Just six years ago, few individuals in the global automotive industry paid attention to Kia. The company lacked exceptional performance, striking design, or strong brand loyalty. Under these circumstances, the only way to sell cars was through increased promotional spending. This resulted in an ‘operating profit margin of 1.2%’ in its 2017 annual report.
Compare this to the current situation: Kia recorded the highest operating profit margin (13.2%) among major global automakers in the second quarter of this year. It outperformed its affiliate Hyundai Motor Company (9.5%) and also surpassed Tesla (6.3%), General Motors (8.3%), and Ford (5.8%). This figure significantly exceeds the operating profit margins in the first quarter for Toyota (10.4%), Mercedes-Benz (10.8%), BMW (8.8%), and Volkswagen Group (6.1%), which have not yet released their second-quarter figures. How did Kia transform into the world’s most profitable automaker in just six years?
Kia reported on the 26th that it achieved sales of 27.5679 trillion won and an operating profit of 3.6437 trillion won in the second quarter of this year. Sales increased by 5% and operating profit by 7.1% compared to the same quarter last year. For the first half of the year, sales increased by 7.7% to 53.7808 trillion won. If this trend continues, Kia will surpass the 100 trillion won mark in sales for the first time this year.
The automotive industry attributes Kia’s transformation to ‘improved product competitiveness.’ The company effectively captured market trends and increased its production of recreational vehicles (RVs) and hybrid cars, which were previously underrepresented in its offerings. In the second quarter, Kia’s RV sales accounted for approximately 70% of total sales, nearly double that of 2017 (37%). The hybrid car share, which was minimal, surged to 14.3% (including plug-in hybrids) during the second quarter. Along with design enhancements and stronger brand equity, Kia’s average selling price in the second quarter rose to 36.3 million won, a 6.6% increase from a year ago (34.1 million won). This represents an increase of over 50% compared to the average selling price in 2017.
A Kia representative stated, “As product quality has improved, there is no reason to sell at a discount,” adding, “The secret to our soaring operating profit margin is ‘getting the right price.’”
Kia plans to continue its focus on profitability-centered management based on the ‘success formula’ it has developed in recent years. The company intends to introduce a series of ‘hybrid RVs’ that blend high-end RVs with hybrid vehicles. Improved models of the Carnival Hybrid and Sorento Hybrid will be launched in the US in the latter half of the year.
Kia’s ‘Remarkable Journey’… Surpassing Tesla through Design and SUVs
Justice Line Established a Foundation for Kia’s Revitalization… Declining Sales, yet Increasing Revenue and Profit
Receiving the ‘World Car of the Year’ award is akin to a movie star winning the Oscar for Best Actor or Actress. This is due to the fact that 100 automotive journalists from 29 countries conduct a comprehensive evaluation of the design, performance, price, and technology of hundreds or thousands of vehicles released annually, ultimately selecting one vehicle as the MVP and bestowing the award.
This year, the award was given to Kia’s large electric sports utility vehicle (SUV), the EV9. Experts recognized Kia’s technological and design capabilities, as well as its ‘innovation’, acknowledged by Time magazine. This recognition contributed to Kia’s achievement of the highest operating profit margin among global automakers in the second quarter.
○High-Performing SUV/Hybrid Powerhouse
The increase in Kia’s second-quarter sales was not due to an increase in car sales. The company sold 795,183 units in the second quarter (138,150 domestically and 657,033 overseas), which represents a 1.6% decrease compared to the same period last year. However, revenue still rose by 5.0% to 27.5679 trillion won, and operating profit grew by 7.1% to 3.6437 trillion won.
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The fact that both revenue and operating profit increased despite lower sales indicates that they sold their vehicles at higher prices. The key drivers were eco-friendly vehicles (electric and hybrid) and SUVs. The share of eco-friendly vehicles reached 21.4% in the second quarter of this year. Despite a global slowdown in electric vehicle sales, eco-friendly vehicles saw an 8.3% increase compared to the previous year, reaching 162,000 units sold. Sales of electric vehicles rose by 21.8% from the same period last year to 54,000 units, while hybrid vehicle sales were up 7.5% to 89,000 units. Kia’s hybrid car sales now account for 14.3% (including plug-in hybrids), and hybrid vehicles are more profitable than electric vehicles.
Another key factor in Kia’s growth is its focus on recreational vehicles (RVs), including SUVs. It is reported that Kia’s RV sales share is as high as 70%. The integration of hybrids into RV models such as the Sportage, Sorento, and Carnival is also considered crucial to its high profitability.
○Sales in Advanced Markets Like North America Exceed 65%
Another contributing factor is design. This improvement can be credited to the ‘design management’ initiated by Hyundai Motor Group Chairman Chung Eui-sun (shown in the picture) upon his appointment as Kia’s president in 2005, where he hired Peter Schreyer, the former design chief of Volkswagen, deemed one of the top three car designers globally. Kia has been consistently winning major global design awards in recent years by continually innovating its design, including the establishment of a distinctive family look with the tiger nose design.
Cost improvement is yet another factor. The strategy here is not merely to reduce parts prices but to plan product designs with cost targets from the outset. The industry believes that Kia’s concentrated focus on car production, as opposed to other automakers who invest in new ventures, has further bolstered profitability. Additionally, Kia’s structure minimizes investment when establishing new factories by manufacturing parts and modules externally and then importing them, which has proven advantageous over the years.
