The End of Detroit (22 page)

Flush with cash and prosperity from a booming economy and the then-soaring stock market, American consumers in the 1980s were willing to buy just about anything, especially when it was cheap. They bought the Yugo in droves despite its shoddy reputation, and when Hyundai turned up in 1985, selling the small Excel, they flocked to its cars, too. Hyundai’s lineup turned out to be better than that of its competitor from behind the Iron Curtain, although it trailed the best Japanese cars. That didn’t seem to matter at first. Fueled by the small Excel, the compact Elantra and the mid-sized Sonata, Hyundai’s U.S. sales jumped above 180,000 a year by the early 1990s. Detroit companies paid little notice. They had long ago given up on the low-price end of the market, ceding it to the Japanese, or else making halfhearted attempts to compete with cars such as the Ford Escort and the Chevrolet Chevette. If the foreign companies wanted to focus on small cars, Detroit reasoned, that was no threat, since it was almost impossible to make a profit on them anyway.

As if to prove Detroit right, the excitement over Hyundai burned itself out quickly, first and foremost because of its cars’ quality problems. Even when those were addressed, Hyundai’s banal lineup and its lack of SUVs, whose popularity mushroomed as the 1990s went on, combined to dampen interest. Hyundai tried to combat its image as a bare-bones maker of small, medium and large vehicles by showing concept vehicles at the world’s auto shows and introducing niche models like the Tiburon coupe. But by 1998, Hyundai’s sales in the United States had plummeted to only 90,000 a year, and the betting was on as to how long it would last. Dealers were defecting in droves, with more than 100 closing up their franchises. Hyundai, which in 1998 had bought its Korean competitor, Kia, was staggering under the complexity of combining the two companies. It was on the verge of pulling out of the American market when O’Neill became its U.S. president, vowing a turnaround. He ordered a series of immediate changes, the most important of which became Hyundai’s trademark: the 10-year, 100,000-mile warranty, among the most generous ever offered in the industry. It was meant to assure consumers that dealers would handle any significant problems, and to give them confidence in the brand. “It addresses the emotional need for reassurance,” O’Neill said. And it was truly canny marketing. “Let’s face it,” said Jim Hall, vice president of AutoPacific Group, an industry consulting firm, “one of the things that put them on the map was the warranty.” Moreover, the potential expense was actually not that great. For one thing, Hyundai had been working on its quality for several years, so when the warranty became available, its cars’ defect levels had diminished. For another, the warranty was available only to the original owner of the vehicle, meaning that by the time any real issues cropped up five or six years down the road, the car had most likely been sold or traded in.

The warranty bought time and attracted attention, while O’Neill set off behind the scenes to convince Hyundai’s Korean management to give the American organization better vehicles. He sensed a true opportunity for Hyundai—namely, as a producer of inexpensive vehicles of decent quality—and he wanted to aggressively explore it. He could see that Toyota, Honda and Nissan, as well as the companies from Detroit, were losing interest in selling cars at the bottom end of the market. The rush to SUVs and other light trucks had sent the average price of an automobile soaring close to $20,000, double what a vehicle had cost only a decade before. That meant a number of customers, working families on budgets and young singles just starting out, would be unable to afford new cars. Their only option would be used vehicles, and O’Neill thought there should be an alternative for them. In spotting his opening, O’Neill was using many of the lessons that he had learned at Toyota, where he had begun his automotive career in the 1970s. But his path to the industry was unusual, to say the least.

O’Neill was born in Cookstown, Northern Ireland, 50 miles west of Belfast, in 1952, and was raised in a primitive stone farmhouse. At age 10, he immigrated with his mother and three of his brothers to the Bronx, where his father worked as a bus driver. “Northern Ireland hadn’t recovered from the depression of World War II, and it was rural and conservative,” O’Neill recalled, his voice carrying a trace of an Irish lilt. “I can tell you it was culture shock, moving to the Bronx.” And lively. His parents had three more children, two girls and a boy, after they reunited. O’Neill was sent to Catholic schools, including St. Nicholas Tolentine High School, where he thought about becoming an engineer and studied calculus and chemistry. But he learned that “just because you have good SAT scores in math doesn’t make you an engineer.” Instead, upon being accepted at Columbia University, he chose to study political science, an interest fueled by heated discussions at home around the dinner table. His interests led him to law school at Fordham in New York, where a classmate was Charles Carberry, a former U.S. assistant attorney who made his reputation helping prosecutor Rudolph Giuliani chase down insider traders. “One thing about Finn, he’s very responsible,” Carberry said about his friend. “You always know where you stand with him.” Graduating from Fordham, O’Neill spent seven years at Skadden Arps Slate Meagher & Flom, a prestigious New York firm, where he specialized in antitrust work.

