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.