The strong dollar, along with favorable exchange rates, has also significantly contributed to Kia’s performance. The company’s cost of sales ratio for the second quarter fell to 75.9%, the lowest level on record, reflecting an increase of 1.0 percentage points compared to the same period last year due to rising sales and reduced material costs.
Kia is also enhancing its profitability through strong performance in regions like North America and Europe, where luxury vehicles are in high demand. North America accounts for 44.3% of Kia’s sales, while Europe represents 21.6%. A Kia representative mentioned, “Profitability has improved because we sold many high-margin cars in advanced markets like the U.S., aided by decreasing raw material prices and the strong dollar.”
However, the slowdown in sales poses a challenge. Kia’s global market share (excluding China), which was 5.2% in 2022, fell to 4.8% in the first half of this year. Woo-Jung Joo, Kia’s head of finance (vice president), stated in a conference call, “To bridge the gap in electric vehicle sales, we will not overextend ourselves and will supplement with internal combustion engine vehicles and hybrids.”
Reporters Jinwon Kim/Jeong-eun Shin jin1@hankyung.com
Kia’s Remarkable Resurgence: How It Surpassed Tesla and Rivals in Profitability
Just six years ago, Kia was struggling in the global automobile market, with an operating profit margin of only 1.2% in its 2017 annual report. The automaker lacked performance, design appeal, and brand loyalty, relying heavily on promotional expenses to boost sales. Fast forward to 2023, and Kia has turned the tables, recording an impressive operating profit rate of 13.2% in the second quarter. This figure not only outperformed affiliate Hyundai Motor Company (9.5%) but also left behind industry titans like Tesla (6.3%), General Motors (8.3%), Ford (5.8%), and others.
Kia’s Financial Breakthrough in 2023: Sales and Profit Up
Kia’s transformation is highlighted by its recent financial performance. In the second quarter of 2023, the company announced sales of 27.5679 trillion won, marking a 5% increase year-over-year, while operating profit surged 7.1% to 3.6437 trillion won. In the first half of the year alone, Kia’s sales rose by 7.7%, suggesting the possibility of exceeding the 100 trillion won sales mark for the first time this year.
Key Factors Behind Kia’s Success
1. Enhancements in Product Competitiveness
The significant improvements in product competitiveness are a major factor behind Kia’s resurgence. The automaker has successfully adapted to market trends, increasing sales of recreational vehicles (RVs) and hybrid cars. In the second quarter, approximately 70% of Kia’s sales comprised of RVs, a substantial growth from just 37% in 2017. Additionally, the hybrid car sales ratio increased dramatically to 14.3%.
2. Improved Pricing Strategies
Kia’s average selling price rose to 36.3 million won, a 6.6% increase from the previous year. This price elevation is largely attributed to the improved quality and features of Kia vehicles, allowing the company to avoid discounting and enhance profitability.
3. Innovative Vehicle Designs and Recognition
In 2023, Kia’s electric SUV, the EV9, was awarded ‘World Car of the Year,’ showcasing the company’s design and technological advancements. This accolade has further strengthened Kia’s brand image and competitive positioning in the global market.
4. Eco-Friendly Focus: SUVs and Hybrids
Kia’s strategy has favored the production of eco-friendly vehicles, with the second quarter seeing a boost in sales of electric and hybrid models. The results reflected this focus:
- Eco-friendly vehicles accounted for 21.4% of total sales.
- Electric car sales rose by 21.8% year-over-year, hitting 54,000 units.
- Hybrid sales increased by 7.5%, totaling 89,000 units.
RVs Driving Profitability
Kia’s focus on SUVs and RVs has been pivotal in its financial success. The recreational vehicle sales accounted for a staggering 70% of total sales in the second quarter. Models like the Sportage and Sorento have shown significant demand as both standard and hybrid variants. This focus has allowed Kia to maximize profit margins in a competitive sector.
Kia’s Global Market Expansion
1. Strong Performance in North America and Europe
Kia’s sales in advanced markets, such as North America and Europe, have consistently exceeded expectations. In fact, North America accounted for over 44.3% of Kia’s sales while Europe contributed 21.6%. The sales contributed to improved profitability, aided by the decline in raw material prices and favorable currency exchange rates.
2. Design Innovations
Kia has been actively investing in design management, spearheaded by notable designers like Peter Schreyer. This commitment to aesthetic and functional innovation has won Kia numerous global design awards and contributed significantly to brand equity.
3. Cost Management Strategies
Kia’s efficient cost management strategies include setting target prices at the product planning stage, minimizing investments in new factories, and outsourcing parts and modules to streamline production costs. Such strategies have elevated Kia’s profitability over the years.
Despite these positive developments, challenges such as slowing sales growth and a declining global market share remain. Kia’s head of finance, Woo-Jung Joo, acknowledged that while the company is amplifying its electric vehicle lineup, it will simultaneously balance this by incorporating alternative internal combustion engine and hybrid models to satisfy diverse market demands.
Conclusively, the Road Ahead for Kia
Kia demonstrates that innovation, strategic pricing, and an unwavering focus on product quality can drastically reshape a company’s trajectory. As it continues down this path—rising to the challenges of a rapidly-evolving market—the world will be watching to see how Kia maintains its momentum and positions itself against formidable competitors like Tesla and others in the automotive landscape.
