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http://www.forbes.com/2008/08/25/hyundai-saturn-bmw-biz-cz_jf_0826flint.html?partner=yahootix

The auto industry faces many of the same challenges as other industries, but in this business, a mistake can cost hundreds of millions, if not billions, of dollars.

One such challenge is switching your position in the market, which means creating a new image and finding new customers. Another big challenge is figuring out the direction of the market.

Hyundai Motor is now confronting both situations. The Korean car maker is a success here with its low prices and smaller economy cars, but it is spending a fortune ($760 million for the car and new V-8) bringing out a new upscale car, called Genesis. The Genesis is rear drive, which luxury buyers like; Hyundai is launching it as a four-door sedan with either a six-cylinder engine or a V-8. Next year comes a sleek Genesis coupe, available with a turbocharged four-cylinder or a V-6. Hyundai figures the Genesis is a competitor against the BMW 528, the Mercedes E350 and the Cadillac CTS, among others.

The testers for car magazines like the Genesis and call it a good value for the money. The "six" I drove carried a 290 horsepower engine and a sticker of $36,000. The power pushed it to 100 mph smoothly, without a whimper or any hint of huffing and puffing. With the 375 horsepower V-8 motor, the Genesis sedan runs over $40,000 fully equipped, which is bold new territory for Hyundai.

Hyundai wants to sell 20,000 copies of the Genesis in its first full year in the U.S. and 50,000 a year after that. This will be tough: Hyundai sells lower-priced cars; luxury customers want status. My driving partner in my test drive was thoroughly impressed, but he admitted his well-to-do lawyer daughter probably wouldn't be interested. No prestige. She drives a Mercedes.

To further illustrate: Hyundai has a higher-priced big sport utility vehicle, the Veracruz, which has received generally favorable reviews, and sells for several thousand less than the similar-in-size Lexus RX. Last month (July), Hyundai sold only 700 copies here, while Lexus sold 7,100 RX units.

This is not to criticize the desire to move into a richer part of the market. Securing a piece of this business is a common dream of mass-market car makers, but it is never easy.

Volkswagen (other-otc: VLKAF.PK - news - people ) has been pushing upward for years and has considerable success worldwide with its Audi division. It has also done well with its ultra-luxury Bentley nameplate, but a few years ago when it attempted to sell an expensive luxury sedan, the Phaeton, through its VW dealers here, the effort was a failure.

The lesson: It is a bad idea to combine luxury and mass market in the same showroom. A customer buying a luxury car expects a different level of treatment than someone buying a $14,000 economy vehicle. Ford Motor (nyse: F - news - people ) is facing a similar challenge in its efforts to combine Ford, Lincoln and Mercury into one showroom.

General Motors' (nyse: GM - news - people ) Saturn division is another good illustration of the difficulty in moving up-market. Its new cars, the Aura mid-size sedan and the Astra small car, are quite good. But the Aura is selling at a 70,000-to-80,000-a-year pace, an improvement over last year but still well beneath the 100,000 a year GM expected to sell. The Astra is a new small car built in Europe, but Saturn sold fewer than 1,600 here last month.

Saturn's problem? Prior to its remake as a purveyor of Euro-style vehicles, it specialized in small, low-priced cars, such as the $15,000 Ion. The bigger Aura pushes past $25,000, and even the small Astra may run $19,000. Saturn needs a new group of customers.

Detroit, in its battle for survival, is coming out with new European-sized small cars. Here in the U.S. our domestic car industry has equated small with cheap, and it has been this way for 50 years. That's one reason Detroit car makers have often said they lose money on small cars.

Its truck business is skidding, so Detroit must expand its small-car lineup and make money in this segment. This means buyers will have to pay $25,000 or even $30,000, not $12,000 to $14,000.
 

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The lesson: It is a bad idea to combine luxury and mass market in the same showroom. A customer buying a luxury car expects a different level of treatment than someone buying a $14,000 economy vehicle. Ford Motor (nyse: F - news - people ) is facing a similar challenge in its efforts to combine Ford, Lincoln and Mercury into one showroom.
That says it all, right there. I saw another commercial from a local Hyundai dealer last night advertising new Accents for less than $10K with discounts and rebates (the margins on Hyundais must be very big to offer such large discounts) and small monthly payments.
 

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Its truck business is skidding, so Detroit must expand its small-car lineup and make money in this segment. This means buyers will have to pay $25,000 or even $30,000, not $12,000 to $14,000.
I disagree, every company except the American ones do just fine selling cheap cars. This is not going to turn to Europe with everyone wanting leather seated Cobalts with $3000 nav systems. s people move out of trucks, prices will rise, but not to the ridiculous level he is claiming.

