November 5, 2012 4:16 pm

Hyundai and Kia – off the gas

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Korean carmakers’ response has been spot on so far

Chances are that Mom doing the school run in her Hyundai Accent did not notice she was getting about two miles less per gallon than promised. She will now: Kia and Hyundai have admitted they overstated some US fuel economy numbers. The Korean carmakers have responded quickly to their first foreign misstep. But there is a cost.

The 7 per cent fall in the companies’ share prices on Monday is appropriate. As a proportion of earnings, the cost of the fuel efficiency overstatement is small – $49m for Hyundai and $29m for Kia. That is less than 1 per cent of forecast earnings for each for this financial year, Nomura calculates. But factor in an open-ended commitment to make good the lost miles, plus a 15 per cent premium. The cost depends on the number of drivers who claim, and their mileage. Assuming $90 per car per year, doing 15,000 miles and refilling at national average prices, and the two will pay a combined $81m a year.

Then there is the reputational cost. There is a tangible element if Kia and Hyundai have to offer greater incentives to maintain market share. If that came to $200 a car, it would cost Hyundai about Won132bn ($121m), or just over 1 per cent of earnings, according to CLSA. The more intangible and important element is brand reputation. The fuel economy overstatement is not a rerun of Toyota’s infamous 2010 recall. There is no safety element, and the Koreans’ communications have so far been spot on. Their response seems tailored to Hyundai’s main US selling point, which has been above-and-beyond customer care.

The two could have done without Toyota buoyantly raising its full-year profits forecast on Monday. But they were on the right track, gaining market share overseas, before this setback. Overstating fuel economy is a costly diversion. But it does not mean the wheels are falling off.

Email the Lex team in confidence at lex@ft.com

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