Focus on quality risks Hyundais mkt share

Written by Reuters | Sriperumbudur/ Seoul | Updated: Nov 13 2012, 10:10am hrs
Running around the clock and selling everything it can build, Hyundai Motors Indian factory is bursting at the seams. But as demand grows and rivals scale up, the car maker has chosen to take its foot off the pedal.

Hyundais strategic decision to focus on quality over quantity, even as its production lines are stretched in India and elsewhere, risks losing hard-won market share and is forcing it to divert output from its plant outside Chennai away from exports to other high-growth markets to meet domestic demand.

The South Korean firm, with affiliate Kia Motors, has surged to the No. 5 spot in the global automaker rankings by offering stylish models at affordable prices. That formula has been especially successful in emerging countries such as India, where it is No. 2 by market share.

The decision to slow down was prompted by fears a growing reputation for well-built cars could suffer in a headlong dash to churn out more vehicles, but it has sparked rumbles of discontent among some executives.

Our operations all over the world are calling for more cars. Executives tell the chairman that capacity should be expanded because they have to sell more cars, a senior Hyundai executive in Seoul said. But the chairman says, What are you talking about We have enough capacity. What we need now is stability, he said, speaking on condition of anonymity due to the sensitivity of the issue.

The chairman is Chung Mong-koo, whose father Chung Ju-yung founded the Hyundai Group chaebol, as South Koreas powerful conglomerates are known.

Hyundai, which, does not yet enjoy the same sort of name cachet as Toyota or Volkswagen, aims to emulate the success of compatriot electronics giant Samsung Electronics, which evolved from a maker of cheaper goods into a powerful global brand in its own right.

To that end, Chung has quietly shifted strategy in recent years to put capacity expansion in the backseat and instead focus on building Hyundais brand and reputation for quality. In the past, pushed for building more factories, but executives said it would be difficult to sell cars because of quality issues, said the executive in Seoul. Now, there is a push from the bottom. Executives now say they can sell more cars.

The expansion freeze has already crimped sales growth in the United States. Hyundais US sales expanded just 8% from January to October this year from the same period a year earlier, more than half the 20% growth achieved in 2011.

Hyundai doubled annual capacity at the plant to 600,000 cars in 2008, and was operating at full tilt within three years. In 2009, it exported nearly half of its Indian production to markets in Asia, Africa, Europe and the Middle East, but only 40% last year.

Next year, overseas shipments, including to high growth markets such as South Africa and Mexico, will likely account for just 35% of India production, the plants production manager said, as local demand absorbs output.