The Hyundai Equus Story by John Krafcik

The fact that you're reading this on Edmunds means that you're a well-informed automotive enthusiast. Given that status, you've certainly earned the right to have a healthy bit of skepticism about the upcoming launch of our new flagship, the 2011 Hyundai Equus.

With the editorial space that the very gracious Scott Oldham has provided me here, I'll give you some insights into what we're up to with our entire premium rear-wheel-drive product lineup, including Equus. And who knows, maybe you'll have a different point of view about what we're doing at Hyundai when you're done reading this.

Whatever you might decide, let me thank you in advance for your interest in hearing about this chapter of the Hyundai story.

The Genesis of a Premium Model
The story of Equus begins with its platform-mate, the Hyundai Genesis. When I joined Hyundai in early 2004, the company had already begun the planning for this bold product — a rear-wheel-drive, premium sport sedan designed to take on the BMW 5 Series, Lexus GS and Mercedes-Benz E-Class. We ended up spending a much longer than usual amount of time in the product development process with Genesis.

Why? Well, we had a lot to learn, for one thing. Engineering a premium rear-wheel-drive platform brings a unique set of technical challenges compared to the front-wheel-drive platforms we'd grown quite capable of developing. And the Genesis program included our first homegrown V8 engine, known as Tau.

Yes, Genesis was a big deal internally, and there was an extraordinary focus to ensure we got things right. We had the time we needed and the budget we needed to design and develop a flexible, world-class, rear-wheel-drive platform that would eventually spawn at least three unique products. These were exciting times at our global research and development facilities, and we were extremely focused on delivering products that would wipe clean any preconceptions about what Hyundai was capable of doing.

The Genesis of a Premium Brand
That focus manifested in many ways. One was exterior design. There was a lot of internal debate on design direction for Genesis. We used a European design house as an early consultant, and its proposals informed the core design elements of the first approved exterior model, which got as far as the tooling stage. In our industry, when you've built tools to stamp the exterior sheet metal, you've committed millions of dollars, and so you're pretty much committed at that stage to bring that design to market. But in the end, we weren't happy with the design. So we made the right decision (albeit a difficult and expensive one) to redo the exterior with a cleaner, more athletic and more enduring design, homegrown from our own design studio. And with that decision, Genesis went from looking like this :

to looking like this :

At the same time that we were overhauling the exterior design, we were refining driving dynamics, which involved targeting a sportier feel differentiated from the isolated feel of many luxury sedans. We were also working out the retail strategy. Internally, there was debate around three different retail options: launching as we did, with Genesis sitting atop the Hyundai lineup and sold through Hyundai dealerships; creating a separate retail channel like Acura, Infiniti and Lexus; and developing a hybridized approach with a unique Genesis brand sold through Hyundai dealers.

In the end, the decision to launch as we did put primary focus on Genesis, providing a halo for the entire Hyundai brand. We got lucky here as well. With the Great Recession coming just a few months after the Genesis launch, a stand-alone retail channel would have been a difficult financial burden for our dealers to support. New stand-alone dealerships can cost anywhere from $5-$75 million and we avoided those costs for our dealers. And winning the North American Car of the Year award in January 2009 gave us a key communication platform to ensure American car buyers understood that Hyundai could engineer vehicles that compete with the very best.

In our business, many automakers speak of halo products, but it's rare to see a product truly delivering a halo benefit to the brand the way Genesis has done for Hyundai. In fact, last year, out of all the creative marketing approaches we used to help drive our success in a tough year for the industry, no communication message was more effective in improving buyer consideration for the Hyundai brand than the North American Car of the Year award for Genesis.

Market Success for a New Image
Beyond the halo value to the overall Hyundai brand, we've also been pleasantly surprised by the market success of the Genesis itself. It has captured a 6.3 percent retail market share of the mid-luxury market this year, putting it in 4th place in this highly competitive segment, behind only the Lexus ES, Mercedes E-Class and BMW 5 Series. It's ahead of the other 14 entrants in the segment, including the Infiniti M, Lexus GS, Lincoln MKS and Audi A6.

That 6.3 percent retail share is even better than the 4.9 percent share of the retail industry that the overall Hyundai brand is delivering. According to J.D. Power's most recent Initial Quality Survey, had we launched Genesis as its own brand, it would have tied Lexus for the best quality in the industry. Automotive Lease Guide's guidebook for May- June 2010 shows that Genesis has residual values on par with the Mercedes E-Class and better than the Lexus GS, BMW 5 Series, Cadillac CTS and STS, Lincoln MKS and Infiniti M. And the product mix has been incredibly rich, with over half of all Genesis' sold to date going out the door with sticker prices over $40,000. Our V8 engine mix runs around 45 percent — the highest optional V8 engine mix in the segment.

