"(Generally) car companies are buying marketshare by sacrificing profits." Jagdish Khattar, MD, Maruti Udyog

In an industry where segments are continuously evolving, a carmaker has to fill in the blanks. And nobody-not even the 11-model company, Maruti Udyog-has played the game better than Hyundai. It came in with a B-class car, entered the C-segment with Accent and then moved on to the D-segment with Sonata. With all these cars, it pulled customers from below and above the segments. Now, having built a nationwide dealership of 110 and 250 service points, it's filling in the blanks once again.

Getz will sport two engine sizes (the new Santro's 1.1-litre Epsilon engine and 1.5 litre of Accent) and fill the gap between the 1.1-litre Santro and Accent, and emerge as an answer to Fiat Palio, which competes in the B-plus segment. It is expected to be launched in June 2003. Ahead of that in July this year, Hyundai will launch a five-door Accent, which-the company claims-will create a new category in the car market known as a semi-notchback. Terracan-a 2.5-litre, four-wheel drive-will follow in September and target consumers who already own a luxury car, but also want an SUV to upgrade their lifestyle.

Simultaneously, the company is carrying out feasibility studies for two C-class cars-Elantra and Matrix-to take the slot between Accent and Sonata. Grandeur XG, a super-luxury car, will take on Mercedes-Benz, the only player with offerings above Rs 18 lakh.

While the option of importing completely built-up units (CBUs) exists, Hyundai is unlikely to take that route, since long-term competitiveness will stem only from indigenisation. Already, the capacity at the Chennai facility is being increased from 1.2 lakh to 1.5 lakh cars a year at a cost of Rs 300 crore. A big chunk of the investment is going into increasing the assembly line capacity, although balancing the capacity of other 'shops' (like paint and press) will be equally important.

"Profits don't come easy. (You) have to work towards that through value engineering and constant cost reductions.." K.K. Swamy, Deputy MD, Toyota Kirloskar Motors

So, by 2005 just how will Hyundai stack up against competition? In terms of sheer number of cars in the portfolio, it will rank only behind Maruti Udyog, which plans to launch one model each year. But in a market that's growing at just 0.5 per cent overall (passenger car figures for 2001-02, SIAM), competition will only get bloodier. Also, some of the MNC carmakers such as Toyota, General Motors, and Honda-all of whom have made slow progress so far-will step on the pedal. Toyota, which has its Corolla and Camry lined up for launch in end 2002 and a new basic (read: small) car in 2004, has made it known that by 2010 it wants to sell a million cars in India-roughly a third of all cars that will be sold by then (See "0 To 33 In 10 Years", BT, October 28, 2001). And Toyota, alongside Maruti Udyog, may be Hyundai's biggest competitor in the years to come.

That apart, the global automotive scene is undergoing consolidation. General Motors already has a 20 per cent stake each in Suzuki and Fiat, and, as BT went to press, gm's Chairman Jack Smith was expected to finalise the Daewoo purchase in the third week of April. A resulting consolidation in India could position gm as the most powerful carmaker in the country. Similarly, DaimlerChrysler owns a 10 per cent in Hyundai and 37 per cent in Mitsubishi, and the trio is already working together on small cars that will compete globally. Then, Tata Engineering-which makes Indica, No. 3 in the segment in 2001-is scouting for a partner. If a Hyundai rival happens to tie the knot, then the Korean major's ride could get a lot rougher.

The Profit Puzzle

The biggest casualty of such a scenario would, however, be Hyundai's phenomenal profits. As such, rivals view the company's humongous profits with part suspicion and part envy. It's easy to see why. In 2000-01 sales rose 30 per cent over the previous year, but net profits nearly tripled. ''All I know is that in this business no one is making money," declares Aditya Vij, Managing Director, General Motors India. Adds Jagdish Khattar, MD, Maruti Udyog: ''Car companies are buying marketshare by sacrificing profits.'' Some others aren't mincing words. "If a car company breaks even after one year of operations on a capacity of 1.2 lakh cars and an investment of $641 million (Rs 3,076.8 crore), then it has created history," says a rival. "This case should be taught in the Harvard Business School," he adds sarcastically.

So, just how is Hyundai churning out super-profits in an industry that's largely bleeding? Some parts of the answer are obvious. Hyundai has a more integrated facility than other MNC players, and it sells the most cars after Maruti Udyog. And unlike its leading rival, has not had any flops in the market. People in the know point out that the spike in profits in 2000-01 is due to the launch of Santro's Euro 2 and Zip Drive versions and a jump in the sale of Accent. In all the three cases Hyundai's realisations were significantly more than the expenses incurred.

More importantly, Hyundai's parent in Korea has its heart in the Indian market. Its 64-year-old CEO Chung Mong Koo came personally to flag off Santro's 1.1-litre Epsilon engine in March this year, and Vice Chairman Byung Jae Park has already made two trips to the country in 2002. The parent has backed the Indian subsidiary with free R&D and product upgradation help. For example, Suzuki charged its Indian joint venture Rs 156 crore in royalty and technical fee last year, when Maruti posted a loss of Rs 269 crore. According to a company official, Maruti pays 3 per cent of its turnover (minus excise) to Suzuki Motors towards royalty and technical fee. Hyundai in Korea has made no such money at all. Even Toyota, General Motors, Honda, and Mercedes Benz pay either royalty or technical fee or both to their parents. ''As a rule in Japan, a company has to take a technical fee from a subsidiary,'' says K.K. Swamy, Deputy Managing Director, Toyota Kirloskar Motors.

Hyundai also runs a leaner operation. It is not one of the best paymasters in the industry and, therefore, its labour costs are low. At Maruti Udyog, labour made up 8-9 per cent of the total car-making cost in January 2001, while at Hyundai it is just 4 per cent. In fact, it's not unusual for top executives like Subbu to fly coach.

Some others feel that a bulging bottomline could be Hyundai's way of making its planned IPO look attractive. Says a Mumbai-based analyst: ''2001-02 was a good year for Hyundai, but don't forget that the company has an IPO in the offing.'' The public offering was originally planned for in 2000, but poor stockmarket conditions forced Hyundai to put it on the backburner. According to Subbu, there are two windows for issue-one in September 2002, and the other in January, 2003. Talks with merchant bankers are to start in May. ''There is no direct play available in the stockmarket in the car industry, therefore, a Hyundai IPO makes sense,'' says Satish Ramanthan, Vice President (Equity), ICICI Securities.

But why list a company so profitable? One reason could be the parent's need to unlock some value. The other important reason is money-Hyundai wants to crank up capacity to 2 lakh cars per annum as soon as possible and the cost of such an expansion could be $200 million (Rs 960 crore). Even a $100 million (Rs 480 crore) debt component would entail a big interest burden. ''Besides,'' says Subbu, ''we want to be seen as an Indian company, and having Indian shareholders will help our brand equity.''

The challenge for Hyundai, however, is to keep its monstrous money machine humming. And that means having to put out better cars at more competitive prices year after year. ''Unless Hyundai innovates, it will be hard-pressed to maintain its value proposition,'' says Amul Gogna, Executive Director of rating agency, ICRA. Despite Hyundai's plans of making India a global hub for small cars, one wrong model will be all needed to set back its exceptionally smooth run. And even if all the new launches do well, Hyundai will necessarily have to keep playing its value game.

Let's hope the company's MD-designate, Jae Il Kim, believes as much in buffet lunches as Yang Soo Kim.

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