That says it all, right there. I saw another commercial from a local Hyundai dealer last night advertising new Accents for less than $10K with discounts and rebates (the margins on Hyundais must be very big to offer such large discounts) and small monthly payments.
I'm doubtful the margin is that high, they probably don't make anym oney off that $10,000 Accent, that being said, nobody buys the $10,000 Accent. Would you like A/C? Add $1500. How bout power locks and windows? $1000 please. Auto trans? $1200 please.

Quickly puts it up to the $15,000 range where there is plenty of profit. I'd be willing to bet that 95% of the people who go in looking for that deal will leave with at least one of those options. That's where they get the money.
 

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Problem with Saturn in Canada is they charge us $4000-5000 more for an Aura XR vs. what they sell for in the U.S. I would have bought one this sumer if they weren't ripping Canadians off so much.
 

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Good article, a lot of good points. I said the same thing about Saturn when they first started to go away from their smaller S cars. And now they are just becoming a new version of Oldsmobile. When will GM get some good leadership???
 

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The Genesis will fail miserably, nobody shopping in this price range is going to buy any Hyundai product. Even if it was exemplary, the luxury market is VERY image driven and Hyundai has significant negative brand equity that is likely to be harmed by failed attempts like this.
 

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Hyundai discovered the same problem in Australia when they launched the Gandeur (which I think is called the Azera in your market) against the $13,000 Accent that they were famous for, very few people came looking for a car over $50,000 and sales were almost non-existant.

I think they have managed to push themselves upmarket to a degree, but they are only mainstream, not luxury. While I'm sure the Genesis is a good car, Hyundai's reputation certainly won't do it any favours.
 

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Not a good article; plus Ford is not trying to combine Lincoln, Mercury, and Ford into one dealer.
 

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...As to guessing where the market will be, it's easy to laugh at Detroit for being caught off guard by $4 a gallon gasoline, but Toyota (nyse: TM - news - people ) was caught too, with a brand new pickup truck plant in Texas plus one in Indiana.
That's true, only in that Toyota is suffering the same sales declines with its FS trucks as is Detroit. However, the similarities end there. Toyota has weathered the downturn much better: they will more easily be able to supplant production of FS trucks with more desireable vehicles in which Toyota has consistently invested; Toyota has consistently invested in products across the board, and other vehicles presently find themselves highly desireable and have been able to mitigate the decline of their truck portfolio. Detroit has focused on trucks and is presently caught with it pants down (again).

Racing to the bottom line demonstrates how the two different approaches leave Detroit and Toyota in two very different financial situations. Unfortunately, rather than learning from history, Detroit seems to be committing the same crimes again; this time, though, they will sacrifice other pieces of their product portfolio to focus on small cars. It's a shame, really, as Detroit will once again place its eggs in one basket, allow other products to linger on the market, and perpetuate the myth that Detroit doesn't get automaking. This in turn will lead to continued struggles in their endless search for profits.

When will Detroit get it?
 

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I'm not particularly fond of Hyundai, and it certainly would be nice to see them fail. However, it does frustrate me that Hyundai seems to be expanding its lineup as some Detroit brands seem content to fade into the background. As one example, it's not to hard to see that Hyundai seems to be nicely usurping Buick's place in the American market, despite the fact that so many GM fans(!) believe there's no place in America for Buick.

Whereas Hyundai was a joke only 10 years ago, now we're witnessing their solidifying their position as a credible small car maker for the US, and they have been having some success moving upmarket. They've certainly made positive changes to their image, including reversing the well-deserved perception as a purveyor of sub-par quality vehicles. In fact, it's not to hard to see Hyundai filling the gap where Buick is fleeing segments it used to dominate. Exit the LeSabre and Park Avenue (and replace it with the old-at-launch Lucerne), and enter the Azerra and Genesis. Exit the storied Riveria, enter the Genesis Coupe. While the Sonata is rightfully accused of finding a large amount of sales success through fleet sales, so does the LaCrosse (which incidentally is outsold by its Hyundai counterpart).

All told, we see the ebb of Buick to a paltry 186,000 (-22%) units last year to Hyundai's nearly 450,000 units. No place for Buick? Indeed! It's easily making way for Hyundai.

It will be nice when GM is run by managers who can just duplicate the efforts of once shoddy imports on GM's home turf. But for now we're unfortunately stuck with "cut-and-run" Rick and his team.
 
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