Industry Report: Is Hyundai Ready for a $4 Gallon?

Earlier this year, Hyundai Motor Company announced a targeted 20-percent

rise in global sales for 2008, a lofty goal in an industry that is seeing declining sales in some of its largest markets. The South Korean automaker is planning on selling 3.11 million vehicles this year, 19.6-percent more than the 2.6 million it sold in 2007.

It seems, however, that today's markets don't appreciate lofty ambition, because after the announcement Hyundai's share value fell 2.23-percent to 70,000 won ($76), compared to an average market decline of 0.32-percent, with auto analysts predicting the target would be challenging to achieve.

But interestingly the big car at Detroit's North American International Auto Show wasn't a small, fuel efficient runabout, or anything with hybrid-electric power, clean diesel or any other eco-friendly technology, but rather a full-size, rear-drive luxury sedan powered by a powerful V8 engine in top-line

trim, called Genesis. As a preview of this internal trend, Hyundai introduced a sport-luxury model only a month ago at the Los Angeles Auto Show, a rear-wheel drive performance two-door dubbed the Genesis Coupe.

While performance and luxury enthusiasts are happy with Hyundai's move up-market, a change of direction that became real when it introduced the impressive new Veracruz sport utility crossover last year, a vehicle which can only be had with a large-displacement six-cylinder engine, others are concerned the brand isn't doing enough to prepare itself for expected increases in fuel prices.

Some worry that Hyundai is becoming a bit top-heavy with large cars in North America, evidenced by the Azera and Veracruz in the full-size category, the midsize Sonata officially labeled full-size by the EPA, and the once compact Santa Fe having grown to midsize dimensions. Only the entry-level, subcompact Accent, which comes in four- and five-door variants, compact Elantra, which currently only comes as a four-door sedan, although a five-door wagon will be here for model year 2009, compact Tiburon sport coupe, and compact Tucson crossover SUV, are available to take care of fuel conscious buyers.

Its Kia division, which is included in Hyundai's global sales projections, hit Detroit with a large, V8-powered 4x4 named Borrego, a model previously launched at last month's Seoul auto show, making known the budget brand has plans to move up-market into entirely new territory, just like Hyundai. Kia's model lineup almost completely mirrors Hyundai's with most cars in the same categories, a number of which are based on current Hyundai products, or vice versa depending on the model.

Hyundai has been smart to include a four-cylinder version of its Sonata, which allows it best-in-class fuel economy, but will this popular midsize model and the rest of its lineup be enough if fuel prices climb to $3.50 or $4.00 per gallon, a conservative estimate if oil prices continue to rise and regulators have their way with a new gas tax, designed to reduce the country's dependence on foreign oil.

The fact is, at $3.00 per gallon we have it pretty good, especially

when comparing our pump prices to Canadians to the north, or much worse, Europeans that can spend the equivalent of $8.00 per gallon. Nevertheless, speculators are forecasting changing buying patterns if fuel prices continue to rise, which means that Hyundai may want to do something a little more drastic than coming to market with a full-size luxury car and performance-oriented sports coupe if it wants to achieve its lofty goals. What's the answer?

Considering the size of its most profitable cars, clean diesel is the quickest way Hyundai has to reduce fuel consumption while improving their environmental footprint. A little over a year ago the South Korean brand introduced a new 2.2-liter, common-rail, direct injection (CRDi)-powered Azera, dubbed Grandeur in the European market. This was Hyundai's first stab at diesel power in the near-luxury segment, and from all reports the engine has been well received. While 2.2 liters doesn't sound like much by North American standards, at just over 147 horsepower and, more importantly with a full-size car, 251 lb-ft of torque, it nearly matches the gasoline-powered Azera in acceleration, although fuel economy is dramatically reduced. As impressive as this efficient engine appears, something with more power would play better in North

America. Addressing this need, Hyundai's fuel efficiency newsmaker wasn't on its Detroit stand, but rather tucked off in a corner of its Kia subsidiary's display area. The engine is a revised version of the 3.0-liter clean diesel V6 which has been used in Korean market Kia and Hyundai vehicles, including the Veracruz.

According to John Juriga, director of powertrains at the Hyundai-Kia Technical Center (HATCI) just outside of Ann Arbor, Michigan, confirmed that the 3.0-liter diesel is currently being tested on dynamometers and in vehicles at the HATCI facility. Information on display next to the engine states that the new engine will be optional with the new full-size Borrego SUV, in 2010. Will Hyundai get to use it as well? During the Veracruz introduction at last year's NAIAS it was announced that the new CUV would receive a diesel in the next few years, and according to reports since, Hyundai spokesman Miles Johnson confirmed that this 3.0-liter diesel is the one that will get the nod. In order to make it 50 state legal, its exhaust system gets particulate filters and urea injection for cleaner emissions.

Until 2010, or 2009 at the earliest, the price of gasoline will partially determine whether Hyundai and Kia continue to enjoy year over year success. Then again, their strong value propositions may be more of a factor.