Vehicles like the Genesis are helping Hyundai and Kia p... Vehicles like the Genesis are helping Hyundai and Kia poach car buyers from BMW and Lexus (Hyundai).
March was a great month for Korean car makers Hyundai and Kia. The two companies, which are related by corporate ownership in Korea, sold over 100,000 vehicles combined last month for the second time in their U.S. history.

But the story of Hyundai and Kia's surge is not just about family vehicles. Hyundai is making a legitimate push into the luxury category, and Kia is gearing up for the same. How times can change when carmakers put quality product on the streets for enough years. A decade ago, these companies were punchlines, and today they are worrying industry juggernauts like Ford and Toyota, even in the luxury market.

For Hyundai, the story started in 2008. The Genesis sedan, priced between $33,000 and $39,500 and offered as a less expensive alternative to the BMW 5 Series and Lexus ES350, earned the prestigious North American Car of the Year award from a jury of fifty automotive journalists. Then 2009 happened. The global recession drove U.S. auto sales into the pit of despair as the industry experienced its lowest output in three decades. But while the vast majority of automakers struggled to keep their collective heads above water, Hyundai actually managed to increase sales by eight percent.

Just as the auto market went south, Hyundai's image began heading north. Quality went from slightly below average to among the best in the industry in only a couple years. At the same time, the automaker began focusing its resources on expressive design and industry-topping fuel economy. All these achievements helped Hyundai improve sales, but an unexpected leap into the luxury sedan business may have given the brand the credibility it needed to take on the big boys from Germany and Japan.

Genesis Had Great Beginning

The Genesis Sedan earned instant credibility among auto enthusiast magazines and bloggers for its stylish yet subdued sheet metal, gobs of standard features, a generously appointed interior and class competitive powertrains. In other words, the Genesis Sedan has been given 'real-deal' status by the toughest arbiters. Hyundai is pushing the envelope further this year with the $58,000 - $64,500 Equus sedan, which is earning similar kudos.

An Unorthodox Approach To Luxury Product Strategy

When Japanese automakers threw their hats into the luxury auto ring in the 1980s, they did so with all-new brands. Lexus, Infiniti and Acura received dedicated dealer bodies and billions in ad support. At the same time, the automakers spent billions more building an all-new lineup of vehicles. Hyundai decided to take a different tact.

"If the whole industry goes to the left, we thought we should at least look right," said Hyundai USA CEO John Krafcik. "The key point with Genesis was that we wanted to build the Hyundai brand. Winning 'Car of the Year' did so much for the brand."

Krafcik points out that the Genesis Sedan forces car buyers to rethink what Hyundai really is. And judging by Genesis sales figures, customers are beginning to take notice. In 2009, Hyundai captured six percent of the midsize luxury sedan market. That's an impressive feat, but the automaker actually saw its market share increase to 6.6 percent in 2010, with 29,000 total U.S. sales.

Krafcik adds "we spent $80 million in advertising in 2008 and 2009, so the increase for 2010 represents a lot of organic approval." And the CEO shrugs off those who report that the Genesis isn't meeting sales goals. The automaker was targeting five percent of the market, yet Krafcik proudly points out that 6.6 percent of the market places Hyundai fourth in the pecking order behind only BMW, Mercedes and Lexus. Not bad company. And those numbers don't even tell the whole story, as the CEO points out that Genesis is at 10.6 percent of the market in the south.

In the central and west regions, where AWD is far more popular due to snow in the winter, Genesis is at only 4.3 percent. "We'll be adding AWD at the next model change, so that will help out a bit," said Krafcik.

"Hyundai has upward momentum that can't be said about any other brand," says industry analyst Dave Sullivan of AutoPacific. "Bringing in high end vehicles is perfect for those who have become value or appearance conscious during tougher economic times."

Hyundai added to its luxury lineup in December 2010 when the automaker began sales of the large and in charge Equus. The content-rich Equus starts at $58,000 for the Signature model and climbs to $64,500 if you're looking at the all-options included Ultimate model.

