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Hyundai sits out small crossover utility boom as rivals gear up

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DETROIT (Reuters) -- Hyundai Motor Co., already struggling with a host of business challenges, is developing another headache: a dearth of product to compete in a fledgling U.S. mini-crossover utility vehicle market even as rivals gear up for a big push.

This adds to Hyundai's challenge in making significant market share gains in the United States, where it has a smaller presence in the SUV segment than its rivals. A Hyundai executive said this week at the Detroit auto show that the company's share of the U.S. market, its second biggest globally, will likely improve to 4.7 percent this year from 4.6 percent in 2013.

Excitement over the promise of a market for small "subcompact" crossover utility vehicles, sometimes called CUVs, is mounting in the United States. General Motors Co. said it expects sales of its own Buick Encore subcompact CUV and other mini SUV-like vehicles by other automakers, including those offered by luxury brands, to reach 400,000 vehicles a year in 2018.

Roger McCormack, U.S. marketing director for GM's Buick brand, believes demand from down-sizing empty nesters and urban youth is going to drive demand for mini CUVs.

"I am really excited about the potential," McCormack told Reuters in an interview this week at the Detroit auto show. "The idea is ... I can get that functionality (of crossovers) but I don't need to do it in a bigger vehicle necessarily. Now, I think it fits a lot of people's lifestyles very nicely."

Yet, according to four individuals close Hyundai, the South Korean automaker won't likely have an answer for that expected growth in the foreseeable future.

"It looks more and more like Hyundai is going to completely miss the boat with mini crossovers at least for the foreseeable future," noted one of the knowledgeable individuals who are privy to Hyundai's global product plans but asked not to be identified. He said it isn't that Hyundai isn't searching for a solution, but there is "no answer so far."

Dave Zuchowski, the recently appointed U.S. CEO of Hyundai, said the automaker plans to boost its crossover and SUV business as part of a mid-term effort to reach a market share of 5 percent.

But Hyundai has no immediate plans, he noted, to come up with a model to compete in the subcompact CUV market. Instead, it plans to focus its sales and marketing effort on its larger Tucson compact and the Santa Fe mid-size SUVs.

Hyundai is "definitely looking at" the subcompact crossover market, Zuchowski told Reuters on Monday at the show. "There are a lot of activities going on there right now. We have no immediate plans, nothing approved in the product cycle. But it is the segment that interests us."

Hyundai's mini crossover challenge compounds a host of issues it's already confronted with in the United States, including heightening competition from Japanese automakers now armed with the cheaper yen, as well as a lack of manufacturing capacity that the company's U.S. sales team has cited in recent months as an obstacle to growing sales.

Zuchowski said the capacity issue was being resolved, albeit incrementally as the company has no current plan to build another U.S. factory.

Lost momentum

Hyundai also has been faced with the relative lack of penetration in the overall U.S. crossover and SUV market. Crossovers accounted for only 18 percent of the Hyundai brand's overall U.S. volume in 2013, according to the Automotive News Data Center -- considerably behind competitors such as Chevrolet and Honda.

Hyundai, along with Subaru, were the only major automakers that increased U.S. sales during the 2009 economic crisis, but Hyundai lost momentum last year with its sales growing 3 percent when the overall market grew 8 percent. That cut Hyundai's U.S. market share to 4.6 percent last year, compared with 4.9 percent in 2012, and its record-high of 5.1 percent in 2011.

Although Hyundai has a subcompact crossover in its global product lineup called the HB20X, which is manufactured and sold in Brazil, it lacks the proper level of sophistication and powertrain to be marketed as a competitive U.S. model, according to one of the four individuals close to the company.

The company could redesign the ix20, a hatchback it sells in Europe, and create a CUV variant for sale in the United States, but "nothing's been confirmed as yet," said one source.

No cannibalized sales

Another problem: Hyundai doesn't want to create a product that might cannibalize sales of its existing SUVs like the Tucson, as well as from affiliated brand Kia Motors' Soul, a boxy mini van that generated U.S. sales of 118,000 vehicles last year, up 2 percent from 2012.

"Hyundai doesn't want to spoil and take away from the Tucson and the Kia Soul's success," one of the individuals with knowledge of the issue said. That is "not an easy issue to solve," he said.

As Hyundai continues to look for an appropriate subcompact crossover for the U.S. market, the smallest SUV or crossover vehicle the Hyundai brand could try to woo U.S. consumers with is the Tucson, which starts at $21,450, compared with the Nissan Juke, a key subcompact crossover that sells for as little as $18,990.

No participation in the subcompact crossover segment, a "hot little market segment" as described by IHS analyst Masaki Taketani, means a big opportunity lost for Hyundai.

Mainstream vehicles competing in the category are limited in number today, with competition more or less boiling down to two subcompact CUVs: the Juke and the Encore.

Juke success

But other automakers are also gearing up efforts in part because of the mini success Nissan pulled off with the Juke.

Nissan sold 8,639 Juke cars in the United States in 2010, when it was launched in that market and the Japanese carmaker sold about 38,157 of them last year, up 5 percent from 2012. To join in the action, GM launched the Encore at the start of 2013, selling 31,956 last year.

Among those contemplating entering the subcompact crossover market, according to IHS, are Mazda, Chrysler, and Honda. Taketani said GM is also seen likely to launch derivatives of the Encore for Chevrolet and GMC, while Honda officials have said the company plans to start selling as early as by the end of this year a subcompact crossover called Vezel based on the Fit.

The mainstream subcompact crossover segment, whose sales totaled about 72,000 vehicles last year, should nearly quadruple to 280,000 vehicles by 2020, while additional demand for luxury subcompact crossover cars, such as the BMW X1, is expected to total about 164,000 by 2020, up from 50,000 in 2013, according to IHS.

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