Mileage flap could cost Hyundai, Kia millions

Paul A. Eisenstein, The Detroit Bureau

Forced to restate mileage claims after a government audit, Hyundai and its Korean sibling Kia could be in a world of financial hurt – even as they struggle to overcome the potential damage to their image which, in recent years, has put an emphasis on delivering industry benchmark fuel economy.

With several lawsuits already filed and more likely, Moody’s Investors Service has warned that the ultimate cost to the two brands could reach $100 million in the U.S. While other analysts aren’t ready to embrace that specific number, there is clear consensus the damage may be costly and long-lasting.

Together, Hyundai and Kia “will incur additional annual costs of about $100 million until the affected models are largely scrapped,” warns the ratings agency in a new report. It also noted that despite the size of that figure, it comes to less than 1 percent of the Korean automaker’s total earnings.

Both Hyundai and Kia have put an emphasis on fuel economy in recent years, together advertising more than a half-dozen models delivering highway mileage of at least 40 mpg. Or so they claimed until last week before an audit released by the Environmental Protection Agency, the federal agency overseeing fuel economy standards and vehicle testing.

Spurred by complaints about the real world mileage some Hyundai and Kia products produce, the EPA conducted an audit showing that the figures for 13 models – accounting for the sale of 900,000 vehicles in the U.S. since 2010 – were overstated by anywhere from one to six miles per gallon.

The Koreans insisted the mileage gap was not intentional but rather was the result of errors in their own testing procedures. After issuing a mea culpa, they also announced a plan to reimburse owners based on the added cost of fuel for their vehicles – adding in another 15 percent to cover the expense of having to bring those vehicles in to Hyundai and Kia dealers for odometer checks.

For someone clocking 15,000 miles a year, the result could be payouts of more than $80 a year for some models. Hyundai and Kia are promising to continue issuing reimbursements as long as the car is in the original owner’s hands. Considering the length of time many buyers today hang onto their vehicles, that could mean eventual payouts of as much as $500 or more per affected automobile. And if that were the case with all 900,000 vehicles, the payout bill might approach $500 million.

“Our focus is on making it right for the customers. We’re honestly not so focused on that cost,” Hyundai Motor America CEO John Krafcik asserted during a media conference call late last week.

In reality, the typical payout is expected to be far less. Indeed, cautions analyst Jim Hall of 2953 Analytics, “For many owners, punching two hours out of their day to go to a dealer for a $60 debit card won’t be worth it.”

For the moment, Hall insisted trying to put a price tag on the fiasco would be like “trying to pull numbers out of the air,” though he agreed, “it is going to cost them.”

And other factors in the long-term payout could dwarf the cost of handing out debit cards to owners of vehicles like the 2012 Kia Soul – whose mileage rating has been cut by 6 mpg.

For one thing, there will almost certainly be fines imposed by the EPA. And the Federal Trade Commission could weigh in if it determines the makers violated advertising rules.

Then there are the legal bills. Even before last week’s disclosure, Hyundai had been sued by a consumer group that had insisted the maker’s mileage claims were inflated. This week, three Hyundai owners in Ohio filed another lawsuit seeking to recover damages and legal fees. It’s almost certain more lawsuits will follow and may very likely morph into one or more national class action cases. If successful, the bill for the Koreans could climb into the tens, even hundreds of millions of dollars.

But analyst Hall warns that the for-now “incalculable cost” could be the way the flap impacts Hyundai and Kia’s image. One may never get a clear sense of the damage to their brand images, as there’s no direct correlation between image and sales. But if mileage brouhaha reduces the number of potential buyers who consider their products, that will soon become obvious – and translate into lower sales.

That may be where the real numbers start to add up.