Hyundai-Kia loosens lid on incentives

LOS ANGELES — The Korean auto juggernaut that once kept executives from Detroit and Japan up at night now finds itself slogging through a much more competitive marketplace.

For the first 10 months of the year, Hyundai-Kia group's U.S. sales were down 1 percent while the industry overall grew by 8 percent. Its market share slipped to 8.2 percent from 8.9 percent, making it the only automaker besides Volvo and Volkswagen Group of America to lose market share in that period.

It's a sharp turnabout for Hyundai-Kia, which lured customers to showrooms in record numbers in recent years with overhauled lineups filled with eye-catching, feature-rich vehicles, along with a strong value proposition that limited the need for incentives. From 2008 to 2012, its U.S. sales increased a whopping 87 percent.

That surge came amid a tumultuous period in the auto industry, encompassing the financial meltdown of 2008, the bankruptcies of General Motors and Chrysler, the safety crisis at Toyota and the 2011 Japan earthquake.

Now, the big automakers are back to full strength and driving the industry's recovery with fresh products of their own, ample inventory and deep pockets to stoke demand.

Meanwhile, Hyundai-Kia's ability to supply cars is tapped out, and many of its brands' volume products are older than the competition's, making it tough to sustain the pace of sales and market share gains of the past few years.

Karl Brauer, senior analyst with KBB.com, says the value proposition of Hyundai and Kia that resonated with consumers early in the recovery may be losing some of its influence as the recovery matures.

"We've backed off some of the economic concerns, and we've got fantastic, competitive product coming from just about every automaker," Brauer said. "In that environment, I think it's harder for Kia and Hyundai to compete than it was two or three years ago when consumers were a little more purely price-conscious."

One result has been a loosening of the lid on incentives. Hyundai incentives in October averaged $1,700 per vehicle sold, up 39 percent from October 2012, while Kia incentives grew 21 percent to $2,120, according to data from KBB.com.

Excluding spiffs on pickup trucks, Chevrolet and Ford spent more than $2,900 per unit last month, while Honda spent $1,529 per vehicle, Nissan spent $2,032 and Toyota incentives averaged $1,919 per unit.

Incentives also account for a larger share of Hyundai and Kia's average transaction prices than they did last year, according to data from TrueCar.com.

"Production capacity is growing again," John Krafcik, CEO of Hyundai Motor America, said in a telephone interview last week. "Our competitors can build more cars than we can. Our competitors are spending more money than we are to sell those cars … it's definitely making things tougher for everyone."

Krafcik points out that despite the incentive growth, Hyundai still spends less than the industry on average.

Hyundai's lineup is also the oldest it has been in years, he noted. The Sonata mid-sized sedan has been on the market since 2010, and its sales were down 10 percent through October. The Elantra compact has been on sale since 2011. The two vehicles account for nearly two-thirds of Hyundai sales. Even so, Krafcik said, the Sonata has lower inventories and lower average incentive spending than most competing mid-sized sedans.

"Next year, we start taking huge whacks out of our product age," Krafcik said, referring to the redesigned Sonata and Genesis sedans arriving in 2014.

Kia's funk is more of a puzzle. Its product lineup was freshened this year — with the launch of a redesigned Forte compact and Soul subcompact, plus the new Cadenza upscale sedan — but the brand's sales were off 4 percent through October.

KBB's Brauer says Kia seems to be vying for a more premium market position in the United States than Hyundai. He points to the Kia Optima, which had a higher average transaction price in October than the segment's best-sellers, the Honda Accord and Toyota Camry, according to KBB.com data.

"This tells me that Kia is pricing their cars so that whether or not they have a low entry price, the actual equipment of these cars that are being sent to dealers and sold to customers positions them higher than the segment average in transaction price," Brauer said. "If Kia's mantra is to start being a premium option like VW, you're not going to sell as many when you do that."