Hyundai, Kia undercut main selling point with overstated mpg
LOS ANGELES -- Three years ago, Hyundai Motor America CEO John Krafcik implored fellow auto executives to boost the industry's reputation by taking more accountability for their actions and embracing fuel efficiency as a social good.
Since then Hyundai and affiliate Kia Motors have launched a slew of cars with eye-popping fuel economy numbers, many hitting the 40-mpg mark. And their U.S. market share has soared -- from 5.1 percent in 2008 to 8.9 percent this year.
But after they admitted this month to selling 900,000 2011-13 vehicles with overstated mileage ratings, the South Korean companies have a big problem: a credibility gap with customers that could turn into long-term damage to the brands. Indeed, their ongoing success may depend on how well they live up to Krafcik's professed standard.
Six nameplates previously rated at 40 mpg now fall below that figure, so the two brands have undercut their strongest selling point. Researchers say consumers buy Hyundai and Kia vehicles for their perceived fuel economy benefits more than for any other reason.
And ALG, a research company that monitors and sets residual values for the industry, says it will analyze every Hyundai and Kia model to see whether a value change is necessary.
The companies apologized for the errors after an EPA investigation found discrepancies between their in-house fuel-economy test results and the agency's results. They blamed the problem on "procedural errors" in company tests and said they will issue debit cards to refund customers for the extra money spent on fuel. But two lawsuits seeking class-action status show that some consumers don't think automakers' actions go far enough.
In a keynote speech at the 2009 Chicago Auto Show, Krafcik said the industry must lead the way instead of dragging its feet on the issues of environment, safety and good business practices.
"Let's face it, our reputation as an industry is horrible," he said.
Then at the August 2010 Center for Automotive Research Management Briefing Seminars in Traverse City, Mich., Krafcik said: "We want to lead the industry in fuel efficiency. We're doing it now. We want to help set the trajectory for the industry."
That kicked off a two-year, $1 billion barrage of advertising that bragged about Hyundai's fuel economy advantage, including comparison ads that mocked competitors' inability to reach 40 mpg.
Hyundai already appears to have dropped fuel economy from its advertising.
In an Elantra commercial that aired Wednesday in Southern California, the script referred only to the car's styling and the fact that it won the 2012 North American Car of the Year award. The terms "fuel economy" and "mpg" were not seen or heard.
For an automaker that has made fuel economy the crux of its marketing message at the national, regional and dealer levels, this cold-turkey advertising approach could damage its brand appeal.
In researcher AutoPacific's 2012 New Vehicle Satisfaction Survey, fuel economy was rated as an "extremely important" purchase reason by more than 90 percent of Hyundai and Kia buyers, well above the industry average of 75 percent.
It was the No. 1 reason buyers chose an Accent, Elantra, Veloster and Sonata Hybrid, as well as the Kia Rio, Soul and Forte. As an overall brand attribute, fuel economy was rated fourth, behind quality, reliability and warranty. For the rest of the industry, fuel economy ranked 19th.
"Hyundai and Kia made a big, big deal about this," said AutoPacific President George Peterson. "Buyers considered themselves smart for choosing such fuel efficient products. Now, they don't look so smart anymore. This is a psychological problem that the mea culpa and compensation offer may not be able to solve in the short term."
In the 2011 J.D. Power and Associates Avoider Study, fuel economy was a key reason for purchase for 80 percent of Hyundai buyers -- by far the highest of any mass-market brand and only slightly less than niche small-car brands Mini, Smart and Fiat.
Moody's Investors Service said that because of the debit-card refund Hyundai and Kia will incur costs of about $100 million annually until the vehicles are scrapped.
While that amounts to only 1 percent of pretax earnings and is unlikely to damage the companies' credit profile, "the impact on the companies' brand recognition and sales performance in North America could be more material," said Chris Park, Moody's senior credit officer.
ALG President Larry Dominique said fuel economy -- both a vehicle's raw number and how it compares with the rest of its segment -- is a key variable when calculating residual values.
If a vehicle's fuel economy rating is revised downward by 1 mpg, he said "The absolute impact is very small."
"But if it's a Kia Soul, where mpg is down by 10 percent, that could have an effect. There's a factor of value attached to fuel economy," Dominique said.
Of greater concern is whether the brand's overall strength has been reduced. A strong brand has a multiplier effect on residual values, Dominique said. When a brand is in crisis, that multiplier is weakened.
"Hyundai and Kia have made significant strides in brand value in the past few years, so that is an area we will look at," he said.
Hyundai and Kia have been hit with two lawsuits seeking class-action status for aggrieved owners. The first, filed in Ohio, asks that consumers who bought Hyundai or Kia vehicles with the inflated mileage figures be allowed to back out of their purchase or lease agreements. A second suit, filed in Los Angeles, seeks $775 million in compensation for owners who say resale values have been diminished.
A Hyundai spokesman declined to comment on ongoing litigation.
Meanwhile, the Federal Trade Commission could file charges under the Consumer Protection Act, although the agency has not commented on the matter.
The company declined to make Krafcik or other executives available for comment. A spokesman said the executives "want to stay focused on making sure the execution is done as well as possible."
Nicholas Parks, general manager of South Dallas Hyundai, said a few customers have asked about the fuel economy numbers, but traffic is still strong.
"It's one of those mistakes you really don't want to make," Parks said. "I would have thought we'd have customers in the service drive upset about cars that they own, but I haven't seen that yet."
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