The Hyundai and Kia Manifesto
How the Korean Brands Won Over the U.S. Market

January 06, 2012 By Jacob E. Brown

"Bischoff!" Volkswagen CEO Martin Winterkorn calls out in a thick German accent to his design chief, Klaus Bischoff, at the 2011 Frankfurt Motor Show while examining Hyundai's new Euro-market i30. As you can see in a YouTube clip, Winterkorn was not thrilled when he found the i30's adjustable steering column operates more smoothly than those in his own Volkswagens.
"I've watched that video a lot," confesses John Krafcik, head of Hyundai North America, comically reenacting parts of it. "It's always good for a smile or a laugh."

Krafcik is understandably proud that Hyundai -- which not long ago was considered an industry punchline -- is now a major player closely watched by Winterkorn and others at the top of the automotive chain. The Koreans have been sweating the details for years, and their dogged efforts are paying off in the form of record sales and higher than ever U.S. market share.
Hyundai, along with its Kia counterpart, are run separately from one another in the U.S. with the exception of technical development. But they've excelled at the same things: getting new models out quickly, and constantly updating and improving their existing lineups. The quality changes began making a big difference in the early 2000s thanks in part to reverse Q&A sessions with journalists on press drives. Although some of the media found the practice irksome, it has proven to be an effective way for the Korean brands to pinpoint flaws. Bob Lutz used a similar strategy when he hired on a small consortium of auto journalists as consultants during his last stint with GM.
Michael Sprague, Kia's vice president of marketing communications, said journalists nitpicked about the quality of the Kia Soul's interior plastics during its March 2009 press introduction. By the time the Soul hit showrooms three months later, Sprague claims Kia made 18 improvements to the car based on that feedback.

In September 2011, during the Veloster's U.S. press introduction, an engineer said journalists felt the car lacked low-end torque. Within two weeks of the event, Hyundai's U.S. drivetrain development team had built a working prototype for an engine with redesigned camshafts that addressed the issue. Two weeks. (Hyundai still is weighing the pros and cons of the hotter Gamma 1.6-liter engine.) And a turbo version of the Veloster is on the way, addressing the other major complaint that the car was more show than go.
It's an example that falls in line with Krafcik's decree: "No major change waits 'til next model year." He's an executive who pores over all manner of quantitative and qualitative data, never letting a product go too long without improvement. He's a fan of drawing diagrams on a sheet of paper instead of giving long-winded lectures, describing what he means down to the smallest detail. But he says he's not solely responsible for Hyundai's turnaround. "The company was headed in the right direction before I got here."

An advocate of lean manufacturing since he helped coin the term in his 1988 master's thesis about Toyota, Krafcik took the practice a step further when he joined Hyundai in 2004. The silver-haired CEO says one of his first experiences demonstrating Hyundai's flexibility was when the Santa Fe topped the Toyota RAV4 in J.D. Power's 2004 Initial Quality survey. As the story goes, Toyota purchased a fleet of 2001 to 2004 Santa Fes to tear down and examine each part Hyundai had changed. Toyota found many parts, such as weather stripping and sound-deadening materials, had changed multiple times. Sometimes, Hyundai even tinkered with parts mid-model year to further refine the crossover.
"One person from Toyota I spoke with said 'Our product developers can't do it that way because our changes were designed to be done all once,'" Krafcik said. "They don't really bother to change parts in the middle of a model cycle. For us, it's imperative."

Change of Direction

Looking at the larger picture, it's clear both Hyundai and Kia have plenty of resources to be able to make changes on the fly. They're part of a conglomerate that raked in revenues of $145 billion in 2010 -- more than General Motors, Ford, or Honda. Hyundai owns its own steel mills in South Korea. Hyundai even owns many of the ships it uses to transport cars around the world.
Diversified business ventures and a supply chain stronghold could only go so far, though. Through the 1990s, the Koreans lacked the expertise needed to compete in the international car market. They nearly pulled out of the U.S. after struggling against image problems created by earlier products that didn't pass muster here.
One of the last-ditch efforts to reverse course was issuing its now-famous 10-year warranty after Hyundai's 1998 purchase of then-bankrupt Kia. The warranty helped the Koreans win back customers to what used to be simple, low-priced cars.

"It costs us almost nothing to do," Krafcik said of the warranty. "But the benefits have been outstanding."
From there, Kia's Sprague says the automakers first built cars to higher safety levels, then improved overall quality and features, and finally updated milquetoast vehicle designs as the Korean brands slowly but surely gained traction in the U.S.
Now, the Koreans are commanding similar price tags to their competitors. Krafcik notes the Elantra sells for an identical transaction price as a Ford Focus -- about $23,000 -- but with more standard equipment. Hyundai only sells three versions of the Elantra sedan in the U.S., about half as many as the Focus sedan. Across all 2011 vehicles, the automaker produces just 97 different trim levels. Krafcik estimates Toyota has thousands of combinations in which its vehicles can be ordered, by comparison.
Hyundai and Kia are led in the U.S. by small executive teams that report to the 15-member board of coordinators in Seoul, helping speed up decision-making. Although the two automakers are autonomous, they share development centers in South Korea, Germany, and Irvine, California. Engineers often work with their overseas counterparts to fine-tune drivetrain and suspension calibrations for specific markets. Designers have a little more freedom.