The Genesis Coupe was our first extension of the Genesis platform, and it, too, has been a remarkable success, also exceeding our overall Hyundai brand market share with a 5.1 percent retail share of the domestic-dominated sporty coupe market. Our engineering teams worked magic with this car, and it shows. When Motor Trend gave the Genesis Coupe the win over the new Camaro, Mustang and Challenger in a comparison test, it said it all with the comment, "the only one that felt like a genuine sports car."

What's amazing is how much under-the-skin commonality Genesis Coupe has with the sedan: engine subframe, frame rails, center floor pan, rear axle, 3.8-liter V6, ZF transmission and much more. We invested the savings from this part-sharing into unique sheet metal and a sportier driving character to differentiate the Coupe. This has paid off nicely for us, as Genesis Coupe sales have been highly incremental to the sedan. (Most of our competitors use a conventional coupe-looks-like-sedan approach, which saves money but doesn't deliver substantial differentiation, or, as a consequence, much incremental sales volume.) Further, the messaging synergy between the Genesis Coupe and sedan has been very efficient for us, with marketing communications and media coverage on either car providing opportunities for consumers to discover both of them.

A Halo for the Brand
Taking the product, the brand and the customer experience a step further, some of you may ask a fair question: "So I see Hyundai is happy with Genesis. That's great. But why bother going any further up-market? Aren't you just going to re-create what happened with VW and the Phaeton?"

The simple answer here is "No."

Let me explain the differences between what we're doing, and how we're doing it, compared to VW's approach with its Volkswagen Phaeton.

First of all, with Genesis, we've demonstrated there is a remarkably large group of consumers already comfortable spending over $40,000 for a great car, with great quality and residual value, wearing a Hyundai badge. At the time of the Phaeton launch, VW hadn't had this type of validation from American consumers. We've found that our early Genesis buyers are smart, affluent and self-confident. They don't need the social approval that a traditional premium badge provides to some, and in fact may be turned off by the unique kind of reverse social stigma a premium badge carries in some circles, especially in uncertain economic times like these.

In many ways, Genesis buyers resemble the first group of Lexus owners in the early 1990s. Like those buyers, today's Genesis owners see the extraordinary value their car provides versus the competition, and their discovery of this value by itself is very appealing to them. So now, looking forward, we've got a large group of Genesis owners who are delighted with the car (it won the J.D. Power APEAL award for its segment, and has won two consecutive AutoPacific Vehicle Satisfaction Awards in its segment), and are already comfortable with the idea of a premium Hyundai product. Hundreds of them have already contacted us on their own, inquiring about the new Equus.

Now compare the price walk from the car below Phaeton in the VW lineup, the Passat (average MSRP of under $25,000 back in 2004) to the base Phaeton price of about $65,000, with a fully optioned price of (gasp, what were they thinking?) over $100,000. That was quite a gap to bridge in their sedan lineup. (For you uber-enthusiasts who remember the $40,000 Passat W8, keep in mind that VW sold only 268 of them through the first eight months of 2004, about 0.6 percent of Passat sales during that period, before production was ended.)

At Hyundai, we're looking at an average Genesis MSRP of $40,000 right now, an incredibly well-equipped Equus starting price in the $50s and a fully optioned price less than $10K more. We think that is a much more manageable price walk.

Low Volumes, High Aspirations
A key enabler of success in achieving our objectives with Equus is the simple fact that our sales expectations for the car are modest — just a few thousand per year. So instead of an unrealistic volume objective as a key business driver, we have just two key goals in mind for Equus: show the world we can build a flagship sedan that rivals Lexus LS, BMW 7 Series and Mercedes-Benz S-Class, and in so doing build further confidence in the Hyundai brand with a broad audience of car buyers; and pilot several breakthrough customer experiences for Equus owners that will differentiate us from the luxury pack and enable rich learning opportunities within our Hyundai retail network.

Based on the early feedback from consumers and consultants, we're pretty confident in the car itself. The quality, craftsmanship, NVH, driving experience, feature content...it's all there. Residual values will be strong. When compared to cars at the same price point, there is really no comparison. And in cost-is-no-object comparisons — the kind that have fueled our engineering team during the Equus development process — we know that Equus performs very well. In the end, journalists and consumers will decide this point, but for now, we're confident with the hardware itself.

