How Hyundai made the grade

April was the coolest month for Hyundai Motor Co.

In the United States, the Hyundai brand topped Toyota in J.D. Power's Initial Quality Study.

Once a byword for badly built cars, Hyundai finally broke through. It was as if Yugo had shot past Mercedes on the Power charts. Everyone knew Hyundai's fit and finish had improved, but here was a sensational stamp of approval.

Hyundai was all but chased out of the U.S. market a decade ago because its cars were put together so poorly. So how did it scale the heights of the study?

Executives say the Power turnabout reflects an extraordinary effort inside the company in the past five years. And they fall all over themselves crediting Hyun-dai Motor Co. Chairman Chung Mong Koo for leading it.

They say Hyundai took a series of steps to improve quality. But more than just processes, executives say, Chung changed the culture at Hyundai.

One thing he did, executives say, is put engineers in charge of the company. For the first time in the automaker's 37-year history, four of the five top managers are technical men.

Chung, 67, and Vice Chairman Kim Dong Jin, 52, are engineers. So are Kim Sang Kwon, 58, the r&d president; and Jeon Cheon Soo, 58, president of Hyundai's Ulsan plant.

"Engineers know how to make better quality cars," says Shin Jong Woon, executive vice president of the Hyundai-Kia Quality Manage-ment Division. "This kind of personnel lineup is unprecedented in the history of Hyundai Motor. Before Chung Mong Koo became chairman in 1999, most of the top managers were the graduates from business colleges."

Hyundai has focused specifically on doing well in the J.D. Power arena. Task forces were set up at Hyundai's Ulsan and Asan plants in 2000 with the explicit purpose of improving the initial quality score.

There are about 50 members of the task forces, which are overseen by Suh Byung Kee, senior executive vice president of the quality division.

"The task force members have traveled to the Hyundai America Technical Center in Ann Arbor, Michigan, once a year since 2002 to study U.S. road conditions, driver habits, weather conditions," says S.M. Oh, deputy general manager of quality control at the Asan plant. "We also have closely monitored top-ranking foreign carmakers that did well in the J.D. Power survey."

The effort paid off. The Initial Quality Study measures defects in the first 90 days of ownership. According to the 2004 study, Hyundai owners reported 102 defects per 100 vehicles, while Toyota-badged vehicles had 104 defects. Hyundai had 143 defects per 100 vehicles in last year's study.

This year's survey polled 51,000 car owners about problems encountered in the first 90 days of ownership.

In Seoul, they've been celebrating the results. Hyundai recently handed out $29 million in quality bonuses to 35,000 employees below manager level - $833 to each worker.

The new emphasis on quality followed Hyundai's painful failure in Canada. In 1993, Hyundai Motor shut its Bromont, Quebec, plant because of the poor quality of the Sonata model produced there. The unsatisfactory reliability cost Hyundai the huge sales momentum it had gained by selling on price in the late 1980s.

When Chung took over, he laid down the law. Beginning in early 2000, the chairman began asking for written "quality commitments" from managers involved in new-model development projects.

The written promises were, in effect, contracts. They could be used to justify the dismissal of a manager if defects cropped up on cars.

Not only had the North American experience been embarrassing; it threatened to destroy the Hyundai brand, at least in the United States. Chung wanted quality uppermost on his executives' minds, and accountability was the way to do it.

"Chung made quality his mantra," Shin says.

Chung also made it his direct responsibility. The quality division reports to him.

The division inspects the quality of new models after they come out of the company's r&d center in Namyang but before they go into production. Previously, quality checks were handled by the r&d center, not by a separate independent unit.

Chung holds a quality meeting twice a month to discuss how things are going. The chairman personally leads the meeting, which can last up to four hours. As many as 50 executives, specialists and engineers attend, and they must be ready to discuss customer and assembly line complaints in detail.

The meetings can turn technical quickly because so many senior Hyundai executives are engineers. Competitive models often are rolled in and given a close inspection. Parts are pulled off, examined and compared with the same components on a Hyundai model.

Toyotas are studied often. The ritual is partly symbolic. Hyundai wants its quality to be better than Toyota's.

Chung usually flies to the United States every quarter to preside over the same kind of meeting. The latest one was held in May at Hyundai's U.S. headquarters in Fountain Valley, Calif.

"Since Hyundai Motor was founded in 1967, there had been no real effort to upgrade the quality," Shin says. "When Chung took control of the company (in 1999), Hyundai initiated the long-awaited drive for quality improvement."

Shin says the company is now obsessive about quality. He cites the two-month delay of the Hyundai group's Kia Amanti in the United States last November as an example.

