Hyundai's enviable new problem

September 22, 2011: 11:53 AM ET

Its cars are selling so well, the once dodgy brand is having more and more trouble meeting demand — and that's a very good thing.

By Doron Levin, contributor

2011-hyundai-sonataFORTUNE -- New-car shoppers who fly to another city often do so in search of a hard-to-find Mercedes, Lexus or other high-price vehicle. Lately they're looking for Hyundai models. In short order, the once-dodgy brand is suddenly being associated with one of the most desirable problems in the auto industry: scarcity.

"I was surprised," says George Glassman, a Hyundai franchisee in Southfield, Michigan who has delivered cars to buyers from Cleveland and Chicago. "Demand is outstripping availability. People who want a particular color or set of features buy the car and fly in to pick it up."

Availability of Hyundais in the U.S. is tight because the company is "more or less maxed out" on worldwide production, according to John Krafcik, chief executive officer of Hyundai Motor America, the U.S. subsidiary of the South Korean automaker. "We're doing everything we can. Some of our dealers are quite upset they can't get enough cars." Marc Cannon, a spokesman for AutoNation (AN), the nation's biggest auto retailer called demand for Hyundais "overwhelming," resulting in shortages at the chain's five franchises.

The remarkable turnaround of Hyundai, a car brand once troubled by poor quality, is already three or four years old, and reflected in the fact that its cars have turned into hot sellers. Hyundai, and its affiliate Kia, now have about the same share of the U.S. market as Honda (HMC). But the South Korean automaker isn't rushing to expand production. The company opened an assembly plant in Montgomery, Alabama in 2005, which today is operating at capacity of about 300,000 vehicles annually. Hyundai executives in the U.S. decline to speculate when, or even if, a second U.S. plant might be built.

Hyundai's growth and the glowing reviews for the latest versions of its Sonata midsize sedan, Elantra compact sedan and Accent subcompact lead some analysts to predict that it could grow within a few years into the world's top seller. The recent misadventures of General Motors (GM) and Toyota (TM), which have been first in sales before, show that the No. 1 title may be a poisoned chalice. "One of the concerns is that our current quality systems won't hold up if they're forced to accommodate too much production," said Mike O'Brien, vice president of product planning at Hyundai's U.S. headquarters in Fountain Valley, California.

Although dealers are losing potential sales because they don't have enough cars on hand, Hyundai is benefiting via strong pricing of the vehicles they do sell. According to Edmunds.com, the average Hyundai vehicle sold in August carried a discount worth $737, compared with an average discount of $2,385 for all brands. Hyundai has begun extensive leasing programs for Elantra and Sonata, charging monthly rates of $169 and $199 respectively. Last year was the first that Hyundai was able to lease more than 10% of its vehicles; this year the rate already is at 19%.

Dealers like the leasing programs because so many customers prefer the predictability of a three-year contract and buyback and because the agreements more or less assure the dealers a chance to sell another car when the lease expires. Leasing wasn't possible in the franchise's early days in the U.S. due to the weak residual value of used Hyundais. Now, that figure has turned into one of the industry's strongest.

"Hyundai's done a great job surprising people" who remember how mediocre the cars were 10 or 15 years ago, said Jessica Caldwell, an analyst for Edmunds.com. "It won't be as easy to surprise people going forward." Ultimately, Hyundai may find itself in the enviable position of having to align its message with its rapid growth.

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