the Hyundai ix35, for example, is up to 4 percent more expensive than competing models.
That's because Hyundai's incentives average 1,850 euros, roughly 30 percent less than rival automakers' incentives, which average 2,200 euros, according to Hyundai-commissioned research.
Since Hyundai and Kia do not disclose regional financial results, it is impossible to know if they are profitable in Europe.
But on a global basis, their profits last year were comparable to the German premium automakers.
Hyundai reported an operating margin of 10.4 percent, second only to BMW Group's 11.8 percent. Kia, at 8.4 percent, wasn't far from Daimler's 9.0 percent, according to data from consultancy AlixPartners.
Revised growth plans
While Hyundai, Kia and Chevrolet are still growing in Europe, they cannot ignore the market downturn.
Overall, Hyundai sales in Europe grew 8 percent in the first eight months to 314,621 units. This year, Hyundai forecasts sales to rise 10 percent to 445,000 cars and aims for a 3.5 percent share of the European market.
But after five straight years of industrywide decline, Europe is headed for its worst sales in 19 years. So Hyundai is re-evaluating its mid-term sales targets, said Allan Rushforth, Hyundai Europe's chief operating officer.
The company had targeted a 5 percent market share in 2015, but Rushforth told Reuters in September that the automaker is pushing that goal back a year. "The market decline exceeded our expectations," Rushforth said.
Kia, which aimed for sales of 450,000 units by 2015, needs another year or two to get there, said marketing boss Oeyen.
And Chevrolet, which had targeted sales in Europe and Russia of 1 million units by 2015 or 2016, is not making predictions anymore.
"I'm not going to predict a volume number and I'm not going to predict a market share number, particularly in a declining market," said Chevrolet Europe President Susan Docherty. Docherty, who took charge in January, says she wants the brand to get its fair share, do so profitably and show consistent growth.
But even if the Korean automakers ease up on their aggressive growth plans, it would mean only short-term relief for embattled Fiat, Ford, Opel/Vauxhall, Peugeot, Citroen and Renault.
Hyundai and Kia, which can plausibly claim they've closed the gap on product and pricing, still lag behind their European rivals in term of brand awareness. So there's huge potential for growth as they become better known.
When European consumers are asked to name all the car brands they know, about 20-percent-plus name Hyundai or Kia. By contrast, more than 40 percent name the European volume brands.
So when a customer decides to shop for a car, Hyundai and Kia are half as likely to be considered because they are relatively unknown.
To raise brand awareness, the Korean automakers are sponsoring major soccer tournaments or teams.
Since 1999, Hyundai and Kia have sponsored the FIFA World Cup and UEFA European Championship.
Chevrolet chose to sponsor teams rather than championships, notably two of the most renowned British teams, Manchester United and Liverpool.
Kia says its soccer sponsorship has paid off, helping the brand to grow its unaided awareness in Europe by 30 percent over the past four years. But Chevrolet has been less effective with its car-racing sponsorship.
This summer, Chevrolet said it would quit the World Touring Car Championship (WTCC), a racing series it joined in 2005 and has dominated for the last three seasons with the Cruze sedan. Instead it will sponsor soccer.
But Hyundai will sponsor both soccer and car racing. Next year, the Hyundai i20 subcompact will enter the World Rally Championship.
This racing series is "important because they connect not only to the brand, but also to the product," Hall said.
If the Korean automakers match the brand awareness of their European rivals, they can compete for the mainstream portion of the European market, which accounts for 40 percent of the region's sales.
For the European brands, that could trigger a battle for survival.
In the first eight months of 2012, Korean exports to Europe rose 15 percent to 281,529 units, according to the European statistical organization Eurostat. Yet, Korean shipments are still well behind the all-time high seen in 2007, when 640,000 units were exported to Europe.
European vehicle exports to Korea grew the same 15 percent in the first eight months of 2012 but, at 58,363 units, they remain well below what is coming into Europe from Korea.
European automakers aren't getting a comparable boost from the trade treaty. In value, Korean exports to Europe grew 23 percent to $2.7 billion in the period, while European exports to Korea increased 16 percent to $1.5 billion, Eurostat figures show. This means that Europe's auto trade deficit with Korea widened to almost $1.2 billion from January to August compared with less than $900 million in the same period last year.
The trade treaty phases out the EU's 10 percent tariff on Korean cars over three to five years. The agreement also ends South Korea's 8 percent import tariff on European-built vehicles.
By 2016, some 99 percent of trade between the EU and Korea will be duty-free. This prospect has alarmed French trade officials. On October 22, the European Commission rejected France's request for “prior surveillance” of car imports from Korea.
What will happen when the remaining tariffs lapse in 2016? With humming assembly plants in the Czech Republic, Slovakia and Turkey, Hyundai and Kia won't have to rely only on Korean imports to expand their European sales.
Chevrolet, which imports virtually all of the vehicles it sells in Europe, is another story because the General Motors subsidiary has no plans to start producing vehicles in Europe.
You can reach Luca Ciferri at email@example.com.