Hyundai and Kia see a crossover-led comeback

SEOUL — Better late than never. And better early than late.

Those are the mantras guiding South Korea's big auto brands as they scurry to align their product lineups and production capacity with surging demand for utility vehicles and try to get a head start on what could be the next truck frontier.

After years in the wilderness, Hyundai and Kia have reached a crossover crossroads. By the end of next year, both brands will be fielding full crossover lineups — from subcompacts to full-size family movers — and executives see them leading to upswings in volume.

In separate interviews last week with Automotive News, the global CEOs of Hyundai and Kia mapped out their comeback routes, pledging that the new products will boost profitability and help the brands deliver modest U.S. sales increases next year, even as overall demand slides.

The plan requires overhauling North American production. And in Hyundai's case, it may mean pioneering new ground with a compact pickup that could put the company ahead of the next big trend.

"Our strategy is to launch more SUVs," Hyundai Motor Co. CEO Wonhee Lee said at his company's global headquarters here. "We will have a full lineup. We are trying to increase our adaptability. When the SUV market grows, we will be able to match that growth."

That growth is expected to keep clipping along for at least the next five years, he said.

Still unknown is when the payoffs will come and how big they will be. Hyundai and Kia will be battling lower brand awareness in the utility segments, thanks partly to their late start. And it will be harder for both to book big gains as the new-vehicle sales boom subsides.

Lee conceded it may take three years to reach his goals for crossovers. And that's not counting the premium Genesis brand, which won't have its first light truck until around 2020.

"It's good Hyundai and Kia are moving in that direction, but they missed out on the bonanza," said Karl Brauer, executive publisher for Autotrader and Kelley Blue Book. "The conditions aren't as favorable for the next five years. And it's also a matter of brand image and recognition."

Slowing overall demand, increased consideration of used vehicles, rising gasoline prices and higher interest rates all pose challenges for a new full-size crossover, he said.

But Hyundai and Kia can't hope to compete if they don't play.

"We expect our performance in the U.S. market to rebound soon," Kia Motors Corp. CEO Han-Woo Park said at the Hyundai Motor Group corporate complex here, where the Kia and Hyundai towers stand side by side.

Both companies, with their car-heavy portfolios, are out of step with U.S. market trends.

Hyundai has three utility vehicle nameplates in its U.S. lineup: the Kona, Tucson and Santa Fe crossovers. They accounted for just 45 percent of Hyundai's U.S. sales volume through September, including Genesis, which has no crossovers. Kia's four-nameplate utility line — the Niro hybrid crossover, Sedona minivan and Sorento and Sportage crossovers — contributed just 41 percent of the brand's U.S. volume.

By comparison, light trucks as a whole make up 69 percent of total U.S. light-vehicle demand. Lee said he wants Hyundai's ratio of trucks to be around 60 percent, but he said that could take three years to achieve. Park said Kia also urgently needs to boost its crossover ratio.

Kia is adding the Telluride three-row crossover at the top of its lineup next spring. A new compact crossover will follow in the second half of the year, Park said.

The Telluride will be made at Kia's plant in West Point, Ga., Park said. The smaller crossover will be based on the SP Concept shown at India's Auto Expo in March. It will be exported from South Korea to the U.S., Park said.

Those additions should push Kia's sales into positive territory in 2019, Park said. Its U.S. sales were down 1.3 percent to 452,042 vehicles through September in a market up 0.5 percent.

After those launches, Kia will consider other light-truck entries, Park added, and maybe a small pickup, though he said Kia has no plans for one now. "It's not an easy market, the pickup market in the U.S.," he conceded.

Hyundai, meanwhile, will roll out its own sibling entries. At the head of the lineup will be an eight-seater expected to be called the Palisade, which takes on the likes of the Toyota Highlander and Chevrolet Traverse. Without naming the vehicle, Lee said a range-topping full-size crossover is scheduled to arrive in the second half of 2019 as an import from South Korea. Hyundai's A-segment crossover, code-named QX, is also due then, he said.

Lee also predicted a sales uptick next year from the crossover influx.

The added truck volume should help Hyundai and Kia shore up margins that have been eroded by incentives on slow-selling products.

"This will help them lower incentives and increase overall transaction prices," said Park Sangwon, an auto analyst at Heungkuk Securities here. "Look at General Motors and Ford — they are getting high margins from light trucks. It's pretty late, but better late than never."

Hyundai has a couple of other projects in the works, Lee said.

One, now under long-range planning, is a full-electric SUV. The other is a compact pickup based on the Santa Cruz concept shown in 2015, he said. Neither project has won final approval, he said.

Lee said the pickup is in the basic r&d stage and would take about 32 months to put into production if it gets the green light.

The CEO dubbed the vehicle a "semi-pickup" and said it would seat four and have a sliding bed that extends from the rear.

Such a pickup would likely be built on the same platform as the next-generation Tucson compact crossover, which is scheduled to go on sale in South Korea in 2020 and land stateside the following year, meaning a pickup could arrive as early as 2021, he said.

A compact pickup would allow Hyundai to plumb pickup demand without going head-to-head against heavyweights such as Ford, Chevrolet, Ram or Toyota in the full-size and midsize segments. If the offering strikes a chord, it could also vault Hyundai to the lead of a new segment and establish it as a trendsetter, even if it isn't a high-volume seller.

"It's a new segment, so we don't have any data to give us a kind of confidence," Lee said. "But we believe we can create a new segment for pickup trucks in the U.S. market.

If the project goes ahead, he said, one thing is for sure: The vehicle would have to be built in the U.S. to avoid onerous U.S. tariffs on imported pickups. And that would require substantial investment to retool Hyundai's assembly plant in Montgomery, Ala., Lee added.

The Montgomery plant, which has capacity to build 390,000 vehicles, produces the Elantra and Sonata sedans and the Santa Fe crossover. Hyundai is considering a revamp to enable it to build four or five nameplates. The additions could be the Tucson and the compact pickup, Lee said.

The ultimate goal, Lee said, is a more flexible manufacturing footprint that can shift from cars to trucks and back in tandem with changing customer tastes.

In terms of product, Hyundai will soon be in tune with the market with its full palette of crossovers, Lee said. "The remaining task," he said, "is shifting production volume from time to time when the market moves."

Lee credited the newfound flexibility partly to better relations with South Korea's labor unions. Before, he said, any change in production plans would have to run a bureaucratic gantlet of review and approval by union representatives.

"The labor union and management are on the same page," Lee said. "Now, they try to listen."

Labor relations in South Korea matter because Hyundai and Kia still source much of their U.S. product from the home country. Of Kia's light trucks, for instance, only the Sorento midsize crossover is made in North America. At Hyundai, only the Santa Fe is U.S.-made.

Having popular crossovers will keep Korean factories busy and satisfy unions that have fought to protect shifts building slow-selling sedans, said Park, the auto analyst.

"They didn't have any work to do because sedans weren't selling," Park said. "This gives Hyundai more leeway in persuading the union to adapt a more flexible schedule."

But the same can't be said about all of the group's South Korean suppliers. And therein lies a risk: Even if Hyundai achieves new levels of flexibility, its suppliers aren't yet so nimble.

Said Lee: "Still, there are some obstacles to overcome."