Q-and-a: Hyundai CEO says expanded U.S. presence, including in Ann Arbor area, is strong possibility

In an interview on the rooftop patio of the Palio restaurant in downtown Ann Arbor during the Rolling Sculpture Car Show on July 8, Krafcik, sipping a beer and intermittently chatting with old friends, spoke with AnnArbor.com. The former Scio Township resident said he:

--Supports President Barack Obama’s administration’s decision to consider requiring that carmakers achieve corporate average fuel economy of 56.2 miles-per-gallon by 2025.

--Believes Hyundai should continue focusing on quality instead of purely ramping up production.

--Thinks a U.S.-Korea free trade agreement, which is stalled in Washington, would have only a minimal impact on Hyundai’s U.S. business.

Krafcik’s comments come as Hyundai is deep into a sustained period of sales successes, bolstered by huge improvements in quality, fuel-efficient vehicles and comparatively low prices.

The company recently raised its goal for U.S. sales in 2011 to 624,000, a 16 percent increase from 2010. Hyundai has sold more cars in the U.S. in the first half of 2011 than it has at this stage at any point in its history.

Still, when Krafcik strolls down to Main Street to check out the vehicles at the car show, he walks right down the center of the street, totally unnoticed by the crowd.

But the vehicles Hyundai brought to the show — including the new Veloster, a 40-mpg hatchback that was tested and calibrated at the Hyundai-Kia America Technical Center in Superior Township — drew plenty of attention.

Here are excerpts from the conversation with Krafcik:

AnnArbor.com: How would you define the technical center’s contributions to Hyundai’s recent success?

John Krafcik: That technical center is just a godsend for us. At Hyundai, our big idea is that we want to design and engineer and build the cars in the markets that we sell them.

It’s a very smart thing to do because then you can respond more quickly to changes in the local market conditions.

AnnArbor.com: The tech center was particularly stable during the auto crisis when everybody else was shedding jobs. How do you see the presence here evolving over the next several years as Hyundai’s market share continues to grow?

Krafcik: There’s no question that we’re going to be growing our capability. That’s the trajectory we’re on.

We want to do more and more work here in engineering, product development, calibration, certification, development as well as manufacturing.

AnnArbor.com: Do you see that equaling more jobs?

Krafcik: It should, over time. And I can’t give you any commitments because it’s really not my part of the business, but I think there’s a great possibility. We’ve certainly got some incremental capacity there.

AnnArbor.com: I asked Bob Lutz a few weeks ago how quickly he believes battery costs will drop and how fast electric vehicles will become affordable. What’s your assessment?

Krafick: It’s a great question because there’s so much uncertainty around it. We have a great battery partnership with some of the best battery-makers on the planet - LG Chem, for example. And we’ve got third-generation lithium-polymer batteries already on the road in our Hyundai Sonata hybrid.

That said, (lithium batteries) are really expensive. And when you look at the cost of a battery pack in a vehicle like a Leaf or a Volt, you’re talking $10,000 or more. It’s very, very considerable. If you just look at the apparent cost of the chemicals in the materials structure, it’s hard to imagine that much cost being taken out. Some — but I don’t know what that cost curve is going to look like.

So our approach at Hyundai to optimize fuel efficiency has been different. We haven’t put a big marketing focus on those so-called ‘green’ technologies. Instead, we’ve focused on optimizing the internal combustion engine solution — the gasoline engine.

We’ve got four vehicles that get the 40-mpg standard. Three of them are conventional, internal-combustion engines — the new Accent, the new Elantra, the Veloster.

Look, if we want to reduce this country’s dependence on foreign oil, the best way to do it is, ironically, not a wholesale movement to alternative powertrains or hybrids. But rather, let’s just invest in the technologies we have right now — we all have these things — and make them standard on everything.

The prices go up a little, instead of a lot, and we make massive improvements in overall corporate fuel economy. We’re (averaging) 35.7 miles per gallon right now at Hyundai, so we’re already hitting the 2016 standard.

AnnArbor.com: And how do feel about President Obama’s administration’s consideration of the 56-mpg standard?

Krafcik: I think it’s a very, very good approach.

AnnArbor.com: Some of the domestic carmakers are talking about how much money this is going to add to each vehicle. Do you have an estimate as to how much it might add to the average Hyundai car?

Krafcik: Last year we committed to hit 50-mpg by 2025 just because we think it’s the right thing to do. Part of our corporate strategy is to be a leader in environmental responsibility and fuel efficiency, so we haven’t really thought about it in terms of incremental cost.

We have to do this whether or not the standard is there. We’re going to hit 50 by 2025. That’s our corporate commitment. So we haven’t really put a number on it.

AnnArbor.com: The recent Wall Street Journal piece on Hyundai was interesting. How does the Hyundai culture need to change for you to continue your success? There was some talk of it in that story.

Krafcik: Yeah, this tension that’s in the company right now is really interesting and very creative. The tension is: Do we continue to grow our production capacity in sales to meet the demand that’s there, globally, not just in the U.S., but in other markets? Or do we give up some of that growth to focus more on quality and ensuring that the craftsmanship is there and our brand image strengthens?

What’s fascinating is five years ago, we would have picked more production. But we have already made the decision: No, we’re not going to do that. We’re going to grow in a more evolutionary matter, we’re going to focus and ensure we deliver the quality our customers demand.

And we think over the long term, that’s going to be better for the company. Now who knows where we’ll end up in 20 years? But I am absolutely convinced that it’s better to take this slower trajectory now as opposed to growing too fast.

AnnArbor.com: Are you frustrated at the status of the U.S.-Korea trade agreement situation at this point?

Krafcik: We’ve all been very realistic about the timing. These things take a lot of time.

Honestly, from our point of view, it doesn’t matter that much. The cost benefits, the tariffs, are relatively low — and we have more and more U.S. production anyway.

We’re going to build about 400,000 cars in the U.S. this year and sell about 600,000. So when you look at it, it’s a pretty small base of cars, pretty small tariffs we’re talking about anyway.

AnnArbor.com: What do you think about Ann Arbor?

Krafcik: I love this town. For 14 years I lived in southwest Ann Arbor in the Uplands subdivision and (it’s great) being back here on a day like today and seeing Rolling Sculpture. I bought my Caterham (car) here in 2002.

It’s a great town. I live in southern California now. I live in Orange County. And there is nothing like this. The oldest thing where I live is 1980.

It’s fabulous to be back here and walk down Main Street and feel the Ann Arbor vibe.

Contact AnnArbor.com's Nathan Bomey at (734) 623-2587 or nathanbomey@annarbor.com. You can also follow him on Twitter or subscribe to AnnArbor.com's newsletters.