"As we prepared for exports to the U.S., we reported a whining noise in the transmission to Chairman Chung," Shin says. "He ordered a complete going-over. Thus, exports to the U.S. market were delayed."

In July 2003, an employee on the Santa Fe line at Hyundai's main plant in Ulsan took the day off for personal reasons. A replacement worker filled in for the day. The job required tightening and checking the tension on seat belts. But for six hours that day the replacement forgot to check the tensions, allowing 200 U.S.-bound units of the SUV to slip by unchecked.

Hyundai held up Santa Fe shipments for three days to check each of the vehicles.

"We found no problems with the seat belts," says Park Jae Won, deputy general manager of the quality control department at Ulsan. "But we took that action because it is a company rule to check the torque after tightening the belts, and the rule had been violated."

Hyundai listens closely to American drivers, Park says. When U.S. drivers complained that the Santa Fe's keyless entry system caused doors to open when they weren't meant to, he says, the company acted quickly.

"We found that it happened when drivers put the transmitter in their trouser pockets," he says.

The two buttons on the transmitter were not positioned deep enough on the surface. Thus doors unlocked when the buttons accidentally rubbed against an object or the person's leg. The switches were relocated early last year.

Last year, Santa Fe buyers complained about wind noise while the sunroof was open, Park says.

"We found out that the noise was created by the luggage racks that dealers installed near the sunroofs."

The company sent letters to drivers asking them to reposition the racks.

To keep track of customer complaints, Hyundai operates a 24-hour call center at its headquarters in Seoul. The center was set up in December 1999. In the United States, Hyundai has a call center in Fountain Valley.

"When I turn on my computer in the morning, the center tells me how many complaints and calls were received overnight, on which models, from customers everywhere in the world," Shin says. "Seoul headquarters should know what kinds of complaints are being made by our customers, including those in foreign countries."

Hyundai has taken steps in its plants to upgrade quality. For example, since late 1997 Hyundai's electrical checkout system at the Asan plant south of Seoul has detected electrical defects in the assembly process.

The Asan plant, which opened in 1996, adopted an 11-line conveyor system, compared with a three-line system at the main Ulsan plant. Asan produces the Sonata and Grandeur XG at the rate of 300,000 units a year.

"Under Ulsan's three-line system, defects were fixed after final assembly on the third line," says Oh. "But we can now fix the problems before then. Keepers at the end of each line check and fix those problems before going to the next line."

The 11-line system includes two chassis lines, three trim lines, four final assembly lines, a touch-up line and a line made up of assistants who can fill in in case of a staff shortage.

The buffers at the end of each line provide room to adjust assembly speed and allow workers to find and fix problems.

Oh Sung Hwan, deputy general manager for production control at Ulsan, says the plant will shift to the 11-line system in the future.

But Hyundai says the key to its quality drive is in the design and engineering process. Suh says Hyundai Motor instituted Six Sigma design for quality principles at the Namyang r&d center in 1999.

"Larger and older companies have had more difficulty integrating Six Sigma into their organizations and processes," Suh says. "But as a young automaker, Hyundai was extremely flexible and able to easily adapt. We're now taking Six Sigma to the next level and spreading the gospel to our suppliers. So the improvements in quality will continue."

Despite its outstanding initial quality rankings, Hyundai is still far from the top in Power's Vehicle Dependability Study, which measures the same criteria as the Initial Quality Study, but after three years. The latest vehicle dependability study measured 2001 model year vehicles.

In the 2004 dependability study, which measured 2001 models, Hyundai ranked 14th of 17 auto-makers with 375 problems per 100 vehicles. The industry average was 269 defects per 100 vehicles. Toyota ranked first with 207 per 100.

Hyundai's initial quality upgrade is impressive, says Kim Hag Ju, auto analyst at Samsung Securities Co. in Seoul. But he says it will take time for Hyundai to upgrade its durability ratings.

"Hyundai is still weak in basic materials such as steel, rubber, bearing and paintings," Kim says. "Hyundai must increase its r&d investment in basic materials to improve its durability."

But Hyundai's main concern is initial quality. Executives say the results are closely connected with the Vehicle Dependability Study.

"2001 was the first model year for the Santa Fe and the XG300 and was the first model year for the current version of the Elantra," says Oles Gadacz, a Hyundai Motor spokesman.

"Hyundai ranked 32nd out of 37 nameplates in the 2001 Initial Quality Study. As our initial quality has improved dramatically since 2001, we expect similar improvements in future VDS

studies."

Peter Chang is an Automotive News staff correspondent in Korea