Raising A Lemon

It was out of embarrassment that Hyundai decided to launch "Operation Dave or Bust." The year was 1998 and the South Korean carmaker was in big trouble. Its U.S. sales had fallen 65 percent from their peak 10 years earlier, and Hyundais had become a favorite target of America's popular late-night TV comedians. Jay Leno equated the Hyundai with the Olympic luge, "a three-foot-long vehicle that has to be pushed to get started and only goes downhill." But when David Letterman compared Hyundai to Russia's breakdown-prone Mir space station, a young Hyundai salesman from Montana decided he'd taken enough. He headed for New York in a Hyundai Tiburon Coupe, planning to challenge Letterman to a test drive. Hyundai assigned a PR team to Operation Dave, and cheering staffers greeted the hero at dealerships across the United States. "It was time to fight back," says Hyundai spokesman Mike Anson. Unfortunately, Operation Dave crashed without impact. Letterman ignored it.

For Hyundai and Korea's other surviving carmakers, Daewoo and Kia, winning a bigger share of the largest of all car markets is only part of the challenge. They also want to prove that their cars and their country are world-class--above all as good as anything in Japan, the hated rival that once ruled Korea. There was joy in Seoul when Hyundai entered the United States in the mid-'80s and broke the 28-year-old sales records for a new import. But soon its cars began to fall apart, leaving a reputation for shoddiness rivaled only by Yugoslavia's ill-fated Yugo. Now it's crunch time: all three Korean carmakers are facing troubles at home (Daewoo is close to bankruptcy, while Hyundai Motors and Kia are carrying heavy debt). Yet all are charging ahead with a risky American offensive, offering huge discounts and sweeping guarantees to gain market share.

On its face, the campaign appears to be paying off. Korean car sales in the United States have risen 170 percent in the past two years. But some industry experts are skeptical of reported profits, pointing to the notoriously tangled accounting procedures of Korean conglomerates and hidden long-term costs. And analysts are projecting a decline in U.S. auto sales for 2001. Even Hyundai, despite sterling reviews for its 2001 Elantra compact, is still in an uphill battle for respect. As the hosts of the popular "Car Talk" radio show put it, many still view Hyundai "as a car that flies around the corner with a Domino's pizza bucket on the antenna."

For a time, Korean cars were no joke. Back in the early 1980s U.S. automakers were getting pounded by an invasion of better, cheaper Japanese imports like the Honda Civic. Hoping to copy those Japanese victories, Hyundai and Daewoo would each invest close to $1 billion to prepare their own invasion. Hyundai struck first, introducing the $4,995 Hyundai Excel in 1986, and within two years it was the fifth-best-selling model in the U.S. market. The honeymoon lasted about as long as the cars. "When Hyundai came to the United States there was no brand definition so the public implied Japanese quality," says Finbarr O'Neill, president and CEO of Hyundai Motor America. "It became apparent the company was not up to the implied standards."

Hyundai had "poisoned the waters for the Korean brand," says Kia's executive VP for marketing, Richard Macedo. So when Kia entered the U.S. market in 1994, it based its marketing strategy on avoiding any identification with Hyundai. Even after Hyundai purchased a 51 percent stake in Kia in 1998, Kia continued to avoid dealers who had sold them and tried to develop a "very different" image. "Unfortunately, there's still quite a bit of work to be done," says Macedo.

Daewoo arrived in the United States only two years ago and has distanced itself from Korea entirely. It describes its cars as Italian designed and German engineered, and rarely mentions the home country. Its U.S. ad budget is nearly doubling to $100 million this year, but mostly the car is sold by "word-of-mouth," says Jim Thomas, Daewoo's U.S. spokesman. "A neighbor will say, 'What the hell is that?' That will lead to the customer defending it, talking about value, quality, and that leads to more sales."

That may be wishful thinking: Daewoo is the Korean car company most likely to fail. Californian car dealer Joe Cardinale was persuaded to sell Daewoos only after the company agreed to pay for $80,000 worth of signs and to cut him a profit of $1,500 per car--about four times the norm. For a while, Daewoos were "selling fabulous," says Cardinale. Not now--amid reports that Daewoo's founder is on the lam from bankruptcy investigators, and that its workers are rioting against a possible American takeover. Daewoo has not given up. "Our company has long yearned for chances to export to the U.S.," says Daewoo spokesman Kim Sung Soo. "You are not really an automaker until you sell cars in the U.S."

While all car companies are racing to go global, the imperative has been stronger in Korea since the 1997 Asian financial crisis. Growth in the Korean market is expected to slow to just 5 percent a year, with little prospect of recovery. Now it seems to rivals that the Koreans will try almost anything to make it in the United States. Hyundai and Kia even extend warranties out to 10 years. "They've undercut everybody on pricing and for the life of us, we can't figure out how they're going to pay for that warranty," says an executive at one of America's Big Three. "Who knows if Daewoo and Hyundai will be around in 10 years?"

Hyundai has the best chance of survival. The company has steadily improved the quality of its cars and many former critics have been converted. Slowly, it seems, customers, too, are catching on. A U.S. watchdog group, Consumers Union, compares the ride of the 2001 Elantra to the Volkswagen Jetta--high praise indeed--yet stops short of recommending the Hyundai until its reliability is proved. Such are the lingering doubts about Korean cars. A current survey of 95,000 "Car Talk" fans gives the Korean vehicles three of the top four spots on its list of the worst cars in America. No. 1 went to Kia, a fate once reserved for the notorious Yugo. Last year the revived republic of Yugoslavia decided to bring back the Yugo--but a new round of Yugo jokes has yet to start circulating. For now Korean is still America's favorite synonym for lemon.