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

by: Markham Lee August 21, 2008 | about stocks: HMC / NSANY / TM / VLKAY.PK    
Markham Lee

Markham Lee

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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 (HMC), Nissan (NSANY.PK), Toyota (TM) or VW (VLKAY.PK)? 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 (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 (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.

Sources:

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.

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This article has 9 comments:

  •  
    Aug 21 10:12 AM
    Isn't Hyundai in much the same position that Toyota was when it launched Lexus, with Mercedes and BMW "unassailable&quo... Early Toyotas rusted out, just as early Hyundais were unreliable. Now the Sonata has captured many would-be Accord/Camry buyers. Are you saying luxury buyers aren't interested in relative value? The Genesis is really challenging (and challenged by) the Infiniti G35 and Acura TL more than BMW et al and both of the former probably outsell the BMW 5. I'm not sure there are 50,000 Genesis buyers out there in this economy, but I'd bet on the Koreans making it a success over a few years.
    Reply
  •  
    Aug 21 10:16 AM
    I tend to think the situations of the Phaeton and Genesis are not really comparable; though both were reaching up-market, the Phaeton was a $65,000 car (base) that was about 2.8X the average car price ($23,000 in 2004) whereas the Genesis, at $32,250, is only about 1.4X the average car price. A 40% reach is not really comparable to 280% and the exclusive market Phaeton tried to co-opt.
    Reply
  •  
    Aug 21 11:06 AM
    First thanks for reading.

    Second: I think Toyota was in a better position than Hyundai when it launched Lexus than Hyundai is now, especially since the marketplace is a LOT more crowded than it used to be. Plus let's not forget that Toyota launched a new brand, while Hyundai is trying to go upmarket with its current one.

    The other issue is that shoppers considering a well established luxury brand (Infiniti or Acura) vs. a Hyundai Genesis is much more likely to pick the former. All things being equal you're getting a luxury car buying experience, a tried and true car and higher resale value.

    It's not so much the cost of the Phaeton vs. the Genesis as it is the degree to which it goes upscale from its current models. The Phaeton is a big jump up from the $30-$40k Passats VW already sells, and the Genesis is a jump up from a Sonata.

    Let's also not forget that the Sonata competes in a rather generic field (mid-sized cars) by being cheaper and/or offering financing to people who may not be able to get it at the Honda dealer.

    I don't think they have the customer base and again, why bother with a Genesis when you can get an Infiniti, a car that does a credible job of challenging BMW performance wise or an Acura TL?

    I don't see how Hyundai successfully competes when they're alternatives in that price range with better reputation and a luxury nameplate.


    -M
    Reply
  •  
    Aug 22 01:05 PM
    I think the big difference here is the lack of a new dealership channel. It is hard to sell a $70,000 VW, a $50,000 Toyota, a $40,000 Hyundai, etc. in general: but to sell them in the existing dealerships is very very tough. When one is selling an upscale vehicle it is crucial to reassure the buyer that he/she is making a very smart decision, that he/she is now one of the elite club, etc. Thus a BMW dealer's muted lighting, soft music, pile carpets, and espresso machines. How does one sell a $45,000 Genesis in a dealership characterized by (sorry for the exaggeration here) linoleum floors, soda vending machines, and nervous buyers waiting outside the F&I office to see if they qualified for the loan? Surveys have shown that as one spends more on a car the dealership matters more and more, relative to the car, and for Hyundai to not launch Genesis in a separate store, or VW not to launch Phaeton in a separate store (versus what Lexus did), really means one starts with two strikes against you....
    Reply
  •  
    Aug 22 08:48 PM
    Glenn I have to say that I agree with you 100%.

    Hyundai is working off the assumption that all they have to do is make the car and sell it at a competitive price, they're not considering the customer experience part of the equation.

    As someone who has shopped and/or purchased cars from the local luxury dealerships, and accompanied others to the local Nissan, Honda, et al dealerships, I just can't imagine a current luxury customers deciding to spend a similar amount of money on a Hyundai whilst tolerating a significantly downmarket experience.

    At least, you won't catch me doing it.

    -M
    Reply
  •  
    Aug 23 01:56 AM
    -M,

    You're 100% on the "mark" with this one...DEFINITELY a "non-starter"...
    Reply
  •  
    Aug 23 01:32 PM
    Volkswagen had an excellent chance to sell an upscale car beyond the Audi, they own the Horch brand, a prewar car equal to Mercedes or Maybach. This car could have been sold by audi dealers with a prewar
    Autounion style grille as an alternate to the Audi R8.
    Reply
  •  
    Aug 23 05:02 PM
    I never understood VW's reasoning behind the Phaeton when they own the Audi brand as well, it just didn't make sense to even waste the time to try and take VW more upscale when they could just sell the Phaeton as an Audi. At the end of the day it's actually a great car so it's just a total waste that it wasn't marketed as an Audi.

    -M
    Reply
  •  
    Aug 26 03:31 PM
    I agree with the author of this story. Picture the crappy Hyundai Accent next to the 40K Hyundai Genesis. Korean cars have come a long way in terms of quality, but they are still not up to Japanese standards. The only way this is going to work is if Hyundai creates a new Luxury brand that is above it's own name (just like Honda did with Acura and Toyota did with Lexus).

    Some people today still do not believe Lexus is able to compete on the same level as Mercedes-benz and BMW. For some of the Lexus products, I believe it. The lower end Lexus cars are nothing more than tarted-up Camry's.
    Reply
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