The $64,500 Hyundai

That's right, a $64,500 Hyundai. This is where journalists and analysts really start to question the decision to sell luxury models with a Hyundai badge. But again Krafcik points out the positive side of having the Equus in a Hyundai showroom. It's tough to call Hyundai an entry level automaker when its showroom features vehicles that can take on the best Lexus has to offer.

"The Equus gives you all of the features of the LS460 without throwing it in someone's face, which could be difficult if you're an executive who just laid off some employees," says Sullivan.

And although the automaker is only averaging between 200 and 300 Equus sales per month, Krafcik tells us that dealers are already sold out of their allotments until summer. Dealers are happy to do anything in their power to sell the Equus as well, as the automaker claims that dealer gross on the big sedan is in many cases higher than the competition from Lexus and the German makes.

Hyundai's chief executive in the US points out that all the money Hyundai would have needed to push an all-new brand, with new dealers and fresh advertising, was invested into the product. For example, the Equus comes with free maintenance, just like many other luxury vehicles on the market right now. But with Hyundai's free maintenance program, someone from the dealership will pick up your vehicle at your home or office, and they'll leave you a Genesis or Equus loaner while your vehicle is gone.

"The best dealership is the one you don't have to go to," said Krafcik. "Focus groups tell us that they love the free maintenance, but they hate spending all the time in the service lane."

New Jersey dealer Brad Benson says that he is selling Hyundai's luxury cars to a new breed of buyer. "It used to be that these customers talked about the horsepower and performance and now they talk about the smartest deal they cut, and if they can save hundreds of dollars a month on a lease with a Genesis or Equus instead of a BMW or Mercedes, they talk about that with their friends," says Benson, who sells about 15 Genesis sedans a month, and all the Equus sedans he has been able to get. Only certain salespeople are trained and authorized to sell these cars. "It's a whole different process and approach selling a Genesis or Equus than a $13,000 Accent (Hyundai's least expensive car)."

Indeed, the Genesis and Equus have helped elevate the entire Hyundai dealership customer experience. Hyundai spent millions of dollars training their dealerships to provide a luxury car buying experience, and the lessons learned for Equus and Genesis must have trickled down to the rest of the Hyundai lineup. "We went from the bottom of the barrel to first among Asian automakers in customer satisfaction," says Krafcik.

Kia Getting Into The Luxe Act

Kia, a cousin company to Hyundai by virtue of common ownership within the vast Hyundai Group in Korea that also includes steel, shipping and even advertising companies, has aspirations of its own in the luxury segment. The automaker showed off a design concept of a sedan it called "K9" before the Seoul auto show two years ago.

The sketch looked a bit like a well-heeled Optima, but recent spy photos showed that this vehicle is likely much larger and far more opulent than Kia's bread and butter mid-size offering. Clues that portend to the K9's pedigree include wheels borrowed from the Genesis, port holes in the front fenders that look like they belong on a Maserati, and a pair of highly stylized headlamps filled with LED lighting. The K9 could slot between the Genesis Sedan and the Equus when it hits the market. We don't know much about the K9 at this point, but given the state of the spy shots we saw, we could know more soon.

What could be next from the Koreans on the luxury front? Hyundai's Krafcik wasn't interested in giving us any breaking product news, but he did admit to a personal interest in seeing a smaller rear-wheel drive sedan. That doesn't necessarily mean that this four-door would be a luxury vehicle to sit alongside the Genesis and Equus. Keep in mind that Hyundai also sells the Genesis Coupe, which can be had for under $25,000, so a smaller rear-wheel-drive sedan could be targeted at the budget-conscious enthusiast set who would normally shop for BMWs and Mercedes-Benzes.

For Kia, the company has to see what kind of reception the K9 gets. There was a thought a few years ago that Kia would keep its prices below $30,000, while Hyundai chased the luxury buyer alone. But there is rivalry between the two companies, and apparently management in Korea believes there are enough of the "new luxury" buyers to go around.

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