How can Hyundai afford a $9,995 Accent?

Since Hyundai Canada first lowered the price of its subcompact Accent to $9,995 last fall, it's clearly had an impact on the auto maker's sales ledger.

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Since Hyundai Canada first lowered the price of its subcompact Accent to $9,995 last fall, it’s clearly had an impact on the auto maker’s sales ledger.

With $3,600 knocked off the subcompact’s base model MSRP of $13,595, the smallest Hyundai has risen to become the sixth-best-selling car in Canada, with more than 25,000 sold so far this year. That’s an increase of more than 90 per cent over last year, and the largest sales increase of any new car in the top 10, helping the company’s overall sales in Canada rise this year by 9.8 per cent.

Those absolute numbers may look good, but aren’t auto makers always whining about how they lose money or barely make a profit on small cars? So how does Hyundai Canada (and its dealers) make money selling a car that only last year cost $3,600 more?

First of all, according to John Vernile, vice-president of sales and marketing for Hyundai Canada, the Accent being sold in the $9,995 cash-purchase special is mechanically and feature-wise no different from any other base model Accent three-door hatchback.

“It’s the same level of equipment as our $13,595 Accent L,” he said, which means it’s lacking some creature comforts, such as air conditioning, power windows and locks, and safety features like ABS and all but the most basic airbags. The reduced price is made possible through some internal bookkeeping sleight of hand on the part of the auto maker.

Typically, in this price range, the difference between what the dealer pays the factory for the car and what the customer pays the dealer is anywhere from $700 to $1,500. In lowering the sale price, the factory also cut the price it charges dealers by $3,600 so they wouldn’t lose money on each sale.

If dealers order more vehicles from the factory, then volume discounts will likely apply and the price they are charged by the factory will drop further.

According to Vernile, Hyundai wasn’t making $3,600 in profit off the former $13,595 Accent L. In effect, the sub-$10,000 promotion is a loss leader, designed to get people into showrooms.

Vernile’s idea – to offer what would become the lowest-priced new car in Canada as a cash buy only – was first seen as radical by Hyundai’s own dealers. It started in discussions with Hyundai dealerships in Quebec, a vital market for the auto maker. They were clearly hurting from last year’s rise in the value of the loonie against the U.S. dollar, which sparked an increase in Canadians car shopping south of the border.

Even at the old price of $13,595, the base model Accent hatch (Hyundai also sells a more expensive four-door Accent sedan) was already a good seller in Quebec, mainly because buyers there have less disposable income and show a greater acceptance of small cars. “It was our bread-and-butter vehicle there,” said Vernile.

Vernile acknowledged that lowering the cash price was a trade-off in that Hyundai Canada cut its profit on each vehicle, but sold more of them.

But the Canadian dealers stood to gain financially from Hyundai’s decision in other ways. Most new-car dealers make the majority of their profits in servicing. More cars sold translates into more vehicles dealers can eventually work on.

After Quebec Hyundai dealers agreed to sign on, they saw showroom traffic increase by almost 60 per cent. Some prospective buyers may have ended up being more interested in better-equipped, more expensive Hyundai models.

The rise in showroom visits prompted Hyundai to take the $9,995 Accent offer nationwide in March this year.

Vernile said that, as a bonus, Hyundai Canada didn’t have to spend additional money on advertising or marketing to lure in new-car buyers. “We just focused our message with our existing advertising spend on the Accent, and hit it pretty hard.”

With the average price of a new car sold in Canada at around $30,000, it was relatively easy for Hyundai to get media coverage about a new car priced like a used one, with a new-car warranty.

For many media outlets (including the Star‘s Wheels section, which has featured the Accent as its long-term tester in the newspaper and an online blog), a new car for less than $10,000 also made for a good story.

Of course, any business that drops its prices 25 per cent overnight will move merchandise. But the Accent’s budget sticker does come with a few strings attached.

First, the $9,995 price (plus taxes, freight and PDI) applies only if you buy the three-door hatchback Accent L and its standard five-speed manual transmission with your own cash, or provide your own financing.

(As of publication, Hyundai Canada is offering a 14.24-per-cent four-year loan, or an 11.15-per-cent five-year lease rate on 2009 models. If you take one of these loans, you don’t qualify for the cash-only price of $9,995.)

With 2009 models, if you want keyless entry/security alarm system, air conditioning, upgraded audio with two more tweeters, power windows and door locks, or body colour door handles and mirrors, you’ll need to spring for the next rung up, the $15,295 Accent GL. The only stand-alone option on the $9,995 Accent is dealer-installed a/c for $1,000.

Want an autobox, four doors and a trunk on top of that? That’ll be $16,745, for an Accent GL sedan.

Originally, Hyundai knocked $3,600 off the price of any Accent, regardless of the trim level. But for 2009, the discount can only be applied to three- and four-door L models.

As with lots of advertised specials, another issue with the lowball Accent has been lack of availability. Calls this week to three GTA Hyundai dealers produced only five $9,995 Accents in stock or on the way.

If you’re willing to wait, we were told by one salesperson that orders from the plant in Ulsan, Korea, where Accents are made take four to five weeks for Canadian delivery.

Following Hyundai’s success, can Canadian car buyers expect to see more $9,995 new cars on the market? That’s still up for debate.

Except for sister brand Kia’s mechanically similar $9,995 Rio sedan, only one other auto maker, General Motors of Canada, has joined the under-$10,000 new-car club.

With similar purchase restrictions, you can buy a new five-door hatchback version of the Chevrolet Aveo5 or Pontiac G3 Wave for Accent L money: $9,995.

That lower cash-only price on the GM models has generated only a 4-per-cent increase in sales so far, mainly because of supply constraints from the company’s Korean plant, according to Tony LaRocca of GM Canada.

But this summer, Aveo5 and G3 Wave production moved to Mexico, which LaRocca said is already increasing availability and should provide “solid growth” for future sales.

How long these prices will be around, neither Hyundai nor GM officials can say.

The current third-generation Accent arrived in 2006, so its replacement isn’t due until around 2010. Theoretically, Hyundai Canada could continue with the current pricing indefinitely if sales stay healthy and dealers are making money.

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