He might never have wound up in the automobile industry except for a desire to travel. Having spent his entire life in the city, O’Neill wanted to find a job elsewhere. One evening in 1983, he was running his finger down the classified ad column in the
Wall Street Journal
and he spotted a notice placed by Toyota’s U.S. sales operations, based in Torrance, California. The distant location intrigued him. “It was like the Saul Steinberg cartoon of New York and the rest of the world,” O’Neill recalled. “I didn’t know from Torrance, California, but I sent my résumé in.” Toyota hired him to run its litigation department, and he spent the next two years there, before receiving an offer from a market newcomer. Hyundai had not yet announced its plans to enter the United States, and thus O’Neill got into the operation on the ground floor. “Before there was a Hyundai, there was a Finbarr,” he quipped. “I didn’t know if Hyundai could sell one car. But I was young enough that I could take the risk. And it was an interesting ride.” The founding group was so small that “we could hold our weekly management meetings at a Chinese restaurant and all fit at one table,” said Jack Collins, the Nissan product development executive who joined Hyundai at the same time O’Neill did. But with the arrival of the Excel and the rest of Hyundai’s lineup, the company took off like a skyrocket. And just like fireworks, Hyundai’s American success exploded and quickly faded. It tried during the mid-1990s to respond with incentives, loading its already inexpensive vehicles with deep discounts that brought prices below $10,000. But customers stayed away, dealers began to defect and Jay Leno was using Hyundai as a subject for jokes on
The Tonight Show
almost every evening. Hyundai’s Korean management had been supportive throughout the crisis, continuing to invest money in new vehicles, but it realized dramatic change was necessary. “The company had to take stock in ourselves. We needed a reason for being. We had to come to grips with the question of whether we could survive in this market, selling only 91,000 cars a year,” O’Neill said. “The experience had kind of a crystallizing effect. When you look over the edge of the precipice, you refine what you need to do.”

Hyundai’s first tactic for fighting back was its warranty. Its second tactic was to figure out what it could offer the car market that nobody else was offering. The answer came in a single word: value. In the automobile industry,
value
is often a code word for cheap, and certainly in Detroit’s eyes, that’s what Hyundai cars are. While the average price of a vehicle built by GM, Ford and Chrysler now costs more than $25,000, Hyundai’s cars start at less than $10,000 for the Excel. Its vehicles generally are priced at about $2,000 less than their counterparts from Japan, and the price gap gets even more impressive as Hyundai cars go up in size. Hyundai’s top-of-the-line XG 350 sedan costs only $25,000, even though it competes with BMW and Lexus models that cost $10,000 more, making the XG 350 one of the real bargains on the car market. Since all of Hyundai’s U.S.-market vehicles are built in Korea and then shipped, executives from around the auto industry, not just from Detroit, have been quick to pin Hyundai’s price advantage on the weak Korean currency, the won. They also blame government policies that they say deliberately keep the prices of Korean goods low.

But Hyundai vehicles, no matter how cheap, would not appeal to customers if they were dismal. Hyundai learned that lesson in the 1990s. O’Neill contends that the company’s strength lies not only in its vehicles’ prices or the warranty, but also in the fact that they are solidly built and offer a lot for the money, which, he says, is the very definition of the word
value
. In defining Hyundai, O’Neill likes to look at the retailing business. In Detroit, people scoff and say that Hyundai is the industry’s equivalent of Wal-Mart, or maybe Sam’s Club, where customers don’t even get shopping bags in which to lug their purchases home. O’Neill prefers to compare his company to Target, which has taken the discount department store and turned it into a haven for style, albeit at an affordable price. Another analogy is with the airline business. If the Detroit companies are the big players, like American and United and Northwest, then Hyundai is Southwest Airlines, scrappy, fun, giving customers something for their money at an undeniable bargain price. O’Neill sees a lot of parallels with the people who shop at Target and fly Southwest. This isn’t the kind of buyer that Detroit has tried to attract with flash and sheet metal, he says. The Hyundai customer, O’Neill says, is most likely somebody who doesn’t care very much about cars. It’s extraordinary to hear the chief executive of a car company talk about his customers this way: O’Neill defines who buys Hyundais with a candor that most CEOs lack. But O’Neill knows exactly who is buying Hyundais: “salt-of-the-earth people,” he calls them.

