Hyundai’s $50,000 Puzzle: How to Sell New Luxury Car (Update2)

Hyundai Motor Co. Chairman Chung Mong Koo insisted the revamped Equus luxury sedan meet all regulations in the U.S., where Hyundai’s flagship has never been sold. Now the U.S. unit has to figure out how to sell a car that costs as much as eight times more than its Accent compacts.

“The person who just spent $40,000 or $50,000 on a vehicle doesn’t want to sit in the dealer’s service drive next to a kid in his Accent,” said Eric Noble, president of Car Lab, an Orange, California-based consulting firm for automakers. “A level of social stratification is expected.”

Equus, a status symbol in Hyundai’s home market, is unknown to U.S. carbuyers who view Hyundai as a maker of vehicles that sell for less than those of Japanese and U.S. rivals. Still, just as Toyota Motor Corp.’s Lexus and Honda Motor Co.’s Acura began winning sales from General Motors Corp.’s Cadillac and Daimler AG’s Mercedes-Benz in the late 1980s, Hyundai wants a share of the U.S. luxury market to enhance its image and profit.

South Korea’s largest automaker will decide this year whether to bring Equus to the U.S., said John Krafcik, president of its U.S. sales company, in an April 9 interview from the New York International Auto Show, where the V-8 engine sedan is on display. The car went on sale in Hyundai’s home market in March, priced from $48,100 to $79,000 at current exchange rates.

“We are honestly thinking about it,” Krafcik said. The company is already building experience with premium customers from its Genesis sedan that went on sale in the U.S. last year, he said.

Hyundai’s Sales

Hyundai, bucking the worst U.S. auto market since the early 1980s, had a 0.5 percent U.S. sales gain in the first quarter, while Toyota’s plummeted 37 percent and Honda’s fell 35 percent.

The company is benefiting from higher incentives, increased advertising, fleet sales and a marketing campaign begun in January offering to take back vehicles from customers who can’t make payments because they’ve lost a job.

Hyundai’s improving outlook led Group 1 Automotive Inc., owner of 100 dealerships, to buy a Hyundai store in Houston on April 14, the retailer’s first for the brand in a large U.S. city, said Pete DeLongchamps, a Group 1 vice president.

“They’ve got great products and one of the few brands that’s enjoying positive sales growth right now,” DeLongchamps said.

Hyundai rose 1.1 percent to close at 65,300 won in Seoul trading, bringing year-to-date gains to 65 percent.

Genesis ‘Halo’

Hyundai touts the Genesis as equaling the performance of the Lexus GS and Bayerische Motoren Werke AG’s 5-Series, and sells the model for at least $10,000 less than the two rival sedans.

“It has delivered a halo effect for the brand,” said Krafcik. “Equus could build on that.”

Unlike Toyota and Honda, which sell their luxury models through separate dealerships, Hyundai may either offer Equus to all U.S. dealers that want it or to only those with the best sales and highest quality service, Krafcik said. Starting a stand-alone luxury network would be difficult during the current slump as dealers would have trouble getting financing, he said.

“That would be a terrible idea,” said Rick Case, who owns six Hyundai dealerships in Florida, Georgia and Ohio. “In this market, no dealer could afford it.”

Fort Lauderdale, Florida-based Case said Genesis is attracting luxury buyers because it isn’t a well-known premium vehicle, a benefit amid the current recession.

Known Brands

“People are telling me they don’t want to be seen in a Mercedes, a BMW, a Lexus right now, because of the economy,” Case said. “It doesn’t look good to be laying people off, and then getting some kind of name luxury vehicle.”

Hyundai sold 3,945 Genesis sedans in the first quarter of 2009, an incremental gain since the model didn’t go on sale in the U.S. until June 2008. Still, the number contrasts with the market’s 38 percent plunge in first-quarter luxury vehicle sales, according sales tracker Autodata Corp.

“Luxury is rarified territory,” said Michael Robinet, an auto industry analyst for CSM Worldwide in Northville, Michigan. “It will take a while to build a capability on the retailing side.”

The risk in adding Equus in Hyundai’s U.S. showrooms is repeating Volkswagen AG’s experience with the Phaeton, introduced in 2003. Sales peaked at 1,939 in 2004 dropping to just 17 by 2007 as buyers balked at paying more than $60,000 for a Volkswagen-badged sedan.

Hyundai’s quality ranking also lags behind Lexus, the most dependable auto brand in the U.S., according to J.D. Power & Associates.

“In the mind of the American buyer, brands are only elastic to a certain point, then they snap back -- think VW with the Phaeton,” said CarLab’s Noble. “A premium vehicle is about more than just the car. It’s the whole experience.”