TTM Tata Motors Ltd

SEOUL—Hyundai Motor Co. has spent a decade making its cars some of the highest-rated in the world in terms of quality. The problem: Not enough people are buying them.

The South Korean auto maker, the world's fifth-largest auto maker when combined with affiliate Kia Motors Corp., is expected to post its seventh straight quarterly profit decline Thursday. Analysts said Kia's result, expected on Friday, largely is expected to be in line with Hyundai's.

The profit slide is continuing despite sterling quality reviews for many models. This year Hyundai and Kia were the top mass-market brands in J.D. Power & Associates' influential quality survey of auto makers, placing in the top four alongside niche luxury names Porsche AG and Jaguar Cars, a brand of Tata Motors Ltd.'s Jaguar Land Rover.

Like most global auto makers, Hyundai and Kia are being hit by weakness in China and emerging markets and fierce competition in the U.S. that is driving up marketing costs. Hyundai and Kia posted record U.S. sales in the third quarter, but the region's cost of incentives rose by more than half from the year-earlier period, according to Kiwoom Securities analyst Choi Won-kyung.

Some analysts said the biggest problem has been that Hyundai and Kia misread consumers demand, pushing midsize sedans like the Sonata instead of sport-utility vehicles that have grown in popularity as fuel prices have fallen.

The Korean auto makers have made progress in catching up with consumer tastes. Sluggish sales in China began to improve with the launch last month of a revamped version of the Tucson, its flagship midsize SUV. The Tucson and its larger cousin, the Santa Fe, were behind the U.S. sales rise as well.

Analysts expect Hyundai's profit to improve in the fourth quarter, helped by favorable foreign-exchange rates as the won weakens and growing sales of new cars.

The won has fallen 14% on average against the dollar in the third quarter year-to-year, said Daewoo Securities analyst Park Young-ho, and currently is trading at its lowest level in five years. "This should help improve Hyundai's price competitiveness against rivals, including Toyota, in global markets," he added.

Shares of Hyundai have risen 31% from a low in mid-July as its earnings outlook has improved and the company in July announced an interim dividend and plans for higher annual dividends in the future. The broader market has fallen 2.2% during the same period.

Hyundai's weak earnings are a reminder that quality, though important, is only a piece of what it takes to be successful in the auto industry.

"When people buy a car, they don't buy it just because it's strong and has few troubles," said Ian Park, an IHS Automotive analyst. "Quality is taken for granted," he said, adding that car buyers today seek slick design and in-car technological features as well.

Hyundai rose to fourth in this year's J.D. Power survey, up from 28th when it first appeared on the list in 1987; Kia came in second, up from a dead-last 22nd in 2002.

Hyundai and Kia began a methodical effort a decade ago to solve quality complaints that plagued their vehicles, spending years talking with J.D. Power to learn its assessment methods and apply that to improve flaws.

Among the problems in the early 2000s that the company jumped on: noise seeping through car windows, undercarriages and door seals.

"Every time J.D. Power raised issues with our cars, such as hissing sound from the window and other noises while driving, we corrected them," said Kwon Kwang-hyuck, a senior official at Kia's quality improvement team. "When it made a suggestion, we followed."

J.D. Power quality analyst Renee Stephens cited newly launched products and a focus on technology as reasons Hyundai and Kia are leading other brands, including Toyota Motor Corp. and Ford Motor Co.

Hyundai is continuing to its customer-relations push. Executives including Kim Choong-ho, Hyundai Motor president, and Peter Schreyer, Hyundai Motor Group president and chief design officer, are set to meet customers and listen to their complaints in the weeks ahead.

Write to In-Soo Nam at In-Soo.Nam@wsj.com

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(END) Dow Jones Newswires

October 20, 2015 20:55 ET (00:55 GMT)

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