General Motors: The next Hyundai?
The symbolism is impossible to miss: General Motors, the world's biggest automaker, is borrowing marketing strategy from Korean upstart Hyundai.
CEO Rick Wagoner's announcement that GM is increasing its powertrain warranty to five years or 100,000 miles on all 2007 models is intended to boost the automaker's image and sales, just as most analysts foresee a slowdown in the car market that could last through 2006 or longer. But it's also a startling acknowledgment that GM has lost key turf not just to relentless competitors like Toyota and Honda but also to inexpensive imports that not long ago were the butt of automotive industry ridicule.
Hyundai entered the U.S. market in the 1980s with low-budget brands meant to offer a new-car alternative to people who otherwise could afford only a used car. Quality was poor, however. Sales were so meager that the company seemed poised to pull out of the U.S. market in the 1990s.
Instead, the company's Korean executives made a concerted effort to raise the bar for Hyundai and its sister brand Kia. They instituted lots of manufacturing reforms to improve quality. But that takes a long time for consumers to notice, so they also began to offer the best warranty in the business: 10 years or 100,000 miles.
The strategy got buyers in the door. And quality did improve — so much so that current models like the Hyundai Accent and Azera and the Kia Sportage are beginning to poach GM's core buyers: middle-income Americans looking for good value.
GM's new warranty squarely takes on those competitors — and will probably force Ford and Chrysler to match the deal. But it also reflects GM's uncomfortable position in the market today: Even though it sells more cars and trucks than any other carmaker in the world, it has less power to move the market than smaller automakers that are far stronger. Greater manufacturing efficiency at Toyota, Honda, Nissan, and, yes, Hyundai allows those automakers to build higher-quality cars and still earn higher margins on them. They don't need to offer lavish warranties to sell their cars. GM's response over the years has been to offer rebates and other come-ons to set itself apart. But that is a short-term strategy at best, which weakens brand image and distorts corporate decisionmaking. That's what GM is now trying to reverse.
Remarkably, GM now has a Hyundai problem. The quality of its products tanked, especially compared with standard-setter Toyota. But from a low point in the mid-1990s, GM's quality has improved markedly. Ratings in surveys like those conducted by J.D. Power have been getting much better. And new models like the Chevy Trailblazer and Buick Lucerne compare quite well with the competition.
But when quality takes a dive, it takes a long time to earn back your reputation. That's what GM is trying to address now, with a show-me warranty that puts its money — literally — where its mouth is. It's risky. Wall Street dislikes generous warranties, because they are guaranteed to increase costs down the road, as the automaker must foot the bill for repairs that otherwise would have been on customers' dime.
GM's gamble is that quality improvements are real and thorough enough to keep extra warranty costs fairly low, while raising the company's image and boosting sales. It ought to know--nobody has better data on the quality of GM's cars than GM does. The question is whether Wagoner is being bold enough, without giving away the store.
When Hyundai rolled out its 100,000-mile warranty, it had loads of internal data showing the gamble would pay for itself. They were right — Hyundai's sales gains have been among the most impressive in the business, and warranty costs have remained under control. In fact, other parts of Hyundai's warranty, like the bumper-to-bumper protection, are still better than GM's offer. Stay tuned. Maybe GM will borrow yet another page from Hyundai's playbook.
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