Hyundai Motor Group beefs up high-end strategy to deliver strong Q1 earnings

Hyundai Motor Co.’s Genesis G90 [Photo provided by Hyundai Motor]

South Korean auto giant Hyundai Motor Group posted first-quarter earnings that exceeded market expectations, with its operating profit surpassing that of Japan’s Toyota Motor Corp. and U.S. General Motors Co. (GM), on the back of its high-end brand strategy.

According to multiple industry sources on Tuesday, Hyundai Motor Group surprised the market by raising an operating profit of 6.47 trillion won ($4.8 billion) in the January-March period, which is larger than that of Toyota Motor, which topped global auto sales last year, and GM.

Hyundai Motor Group’s operating margin was the highest among global automakers at 10.5 percent (Hyundai Motor 9.5 percent and Kia Corp. 12.1 percent) when excluding Germany’s Mercedes-Benz Group AG that produces premium models and Tesla Inc. that sells relatively high-priced electric vehicles (EVs).

The auto industry attributes Hyundai Motor Group’s strong performance to its high-end brand strategy.

Sources noted that the average price of Hyundai Motor Group’s passenger vehicles, which used to be 36.4 million won in Korea in 2018, exceeded 50 million won last year.

The price of its sports utility vehicles (SUVs) and recreational vehicles (RVs), which have been gaining popularity among the local consumers, also jumped to 46.4 million won from 38.3 million won over the same period.

RVs for exports saw the largest increase in terms of price, rising to 62.8 million won last year from 33.9 million won four years ago.

The price of Kia’s non-flagship passenger cars changed little during the period but that of RVs for domestic sales increased to 43.6 million won from 33.4 million won and RVs for exports to 50.9 million won from 38.9 million won.

“Higher-priced Genesis, RVs, and eco-friendly vehicles are increasingly accounting for a large portion in sales,” said an unnamed official from Hyundai Motor Group.

“The launch of the first all-electric EV6, fifth generation Sportage, and hybrid and plug-in hybrid models of Sorento should have had an impact on the price.”

Market insiders note that the increase in the sales price comes from the expansion of the high-end lineup and installation of various convenience options in standard models.

HMG had been promoting cars with no options by highlighting their price competitiveness. Its strategy, however, has changed recently to increase the price by including expensive options such as advanced driver assistance systems (ADAS) in standard models.

This new strategy has been well received by consumers abroad, especially in the U.S.

Kia Corp.’s fifth generation Sportage [Photo provided by Kia]

Kia Sportage, for example, had more than 80 percent of local buyers opting for low-cost trims, but the proportion dropped to the 10 percent range after the release of new models and then to a mere 7 percent in the first quarter.

“Sales did not come easy in the early days of raising prices, but customer satisfaction increased with improved products and the current strategy led Kia to stand out among its peers,” said Song Ho-sung, president of Kia, at the CEO Investor Day last month.

Hyundai Motor and Kia, in the meantime, managed to retain the lowest level of cost per unit among finished carmakers despite the price hike.

According to Samsung Securities Co., Kia’s sales cost per unit was $19,100 last year, the lowest among the world’s major automotive companies. It is only 30 percent of the highest Mercedes-Benz Group and a little higher than half of the industry average of $36,300. A Hyundai car also costs only $24,000.

The market sees that this strength of low cost per unit of Hyundai Motor and Kia is expected to give a competitive edge in the future EV price competition.

“Platform and parts standardization was key to lowering manufacturing costs for Hyundai Motor Group,” said an unnamed industry official.

Yet, concerns arise that this high operating margin of Hyundai Motor and Kia comes at the expense of the auto giant’s affiliates that provide car components.

The first-quarter operating profit of Hyundai Mobis Co., a parts manufacturer under Hyundai Motor Group, increased by a mere 8.1 percent from a year ago. Its operating margin was below 3 percent.

Hyundai Wia Corp., which supplies engines to Hyundai Motor and Kia, saw a 1 percent decline in operating profit during the same period.