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Korean carmakers turn to the luxury market

Hyandai 2013 Genesis 5.0
Source: Hyundai Motors
Hyandai 2013 Genesis 5.0

For those who still associate Hyundai and Kia with what reviewers euphemistically refer to as "cheap and cheerful" products like the old Pony subcompact, the new K900 might come as quite a shock. When it goes on sale early next year the big Kia sedan is expected to carry a price tag that could nudge up into the $70,000 range.

Hyundai, meanwhile, is getting ready to roll out a completely restyled version of its big Genesis sedan, taking aim at entrenched luxury competitors like the BMW 5-Series, Audi's A6 and the Mercedes-Benz E-Class.

Korean cars "used to be one step above a Yugo," said Joe Phillippi, a longtime automotive analyst and head of AutoTrends Consulting. "They've totally turned the company on its head," he said, referring to Hyundai and its smaller, sibling brand Kia.

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That's not to say either of the two marques are walking away from their traditional audiences. But even their most basic models, such as the $15,340 Hyundai Accent and the $14,400 Kia Rio have recently gone through stylish remakes and offer the sort of performance and features one traditionally wouldn't expect of the econoboxes that once dominated the lineup of the Korean carmakers.

"They've made remarkable strides in terms of fit, finish and design," added Phillippi.

But while they retain a foothold in those entry-level segments, there's little doubt the Koreans are pushing upward—and fast. They've redesigned mainstream models, such as the Hyundai Azera and Kia Cadenza, that push into the $40,000 range, prices few would have expected to see on the Munroney sticker of Korean products a decade ago. But that's only the beginning.

Hyundai scored an unexpected hit when, in 2008, it stuck a toe in more exclusive waters with its first true luxury model, the Genesis sedan. That original model landed a slew of awards—including the coveted North American Car of the Year trophy.

More recently, the maker has launched the Equus, a full-size model that has targeted those on a budget who might otherwise lust for premium luxury models such as the BMW 7-Series or Mercedes-Benz S-Class.

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The Equus doesn't come close to knocking those rivals out of the box, generating around 2,000 sales a year. Nonetheless, the move into luxury has given Hyundai, in particular, "a very good way to enhance the brand image," explained Joonhong Park, a senior program manager working on the 2014 remake of the Genesis model.

The new model will be a "game changer," added Moon Sik Kwon, head of Hyundai Motor Group's R&D Center, located just outside the Korean capital of Seoul, as he pulls the covers off the 2015 model for the first showing to a group of U.S. automotive journalists.

The new model adopts a less anonymous design, in keeping with the direction Hyundai has been taking with other, more mainstream products, such as the edgy Sonata and compact Elantra models. But, in keeping with the target market, the 2014 Genesis sedan adds even more luxury touches, both in terms of new high-tech features such as a radar and camera-based collision avoidance system as well as traditional, high-line features such as leather and wood.

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Hyundai hopes to boost demand for the new model—in both the U.S. and other global markets. It could also encourage the Korean carmaker to expand its luxury lineup, Kwon suggests, hinting that the company is working on an assortment of other upmarket models. Several more could be in the lineup before decade's end.

And as the K900 suggests, sibling brand Kia has similar, upscale aspirations in mind. The new model could be followed by a slightly lower-priced product on a par with the Hyundai Genesis, company officials hint.

But why are the Korean carmakers so intent on moving upmarket? There are a variety of factors. For one thing, luxury vehicles provide significantly higher margins than base-level vehicles like an Accent or Rio where the market is extremely competitive for budget buyers.

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There's also the issue of image, as Park points out. The original Genesis helped put Hyundai on the map for buyers who had long dismissed the brand. According to John Krafcik, CEO of Hyundai Motor America, the larger of the Korean makers has roughly doubled its awareness level among potential U.S. buyers since the Genesis debuted.

But analyst Phillippi believes another factor is weighing on the minds of Korean planners. "Clearly," he said, "the Koreans have recognized that the Chinese will eventually come in after them—and under them."

While Chinese makers have repeatedly been frustrated and delayed in efforts to penetrate the U.S. and American markets, they're already a factor in some emerging markets, such as Brazil, and will eventually go global, much like the Koreans and Japanese before them, analysts expect.

The Chinese are likely to first target the entry segments with cheap products, much like their Asian rivals did, said Phillippi, so the Koreans "are ready to walk away from the low end of their brand as they drive their reputation [and product lines] ever higher."

By CNBC Contributor Paul A. Eisenstein. Follow him on Twitter @DetroitBureau or at thedetroitbureau.com.

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