“There is a whole market of people who have a quiet confidence about life,” he explained during a conversation in his office in Hyundai’s Fountain Valley, California, headquarters. “They have a certain sense of satisfaction about how things fit in and enable their lives. A car is just a part of that.” Hyundai buyers simply don’t respond to the kind of tactics that Detroit has always tried to employ with its customers: playing on their emotions, playing on their sense of excitement, making them lust after new vehicles and what they represent, making them crave them in a primal way. O’Neill, for his part, simply doesn’t buy into the traditional definition of “emotion” that shapes the way Detroit sees the world. His buyers are not making their decisions based on that, because a Hyundai customer, male or female, does not express his or her personality primarily through automobiles. “They have other outlets for that,” O’Neill says of his buyers. “They have a sense of what life is about. They are connected with their families. It’s not the automobile, it’s their lifestyles that make their statements. The car, for them, is not sex appeal or the genius of great designers,” said O’Neill. That might sound as if Hyundai customers view automobiles as toasters or television sets, and it’s a prospect that would send chills down the backs of Detroit’s executives. But in fact, O’Neill believes that the Hyundai buyer has more in common with the state of mind of the typical American consumer today than with the mythical, passion-driven buyer that Detroit has traditionally chased. He believes that is a reason why Americans have embraced Toyota and Honda with growing enthusiasm over the past 25 years.

To O’Neill, there is a kind of emotion other than just a superficial sexiness. He completely rejects the thought of “gotta have it” automobiles, the approach that GM, under its product czar, Robert Lutz, is applying to its product lineup. That has a “very short shelf life. It’s based on visceral reactions,” said O’Neill. “The question that has to be answered is, ‘Has it got legs?’ A car has to resonate with buyers. It has to meet a real need.” Now that Toyota and Honda have broadened their lineups, gone up in price, and in essence abandoned the market for inexpensive cars, Hyundai has hustled right in to fill the gap. But O’Neill knows that he cannot sell toasters forever, no matter how good they are. For buyers’ tastes evolve and their expectations grow as well. Rather than offer Hyundai as a step-up brand to them, O’Neill is counting on Hyundai to broaden its lineup as well, in its own way. Through the rest of the decade, he foresees adding more SUVs to the mix, along with a minivan and a crossover vehicle, which would compete in the same category as the Toyota Highlander. He also is thinking about how Hyundai and Kia will mesh their lineups. Through 2003, the two companies maintained separate sales operations, and that’s expected to remain the case in the United States for some time to come. However, Hyundais and Kias are going to share the same platforms, or underpinnings, and that presents a challenge in making them look and drive differently from each other. Differentiation is key, because right now the two brands compete head-on in a number of areas.

The trick will be to aim Hyundai and Kia at slightly different customers, instead of fighting for the same consumers. One idea would be to have Kia develop sportier vehicles and limited-edition niche models, like two-seater sports cars and coupes, leaving Hyundai to be a more traditional parent company. It will all have to be sorted out. O’Neill, seeing the market in his unusual way, knows that the rest of the auto industry is just waiting for Hyundai to slip up. In 2003, when Hyundai’s sales rose by only single-digit levels instead of by the leaps that they grew in previous years, there was a sense of
Schadenfreude
among the Detroit companies that perhaps Hyundai’s moment of buzz had passed. O’Neill saw it as more of a pause after some very strenuous years. But he says, “We don’t have a lot of forgiveness. If we miss the market, it will impact our ability to introduce world-class products.” So precision is the key—not trying to be what any other company is in the marketplace. Only, says O’Neill, to be what Hyundai is.