HYMLF - Hyundai: Challenging Tesla In The EV Race

2023-04-24 12:47:57 ET

Summary

• Larger than Tesla Model 3, Ioniq 6 starts at $41,600 and offers 240 miles of range with its standard battery and up to 361 miles with its larger battery.
• Hyundai’s electrification strategy so far favors gas-electric and plug-in hybrids over batteries. Ioniq 6 availability will be small in the U.S., posing no threat to Model 3.
• Hyundai Group models, rising in popularity, passed General Motors in 2022 to become No. 3 in global sales, behind Toyota and Volkswagen.

From a branding standpoint, Tesla ( TSLA ) grabs the title of go-to automaker in the battery-electric vehicle (BEV) category. It's the top seller and the name that owners love to drop at cocktail parties. Tesla's brand arguably conveys the Silicon Valley spirit of innovation and earth friendliness as embodied by mega-billionaire and "cheerleader-in-chief" Elon Musk.

From a driving standpoint, the Ioniq 6 sedan - a cousin of Hyundai Motor Co.'s ( HYMTF ) Ioniq 5 SUV - feels more solidly constructed and is a smoother riding vehicle than Tesla's top-selling Model 3 sedan. The preceding is my opinion based on driving both vehicles on a variety of roads around southeast Michigan.

Thumbs up to Ioniq 6

The Ioniq 6's performance, fit and finish of the spacious cabin, easy-to-use infotainment system, creative use of materials, safety and convenience features and eye-catching styling aren't a surprise since Hyundai's models, year in and year out, continue to show incremental improvement in nearly every category from the company's early days.

In 2022, for the first time and thanks to consumer enthusiasm for its models, Hyundai Group - Hyundai Motor plus its South Korean affiliate, Kia Motors - passed General Motors (GM) and Stellantis (STLA) to occupy third place in global automotive unit sales. Hyundai's surge comes overwhelmingly thanks to its gasoline-powered models.

Ioniq 6, which began selling in the U.S. in March, arrives on the heels of Hyundai's Ioniq 5 BEV. Since Ioniq 6 is a sedan, it likely will lag its predecessor in sales because consumers these days prefer SUVs over sedans. A large battery-powered SUV, probably called the Ioniq 7, is in the works.

Gas cars ascendant

In any event, the heart of Hyundai's sales aren't battery-powered models, they're gasoline models like Elantra, Sonata, Santa Fe, Tucson, and Palisade. The automaker's electrification strategy relies - like its rival Toyota (TM) - mainly (and for the moment) mostly on gas-electric hybrid versions of some of its gasoline models, and to a lesser extent, plug-in hybrids, which provide a short all-electric range backed up by a gasoline engine.

All battery-powered models from Hyundai, its Genesis luxury division and Kia are based on a single platform called E-GMP for the Electric-Global Modular platform. Hyundai sold fewer than 23,000 Ioniq 5 BEVs in the U.S. in 2022, of the 1.47 million vehicles the company sold overall. It expects to sell a similar number of Ioniq 6s in 2023 - in other words, a sliver of its total sales volume and a fraction of the 240,000 Model 3s Tesla sold in 2022.

Hyundai has adopted a strategy similar to that of Toyota, developing a battery-electric capability while adding production capacity and output sparingly, only to the extent and at the pace that consumer demand grows. For the time being, real and immediate demand for BEVs in the U.S. remains in a very early stage, mostly because of concerns over insufficient charging infrastructure, range anxiety, and the premium pricing of new BEV models.

Ioniq 6 is built at Hyundai's Asan, South Korea, factory and, as an import to the U.S., does not qualify for a federal $7,500 tax credit under the Inflation Reduction Act (IRA) passed earlier this year. Imported vehicles as well as BEVs using a large proportion of imported minerals for their batteries don't qualify for the incentive.

A year ago, Hyundai announced plans to open a new assembly plant for BEVs in Bryan, Georgia. The new plant with a potential capacity of up to 500,000 vehicles, including an adjacent battery plant, is slated to come online in 2025. Currently, Hyundai operates an assembly plant for internal combustion engine vehicles in Montgomery, Alabama, and a plant in Mexico.

With its pursuit of an incremental electrification strategy, Hyundai so far has managed to avoid being targeted by environmentalists and media that are urging an accelerated switch to batteries. Part of that strategy is designing, developing, and exhibiting BEVs like Ioniq 6, impressively rendered though produced in relatively small number. Until range is improved, charging times are reduced and the charging infrastructure in much more extensive, demand for models like Ioniq 6 will be limited - and Hyundai would be risking much by assuming that governments - especially the U.S. - will create regulatory mandates that, in effect, force consumers to buy BEVs.

The recent announcement by the Environmental Protection Agency tightening emission standards, while not yet in force, shows that government may indeed create such a mandate. If so, Hyundai should be ready to step up production.

Tesla, as a maker of the Model 3 and other BEVs, is in a different position than Hyundai and incumbents that are "electrifying" their product lineups gradually with the expectation that one day in the distant future they may be exclusively BEV. Tesla has successfully positioned itself as a premium product, a luxury automaker whose price isn't questioned by the mostly affluent consumers that buy its vehicles.

TSLA over HYMTF

Tesla, the stock, has achieved premium status as well, currently trading at a 50 price-earnings multiple (compared with Hyundai's multiple, a paltry 3). Thus, TSLA shares have generously provided and likely will continue to provide the investment capital the company requires to expand production.

I would argue that while Hyundai has done a great job climbing toward the top tier of global automaking, its performance as an equity has been unfortunate. In fact, the ADRs are thinly traded in non-Korean markets and largely off the radars of U.S. investors. Why Hyundai hasn't piggybacked on the rising popularity of its vehicles to raise capital in the West is mysterious. Perhaps the company wishes to avoid the scrutiny and accountability that a more ambitious capital-raising strategy would entail. Perhaps banks in Korea furnish all the capital Hyundai needs. Repeated requests to discuss investor relations with the company are ignored.

For the moment, Western investors have little reason to pay attention to HYMTF - and plenty of reasons to pay attention to TSLA. But the day may come when Hyundai's ruling Chung family and its management decide to be more prominent in global stock markets. The models that Hyundai builds - Ioniq 6 being the latest example - certainly justify consideration of such a move.

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