TOKYO/SEOUL Hyundai Motor (005380.KS) has left rivals in the dust with a stunning run this year, and Japanese automakers have even more to worry about now as the yen climbs and South Korea seals more trade pacts to benefit its exporters.
Japan's top automakers have kept a watchful eye on the South Korean underdog over the years as it clawed its way onto the global stage with a strategy modeled on Toyota Motor's (7203.T) playbook.
Hyundai and its affiliate Kia Motors (000270.KS) are the world's fourth-biggest automaker by sales and making money hand over fist despite the industry's worst ever downturn.
That's putting the heat on Japanese auto executives, especially at a time when the two governments seem to be heading in diverging directions in their support for the export industry.
South Korea last month inked a tentative trade pact with the European Union to add to list of more than 40 free trade agreements (FTAs) with countries ranging from the United States to India. Japan has less than a third as many, almost all of them with the rest of Asia.
Even more worrying for Japanese automakers is the newly elected government's apparent indifference toward the yen's rise against the dollar as the ruling party pledges policies focused on fostering strong domestic demand.
"I think there's a sense of crisis in the whole (Japanese) industry," Toshiyuki Shiga, chief operating officer at Nissan Motor (7201.T), said of Korean automakers' growing clout.
"Whether you take the FTAs or foreign exchange policy, I get the impression that South Korea is tackling things well."
The Korean won has gained 27 percent since hitting a 20-year low against the yen in February, but it is still down by about a third from two years ago.
Japanese auto executives have publicly lamented the yen's levels, saying the government should take steps to ensure the auto industry -- a major driver of the country's economy -- remained competitive.
Such jawboning has gone unheeded, with the dollar under 90 yen, losing more than 10 yen from a high this year.
Analysts say the won could gain further as South Korea's economy stages a faster recovery, but add that foreign exchange authorities in that country are unlikely to condone an unchecked rise.
A HEAD ABOVE THE REST
Hyundai has gained market share around the world this year as government measures to encourage the purchase of less-polluting cars saw consumers flock to its Elantra, Accent and other models.
Hyundai has also struck gold with big operations in India and China -- two of the fastest-growing markets. And ingenious marketing such as an offer to allow buyers to return vehicles if they lost their jobs within a year helped Hyundai and Kia increase sales even in the sinking U.S. market.
The volume growth has come hand in hand with industry-defying profit improvements. In July-September, Hyundai made a record net profit of 979 billion won ($847 million) -- equal to the combined earnings of Toyota and Honda Motor (7267.T) that quarter.
The conspicuous lead, aided by a weak won, swept Hyundai's shares up 50 percent that quarter, while Toyota lost 3 percent.
Still, some said the optimism over Hyundai and other Korean companies was overblown. Fundamentally, Japan's top brands still carry more clout due to their global reach, flexibility and longer experience building cars abroad, they said.
"There's no comparison," said Diane Lin, a portfolio manager at Pengana Capital in Sydney.
Lin said Japanese companies had shown their mettle by reacting quickly to the financial crisis with disciplined production cuts -- something that Hyundai would have difficulty doing given the hawkish labor union at home.
"(Hyundai) is not as flexible. If you compare apple-to-apple, fundamentally, Hyundai still has a far, far way to go."
To be sure, Japanese automakers are putting up a good fight.
To ease the pain of a rising yen, Toyota, Honda and Nissan slashed exports out of Japan by 43-64 percent in the first financial half-year to September 30, shifting as much production as they could to overseas factories at minimal cost.
"We can do this because we produce the same models across factories in different regions," Honda Chief Executive Takanobu Ito told Reuters last month. "We're lucky that way."
Hyundai is aware of such realities -- including the political backlash from other countries that could ensue if they rely too much on shipping cars from South Korea.
That is why, despite the FTAs, Hyundai has not built a car plant at home since 1996. Instead, it has set up shop in the United States, China, India, Turkey and Czech Republic. Sites in Brazil and Russia are on their way.
But some doubt Hyundai will be able to keep up its frentic pace.
"Overall, Hyundai/Kia benefited from a very favorable set of factors and developments (this year), and the operating environment during 2010 will be much more challenging," said Ashvin Chotai, London-based managing director at consultancy Intelligence Automotive Asia.
"The ability of Japanese companies to be profitable and competitive at (a dollar) of 90 yen and below will be crucial in determining their competitive position against Hyundai and Kia."
($1=1156.2 Won=89.7 Yen)
(Editing by Lincoln Feast)