Peter Schreyer, the design chief whom Kia hired away from Volkswagen and Audi in 2005, said his instructions from corporate were fairly simple: "Do it and make it good." He explained that Kia encourages daring concepts like the Kia GT sedan that debuted at the 2011 Frankfurt Motor Show to keep the creativity flowing and the design aesthetic moving in new and different directions. Schreyer shuffles mostly between the German and U.S. offices. And just recently, Hyundai hired away Christopher Chapman -- one of BMW's top designers -- from the German automaker's California-based DesignworksUSA studio.
Krafcik explained that the U.S. offices have been pivotal with resuscitating sales, both in the U.S. and abroad. "Think about all the products designed here in California," he said. "All of our major products were designed in the U.S."
The U.S. Hyundai office famously flexed its muscles when Krafcik halted development of the Genesis sedan to have it redesigned before reaching dealerships. It was a ripple felt in all markets where the Genesis is sold, signaling the end of Hyundai's overly cautious direction.

In Korea, conservative designs are par for the course, where domestic makes represent some 90 percent of the Korean market. Here, it was harder to compete in the 1990s and 2000s with staid designs when Japanese products with similar looks carried better reputations. When Hyundai switched to its current "fluidic sculpture" design language, the more traditional, European-style designs coming from Schreyer at Kia began gaining ground on Hyundai in Korea. But both had finally shaken the bland image where it counted -- in the U.S.

Creative Aggression

Kia pushes a lean organization, with its telematics department being one example. Chief engineer Henry Bzeih, picked from Ford where he helped develop MyFord Touch and Sync, is now tasked with developing the UVO system. Bzeih and his team are finishing work on integrating telematics systems into UVO for diagnostics readouts, as well as a more modular next-generation system on a completely new platform.
"For every 10 guys over there [at Ford], we maybe have two working on the same kind of project here." It's strenuous, but Bzeih takes solace knowing that his team is responsible for designing both the U.S. version of UVO and versions that will eventually enter Kia's worldwide portfolio.
Kia's Sprague says keeping teams small allows the automaker to operate at "warp speed." "If something has to be done that's going to improve the product, we just go and do it. There's not a lot of sitting around in a room weighing the pros and cons."
The lean approach is fundamentally similar at Hyundai, and Krafcik says it helped his company navigate production issues in the wake of Japan's devastating March 2011 earthquake and tsunami.

Falling prey to the natural disaster was the only plant in the world that processes Xirallic, a mica flake used in metallic black paints. Many companies carried limited supplies of black vehicles afterward. Some even stopped selling black cars altogether. Not content to wait for the plant to come back online, Hyundai re-engineered its metallic black -- changing the color's name in the process without discontinuing availability -- in a matter of weeks.
"I'd call it controlled chaos -- creative aggression," an engineer who works with the two companies said of the atmosphere. "The company leaves a lot of room to have a hand in developing the products." He said every product goes through development in South Korea, but each region has its own responsibilities and tunes cars differently. The Western development centers were tasked with fine-tuning the upcoming Veloster turbo, which the engineer said was benchmarked against the Volkswagen GTI.
"In this company, your opinion can become frighteningly important very quickly," said an employee who works with Hyundai and Kia's U.S. tech center. He claimed that anyone who so much as breathes on a Hyundai or Kia has the ability to change the product, from customers to suppliers to company employees.
The technical staff exudes a scrappy, youthful attitude. Nearing 40 years old on average, they're a decade older than Honda's engineers were in the late 1980s when the Japanese automaker made its most important splash in the U.S. market. They mingle at auto shows and press events, casually asking for opinions from anyone who has one. They inconspicuously examine rival automakers' fleets without looking like scientists in white coats with clipboards.

They've got their work cut out for the foreseeable future with the Azera, refreshed Genesis coupe, and Veloster turbo launching next year; the Elantra coupe and hatchback and the next-gen Santa Fe in 2013; and an all-electric car larger than the Korean market i10 to be sold in the U.S. shortly thereafter. On the Kia side, engineers still must fine-tune the full-size Cadenza sedan, which is scheduled to launch in the U.S. next year, and the second-generation Soul and Forte for 2014.
Despite the continued aggressive rollout of new products, Hyundai and Kia aren't planning on declaring a sales edict like several of their rivals. With their Alabama plant already running at capacity and the newly built Georgia facility almost there, the two automakers are still striving for some growth. But their goals are modest.
Kia sold a record 485,492 vehicles in 2011, but refuses to make hard projections. "Are we going to put a stake in the ground and say we're going to build X number of vehicles? No. It doesn't really serve us well to do so," Sprague says.

Echoing his sentiments, Krafcik said the next phase in the U.S. market -- like Kia, Hyundai continues to set sales records, moving 645,691 vehicles in 2011 -- is to keep products simple in packaging and functionality and to further heighten quality and customer satisfaction. Hyundai also plans to continue stressing value across the lineup.
Krafcik says the success of his company and Kia should put to rest any notion of the Korean brands being second-rate, going as far as to say Hyundais are "unabashed leaders" in their segments.
"We're not going to continue at our current volume levels. We're going to keep pushing forward. But our primary goal is simple: to delight the customer," Krafcik says. "We want to be the most-loved automotive brand out there."