Hyundai prepares for robust rebound

As the severity of the coronavirus outbreak was coming into focus mid-March with a plunging stock market and a national emergency declaration from the White House, Hyundai Motor America CEO Jose Muñoz and his top executives were trying to get in front of the wave about to crash down on the U.S. auto industry.

Muñoz, who was closely watching the disruption in Hyundai Motor Group's home market of South Korea and in China, wanted to move quickly and aggressively to support dealers and customers in the U.S. with the relaunch of the automaker's job-loss protection program for new buyers — first seen during the Great Recession. But not everyone was on board.

Muñoz stuck with the plan. That and other moves by Hyundai and its corporate siblings Genesis and Kia mark a line in the sand for the surging Hyundai Motor Group. After gaining market share and industry awards in recent years, the group is willing to spend to defend its gains and position itself for a quick comeback when the economy begins to normalize.

"There were several options, and there were some within the company who didn't see the need to develop such a program," Muñoz told Automotive News last month. "There were some people who were saying, 'Why do you do this? You know the unemployment rate in the U.S. is very low, so there is no such need.' "

Muñoz was right to fear the worst. Unemployment claims across the U.S. ballooned into the millions by the end of March. Hyundai's Assurance job-loss program, which provides up to six months of payments following a layoff, was announced March 13. That gave Hyundai and Genesis dealers a unique sales tool.

"We knew this [shutdown] was going to have a big impact on our industry, and on people's lives, and so when we reached out and said that we're going to bring back the job-loss protection, that was really just the first step in now what's become multiple layers of support," said Brian Smith, COO of Hyundai Motor America.

Those layers, including 0 percent financing and 120 days before first payment, weren't enough to prevent a 43 percent drop in Hyundai's March U.S. sales. But the incentives are part of a big-picture strategy by Hyundai Motor Group to keep existing customers loyal and dealers solvent, and to lay the groundwork for a return to the core goals of gaining market share and improving margins. Kia doesn't have a job-loss program but is offering aggressive financing, payment deferrals and discounts on new vehicles.

The group's brands also joined in the fight against the coronavirus. Hyundai and Genesis have pledged $4 million in grants to provide cash and testing kits at drive-through testing stations at 22 locations across the U.S. Kia has donated $1 million to assist homeless youth.

"I think there are going to be consumers who see what Hyundai's done through this process — taking care of customers with the programs we've talked about or our investment in trying to help hospitals deal with their challenges — and they're going to become Hyundai customers in the future," said Smith.

The Korean automakers also have fundamentals in their favor once the market recovers. One is product: Hyundai and Kia still have inexpensive cars in their lineups that could be in demand as consumers look for economy over style. They also have inexpensive crossovers.

"Things have worked out in their favor because they haven't discontinued all their smaller, more affordable cars yet," said Sam Abuelsamid, principal research analyst at Navigant Research. And small crossovers such as the Hyundai Venue and Kia Seltos — both new models — "are available at a more reasonable price point than pretty much anything you could buy from a Ford dealer today," he said.

The brands also had sales momentum before the virus struck. A lot of that comes from a product lineup that continues to improve with each new model.

Smith said Hyundai is working with dealers to establish inventory levels that should help with a quick rebound when conditions in the U.S. allow for it. "When we come out of this, it's likely to be a pendulum swing; there's going to be a lot of pent-up demand," he said. "So there's many dealers that are saying they still want to keep the flow of vehicles coming."

Abuelsamid is more cautious. Unemployment could linger if small businesses fold over the coming months, and auto sales could fall as low as 10 million this year in a worst-case scenario. That kind of financial pain could outweigh any good will generated by Hyundai now. "Consumers tend to have fairly short memories," he said.

Because the coronavirus had its biggest impact in South Korea in February and March, its auto plants are operational now that the outbreak has been mostly contained there. That gives the Korean brands models to export to the U.S. at a time some rivals depend more on now-closed plants in North America.

Ratings agency Fitch revised its outlook on Hyundai and Kia globally to negative from stable this month because of the pandemic but gave the automakers high marks for robust liquidity, access to capital and recovering sales and production at home. "As such we believe the companies are better positioned than some global competitors, especially European and U.S. automakers who face effective shutdowns in the home markets in the near term," Fitch said.

The agency's BBB+ debt rating for Hyundai and Kia was the same as for Volkswagen AG. Toyota and Honda had higher A+ and A ratings, respectively, but Fitch put General Motors behind the Koreans at BBB and Ford at BBB- after a downgrade in March. The ratings suggest the Korean automakers are in solid shape relative to peers.

"It takes a lot of planning to get ahead of the cash position that the company needs, and that's why we've been working with dealers to say, 'Make sure you're doing the same thing,' " Smith said. "We feel good about where we are, the strength of the company and the forecast that we're doing to get through this together."