SEOUL (Bloomberg) -- Lee Tack Young says Hyundai Motor Co.'s luxury vehicles are oversized, overpriced gas guzzlers. So he opted for a more modest alternative: a BMW 528i.
Foreign brands have seen their share of South Korea's market for premium vehicles surge to 41 percent from 28 percent in the past two years, according to Korean industry groups, as lower tariffs make their cars cheaper and local buyers abandon a decades-long preference for domestic brands.
"I was looking for a quality car that wasn't too big," said Lee, president of Cosmetic Engineering, a packaging-machinery maker near Seoul.
The 65-year-old's last seven cars were all Korean, starting with a Hyundai Excel in the 1980s. This time, he chose his 71 million won ($64,000) BMW over an 85 million won K9 from Hyundai affiliate Kia Motors Corp.
"Unless Hyundai and Kia change and offer me more variety and better quality, I don't see any reason to go back," Lee said.
The shift has made South Korea a growth market for BMW AG, Daimler AG's Mercedes-Benz, and Volkswagen AG's Audi. Their gains are coming at the expense of Seoul-based Hyundai and Kia, which count on sales of luxury vehicles in their home market for much of their earnings.
"It's definitely something Hyundai and Kia are worried about, and they should be worried," said Lee Sang Hyun, an auto analyst at NH Investment & Securities Co. "This trend will undoubtedly have an adverse effect on Hyundai's profits."
Duties on European imports have fallen to 3.2 percent from 8 percent since a trade pact was implemented in 2011, and next year they will be eliminated for most cars. A U.S. deal has halved tariffs for passenger vehicles to 4 percent and will eliminate them by 2016.
BMW, Audi and Mercedes-Benz -- the world's largest luxury automakers -- all saw Korean sales rise by at least 25 percent in the first quarter, faster growth than in China.
Hyundai's high-end sales fell 4.7 percent in the period as the country's overall auto market shrank 2.2 percent.
The three German companies sold 18,114 vehicles costing more than 40 million won in Korea in the quarter, versus 31,444 for Hyundai.
"Sure, it's every boy's dream to have a German car, but that wasn't the most important reason," said Park Jun Bum, 28, who traded his Kia Forte sedan for an Audi A4 a few weeks back. "Audi offered better design, engine, safety -- better quality overall."
Sticker prices for the Hyundai Equus -- the company's most luxurious model -- range from 68 million won ($61,000) to 151 million won. BMW's 5-series runs 61 million won to 113 million won, though the Equus is closer in size to the BMW 7-series, which starts at 124 million won.
Hyundai's profit fell 15 percent last quarter, squeezed by Japanese competitors boosted by the weakening yen.
This year, Hyundai says its sales will likely rise at the slowest pace since 2007.
Investors have taken notice. Hyundai's stock this year has underperformed all major automakers.
Its Seoul-traded shares are down 11 percent, versus a minimal gain for BMW and a 23 percent increase for the Bloomberg Industries global auto index.
BMW is planning a range of new models and a track in the Korean city of Incheon where customers can test drive its cars at high speeds, its first such facility in Asia.
Mercedes-Benz says it will add A-Class hatchbacks in the second half of the year in a bid to lure customers in their 20s to 30s.
To fight back, Hyundai this month cut the price of mid-sized sedans by as much as 1.5 million won.
The automaker is developing diesel engines, which have become popular in the imported brands. And it's remodeling some dealerships and service centers to better compete with the upscale digs offered by the Germans.
Hyundai has considered creating a separate luxury brand, like Toyota Motor Corp.'s Lexus or Honda Motor Co.'s Acura. For now, the company has ruled out the idea in favor of selling its higher-end models under the Hyundai nameplate.
"We will continue our efforts to enhance brand value and increase premium car sales," Chief Financial Officer Lee Won Hee said in April.
Kim Pil Soo, a professor of automotive engineering at Daelim College in South Korea and an adviser to the government, said Hyundai must promote its extensive dealership network and comparatively cheaper maintenance costs to win back domestic buyers.
"They should focus on the soft side," Kim said.
Still, the recent change in the Korean auto market won't be reversed easily, especially since both younger and older buyers are considering imports rather than domestic brands. And with more than 45 percent of the market, Hyundai still has plenty of share to lose.
"Customers who were loyal to the brand for over 20 years are breaking away," Kim said. "It shows that imported brands are now perceived as something accessible."