It's the Equus customer experience where we see significant opportunity to improve upon current industry practice. We've got several initiatives underway here that rewrite some of the established rules of the premium automotive retail and ownership experience.

You may have already heard that we will be providing an iPad to 2011 Equus owners. Why? An interactive color touchscreen tablet computer like the iPad provides a fabulous platform for our owners to navigate all the features of this very technologically complicated vehicle. It is the ultimate owner's manual. Interactive text will mingle with detailed photos and videos to provide rich feature descriptions. We'll also be offering a live service-scheduling functionality from the iPad (or any computer or smartphone) that will allow Equus owners to schedule a service appointment directly with the dealership at their convenience.

But here's the best part. We'll come and pick up the Equus at your home or business and leave behind a service loan car for you to drive while we perform the work. And when we're done, we'll deliver your Equus back to you. That's pretty special, and unique in our industry. We call it Service Valet. With Equus, it's not about putting you at the front of the service line, it's about eliminating the line entirely and demonstrating extraordinary respect for your time. For many smart and affluent buyers, time is the ultimate luxury. Here, our low-volume aspirations enable us to provide this kind of personal touch. Lexus, BMW and Mercedes cannot match this service, as their volumes are simply too high.

A Smarter Customer Experience
Our insight here on the customer experience isn't rocket science, but it is a different take from traditional thinking in our industry. Traditional thinking says that luxury cars need to be sold in large, expensive, dedicated, luxury showrooms, often featuring marble, waterfalls, cappuccino machines and putting greens. Those things are nice, but they don't make up for the basic observation that, except for a few car geeks (like me, and perhaps many of you reading this), no one really wants to go to a car dealership. We've all got better things to do with our time. If I want a coffee, I'll get it from Starbucks or Caribou, not the local Lexus dealer. And if I were a golfer, I wouldn't choose to get my putting practice in at the BMW dealership. Sure, those things are nice if I have to go to the dealership to get my car serviced. But wouldn't it be better if I didn't have to make that trip at all?

Many of these old-school luxury-brand dealerships were built just a few years ago, and many of them cost their owners $25-$75 million to construct. (We have a nickname for facilities like these in our industry: mausoleums. That's fitting, isn't it?) But we've found that many affluent consumers, particularly the smarter ones that have been most adept at building and maintaining their wealth, fully understand that they're paying directly for that luxurious overhead. And since you can't take your fair share of the marble in the showroom and stick it in the trunk of your Lexus, there is very little tangible value there considering the short periods of time you'd spend in the dealership.

Most affluent buyers understand this, and our Equus target buyer really gets it. They're the kind of person who may shop often at Costco (where the average household income is over $110,000), while enjoying overseas vacations with their families each year. For these buyers, intent on quality experiences, confident in their own skin and hesitant to pay a premium for the superficial patina of a luxury showroom, our focus with Equus on an outstanding product delivered to them on their terms will provide an intriguing alternative for them.

Premium Means Consumer-Friendly
So how will we get these types of buyers into an Equus? One exclusive and unique approach we are taking is to extend the Service Valet concept to product demonstrations and test-drives. Consumers who are interested in Equus will have the opportunity to make a reservation for a product demo and test-drive. Some consumers may wish to do this at the dealership, while others may decide they'd prefer a demonstration car be brought to their home or business — a personal demonstration. Our dealers will work with our customers to determine their level of interest and arrange the demonstration that works best for them. Here again, our low volume enables this kind of personal touch, providing a convenience that traditional high-volume luxury brands cannot match.

While all Hyundai dealers will have the opportunity to sell Equus, qualification criteria will result in perhaps 200-300 dealers onboard over the next year, meaning a typical dealer may sell 10 examples of the Equus or so per year. That will provide our dealers with the time necessary to provide the personal care that will differentiate the Equus sales and ownership experience from the traditional luxury-brand experience. These dealers are now making plans to construct their "showroom-in-a-showroom" displays that will house Equus and Genesis products. The showroom feel is efficient, technical, and definitely not over the top. Each dealership will have a dedicated Premium Vehicle Champion, with only qualified sales consultants to present and sell Equus and Genesis products.

We're still several months from the retail launch of the 2011 Hyundai Equus. Within our company and our retail network, we're hard at work putting the finishing touches on the Equus, and our new set of premium services. It's an exciting time and a terrific symbol of how far we've taken the Hyundai brand these last few years...and how much farther we think we can go. Thanks for listening to the story. Be sure to watch us, and feel free to send us your thoughts via the team at Inside Line.