GETTING OFF FLOOR MAT IN U.S.; SOUTH KOREAN CARMAKERS SEEKING NICHE.

Byline: Joyzelle Davis Bloomberg News

Hyundai Motor Co. and other South Korean automakers have a problem. With their home market collapsed amid the deepest recession in more than four decades, they're turning to the U.S. for badly needed sales.

Yet they're dogged by a reputation for poor quality. And they're trying to crack the U.S. market with inexpensive cars, the industry's weakest-selling segment.

Lots of luck, analysts say. ``The competition in today's market is so fierce that the established automakers won't let them get a foothold,'' said Jay Houghton, a consultant with A.T. Kearney in Southfield, Mich.

The speedy growth that South Korean carmakers experienced this decade has stalled. For the first time since 1990, worldwide exports of South Korean cars are running below the previous year's total. In the first seven months, foreign sales fell 4 percent to 713,936 vehicles from the same period last year. Domestic sales were worse, tumbling 52 percent to 428,950 vehicles, according to the Korea Automobile Manufacturers Association.

With no recovery in sight at home and their major export markets in Asia troubled by weak economies, South Korean companies are focusing on the U.S. - which, with annual sales of about 15 million cars and light trucks, is the world's largest market.

Hyundai, Korea's largest automaker, has been selling cars in the U.S. since 1986. It's trying to shake a reputation for making only cheap, low-quality vehicles. Kia Motors Corp., once Korea's second-largest carmaker, went belly-up last year under the weight of $10 billion in debt. It's now under court receivership.

The company is nonetheless using revenue from U.S. sales to rapidly expand its dealer network. ``We are the most important source of sales right now for Kia,'' said Dick Macedo, vice president of sales and marketing at Kia Motors America, the South Korean company's Irvine-based subsidiary.

Daewoo Motor Co., meanwhile, began selling cars in the U.S. market this month, making it the 24th automaker doing business in the American market.

So far, the Koreans hardly have made a dent in the U.S. Through August of this year, Kia and Hyundai had combined sales of 122,711 vehicles. That's just 1.2 percent of the market - and about the number of vehicles Toyota Motor Corp. sells in the U.S. in one month.

Hyundai got off to a promising start when it entered the U.S. market with its subcompact Excel 12 years ago. It sold 164,000 cars in 1986, then a record for a new brand. Sales reached 261,782 in 1988. Then the problems hit: Engines blew, frames rusted and air conditioners malfunctioned. Sales tumbled to 137,448 in 1990.

``In the 1980s, we weren't fully prepared to meet the U.S.'s stricter quality standards,'' said Oh Tae Hyun, a vice director general of Hyundai in Seoul. ``Now, we've learned the lesson. We've since invested a lot of money to improve the quality of U.S.-bound cars and our tainted image.''

The company has a long way to go. Hyundai, which sold 113,186 vehicles in the U.S. last year, still ranks 34th out of 38 brands in the latest quality survey by market research firm J.D. Power & Associates of Agoura Hills.

Quality issues aside, analysts said none of the South Korean carmakers has the financial strength to assure U.S. consumers they won't find themselves with ``orphaned'' vehicles. That happened to buyers of cars made by Renault SA and Fiat Spa, two of the foreign automakers that couldn't hack it in the U.S.

Hyundai, hobbled by a three-month labor dispute, lost 1.21 billion won ($930,670) in the first six months of 1998, its first semiannual loss in almost 20 years, and a sharp drop from the profit of 28.2 billion won ($20.7 million) it reported in the first half of last year.

Hyundai, whose network of 470 U.S. dealers is the largest among South Korean carmakers, is pinning its hopes for a revival on two new vehicles - an as-yet-unnamed minivan for the 2D000 model year and a sport-utility vehicle for the 2001 model year.

Until then, the company hopes to ignite U.S. sales - which increased 4.4 percent last year - by boosting incentives to dealers, increasing advertising spending, and offering longer warranties on new and used cars.

All three South Korean automakers - Hyundai, Kia and Daewoo - are trying to sell in the same entry-level market, risking the cannibalization of each other's sales.

Hyundai's U.S. lineup consists of four cars: the compact Elantra, the subcompact Accent, the two-door Tiburon coupe and the midsize Sonata. The ill-fated Excel no longer exists.

Kia sells two vehicles, the Sephia compact car and the Sportage, a compact sport-utility vehicle. Thanks partly to an increase in dealers, Kia's U.S. sales almost doubled through August from the year-ago period to 58,632 vehicles. That gave it a market share of 0.6 percent. That's the same share held by Hyundai, whose sales through August fell 7.6 percent to 64,079.

Kia says its sales haven't been hurt by its parent company's problems. Company research shows only 2 percent of Kia's U.S. customers are aware of them, a spokeswoman said.

Daewoo is entering the market with three cars - the midsize Leganza sedan, compact Nubira and subcompact Lanos. Adopting a novel tactic, the company plans to avoid selling through franchised dealers and market its cars instead on the Internet and through a network of representatives on college campuses.

Daewoo expects to price its cars 10 percent below comparably equipped Japanese vehicles, said Yoon Dong Yul, a director general at Daewoo's export strategy division in Seoul.

At best, the South Korean companies' combined U.S. market share may eventually reach 3 percent, A.T. Kearney's Houghton said. Their product lineup hardly assures that the U.S. will be a big profit center, though.

``No other automaker has ever been able to make money selling entry-level cars in the U.S. Why should they?'' Houghton said.