• by Thom Forbes  @tforbes, November 5, 2012

The U.S. Environmental Protection Agency charged Korean automakers Hyundai and Kia on Friday with overstating the mileage claims on the “majority” of their current new vehicles sold in North America. The cause was “procedural errors” at a testing facility, according to the companies, which they are remedying in the short term by issuing debit cards to 900,000 buyers based on the price of fuel in their areas, the amount of miles they’ve driven and an extra 15%. Long term, they face hits to both their market value and brand reputation.

The automakers “share engines, model platforms and a chairman,” as Saeromi Shin and Eunkyung Seo write in Bloomberg Businessweek. They also shared a disastrous day at the Seoul stock exchange today, losing a combined $4.7 billion in value –- a decline of 7.2% for Hyundai and 6.9% for Kia.

“This would be negative on their share price as impact on sales seems inevitable given that their strategy has been focused at high fuel efficiency and reasonable price,” KTB Investment & Securities Co. analyst Nam Kyeong Moon posits.

“The blunder could hurt Hyundai's reputation, particularly because the company has built its marketing on claims of 40 mpg on the highway in many of its cars,” write Evan Ramstad and Mike Ramsey in the weekend Wall Street Journal. 

The Hyundai Elantra, Accent and Veloster, and the Kia Rio all falsely claimed 40 mpg on the highway. Other vehicles affected are the 2013 Hyundai Genesis, Azera, Santa Fe and Tucson and Kia's 2013 Sorento, Soul and Sportage. Kia's 2012 Optima hybrid and Hyundai's 2012 Sonata hybrid are also on the list.

"We are going to make this right and we will be more driven than ever to make sure our vehicles deliver outstanding fuel economy," John Krafcik, CEO of the North American sales arm of the company, tells the Journal’s reporters. "Fuel efficiency and the trust of our customers is the most important thing," he adds.

“The setback poses a major challenge for Hyundai Chairman Chung Mong-koo who has led a more than doubling of its U.S. sales over the past decade on improved quality and is now focusing on lifting the company's brand image,” writes Reuters’ Hyunjoo Jin in a widely distributed story that carries the word “fiasco” in its headline.

"This could be a game-changing event in Hyundai's success story," BNP Paribas analyst James Yoon writes in a report cited by Jin. "We think the potential financial loss is immaterial compared to the potential reputation loss of brand equity." 

But other analysts, such as Citi’s Ethan Kim, applauded the companies for their rapid response to the problem in contrast to the slower responses of, for example, Toyota and Ford when they faced “damaging recall scandals.”

That said, USA Today’s Chris Woodyard takes the companies to task for not fully owning up to the problem on their consumer home pages. 

“It's shocking enough to have sold 900,000 vehicles with inflated gas-mileage ratings, but Hyundai and Kia amp up the hubris by refusing to properly inform owners about the mistake on their consumer website home pages,” he writes in a story updated at 1:59 a.m. Sunday.

“Hyundai Owners, We’ve Got Your Back” flashes on its home page with a link to “more information on Adjusted Fuel Economy Ratings. 

“I don't think we've ever tried to ‘characterize’ this as anything other than admitting our mistake and helping our owners understand it and work through it,” Hyundai spokesman Jim Trainor tells Woodyard in the story. “‘We've got your back’ can just as easily mean ‘we'll fix our mistakes' as anything else, especially when they impact you.’” 

Kia has a tab at the bottom of its homepage that reads “MPG Rating Reiumbursement Program/Click Here To See If Your Kia Qualifies.” Woodyard excoriates it for refusing “to explicitly tell its owners in the tab that it made a mistake and is going offer them money to compensate.”

Hyundai’s Trainer took issue with the story in a comment posted on the site, detailing all the efforts the companies had made over the weekend to inform consumers and media of the error and concluding: “Your story was ill-tempered, wrong, misleading and unfair. I respectfully ask that you remove it, and consider posting this note so readers who saw the original post can be properly informed.”

On a more positive note for Hyundai, our Karl Greenberg writes this morning about the 2013 Santa Fe’s sponsorship of the musical segments of “Jimmy Kimmel Live,” which was broadcast from the Brooklyn Academy of Music's Harvey Theatre last Tuesday through Friday. Its “Helping Parents to Rock" conceit, Greenberg writes, included “a series of humorous faux PSA's around the idea that parents must confront existential anemia pursuant to raising kids.”

Take a look; it’s much more lighthearted than confronting existential angst pursuant to re-raising brand reputation and market value.