Will Hyundai's Luxury Car Be Like the VW Phaeton?

by: Markham Lee

Reading about Hyundai's plans to break into the Luxury Car market reminds me of the days when Acura first launched and the parts under the hood still said "Honda" on them. It was a mistake that slowed down Acura's initial progress towards being recognized as a legitimate luxury automaker.

I'm also reminded of the launch of the VW Phaeton, which was a failure despite the Phaeton being a great car. The problem was never the car but the fact that the shoppers VW was pursuing don't shop at VW dealerships. The car probably would've been a success if it had been marketed as an Audi.

From the WSJ:

ANN ARBOR, Mich. -- Hyundai Motor Co. is aiming to sell about 50,000 Genesis luxury sedans in the U.S. in 2009, a senior executive said on Tuesday.

The vehicle, which started arriving in U.S. dealerships in June, represents a significant gamble for Hyundai, which is known for offering small, economical models rather than alternatives to BMW and Lexus.

But the Korean company thinks the Genesis will attract a class of "non-conformist" consumers who want luxury cars but are not concerned about the brand they drive, said John Krafcik, vice president of product development.

Speaking to reporters here, he said the goal of selling 50,000 Genesis sedans and coupes in the U.S. next year is "reasonably achievable." The question, he added, is "are there enough of these confident nonconformists out there for us."

As a premium, rear-wheel drive sedan, the Genesis faces some well-established tough competitors such as BMW AG's 5 Series. So far this year, BMW has sold more than 27,000 5 Series.

Hyundai will market its car as a great value. It sells for $33,000 to $42,000 -- about $20,000 less than a 5 Series.

Other rear-wheel drive sedans in the same price range as the Genesis are also well entrenched, such as the Chrysler 300. Chrysler LLC has sold more than 44,000 300s in the first seven months of the year.

When I first read about the Genesis I thought:

If VW can successfully sell the Passat (itself a $30k-$40k car) within the Premium/Near Luxury market and yet fail with the Phaeton, what does this say about Hyundai's chances when Hyundai's brand isn't in the same league as Honda (NYSE:HMC), Nissan (OTCPK:NSANY), Toyota (NYSE:TM) or VW (OTCPK:VLKAY)? Are consumers going to be especially keen on spending $40k at the same dealerships that are presenting themselves as low cost providers, offering financing to those with bad credit and where the customer experience will pale in comparison to what they're used to?

What Hyundai is missing is that luxury cars aren't commodities that are purchased based on how well a particular car company's branding message reached a particular customer. Instead, it's a fiercely competitive field where people don't compete on price but by trying to sell their interpretation of the best luxury car on the road within a certain price range, class, etc. You build a successful luxury car business by selling people on the idea that your car is the best solution for their luxury car needs, because people are more concerned about the nature of the car then they are about price.

As I said last week, a brand is as follows:

A name given to the set of functional, emotional, positive and negative attributes that comprise the consumer's view of a product, service, company, etc. The strength of a brand isn't so much a function of awareness as it is that brand's ability to cause a consumer to chose Product X over Product Y, even if it means that they have to wait for that product, pay a premium for it, etc, etc.

You can't build a luxury car business by ignoring the importance of branding and trying to compete on price, because a successful luxury car business has a brand that people are willing to pay a premium for. You can't lure away one of BMW's near fanatical customers by offering them a lower price you have to offer them a better BMW, because the selling point was never price it was the nature of the product. The problem here is that Hyundai is competing on the wrong basis (price), instead of competing on the product attributes that draw people to luxury cars in the first place.

Furthermore telling consumers to "think differently" instead of just giving them what they want isn't likely to be a successful sales strategy, and people that don't care about brands, cars, etc, aren't going to be too keen on spending $40k on a car.

I have to wonder: do these non-conformists that will spend $40k on a Hyundai instead of on a similar Acura, Infiniti, Lexus or Volvo even exist?

It's a non-starter all the way around.

The situation almost reminds me of Wal-Mart's (NYSE:WMT) attempt at going upscale failing miserably due to the fact that the company wase trying to compete on price as opposed to cachet and brand attributes like Target (NYSE:TGT), in addition to the fact that the customers they were pursuing weren't especially keen on shopping at Wal-Mart in the first place.

If the Genesis is truly all that Hyundai purports it to be they would be better served by attempting to build a luxury brand in much the same way that Toyota built Lexus, instead of trying to sell it under the somewhat down market Hyundai name. Otherwise, the people who can afford this car will generally continue to stick with the usual suspects in the luxury car market and pass by the Genesis. You can't build a luxury car business under a brand name that luxury car consumers ignore, and/or won't pay a premium for.


The WSJ: "Hyundai Makes Big Gamble With Luxury Genesis Sedan" -- Neal Boudette, August 20, 2008

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.