False mileage claims will dent Hyundai’s profits

Analysts can’t yet predict the fallout on Hyundai Motor and its sister company Kia Motors over overstated fuel mileage claims in the U.S., although some are already cutting estimates for the companies’ profits next year.

Hyundai Motor Group admitted over the weekend that it overstated fuel economy ratings on nearly 1.1 million vehicles sold in North America since 2010.

After issuing a public apology on Sunday, Hyundai said it will reimburse owners for the overstated fuel efficiency for as long as they own the cars, and add a bonus of 15 percent of the extra amount of gas required. Reportedly, the average North American customer will get a debit card worth $90 every year they own the car.

Industry insiders predicted the reimbursement program could cost Hyundai and Kia over $100 million per year. But the bill could grow as customers begin to file lawsuits against the world’s fifth largest automaker by sales.

The Detroit News reported that three customers, including two Canadians, filed a lawsuit at the U.S. District Court in southern Ohio seeking more than $5 million in damages.

Meanwhile, the U.S. Environmental Protection Agency said it could seek civil penalties on the two companies.

“The mileage overstatement was found in almost all the Hyundai and Kia models sold in the U.S.,” said Nam Kyung-moon, an analyst at KTB Investment & Securities. “Hyundai and Kia have been promoting their vehicles based on their high fuel efficiencies and those errors could influence consumers’ views of their vehicles.”

Analysts are starting to revise estimates of fourth quarter earnings of the two automakers and even next year’s estimates.

Lim Eun-young, an analyst at Dongbu Securities, told Yonhap News that Hyundai’s operating profit would be 9.21 trillion won ($8.44 billion) next year, 8.4 percent lower than her firm’s earlier estimate, while Kia’s operating profit would dive to 4.48 trillion won, a 9.3 percent plunge from the previous estimate.

However, some analysts said the companies’ problem was nothing as serious as the recall of Toyota cars in 2009 - which the company overcame successfully.

“Toyota lost consumer trust at the time and responded too slowly, but compared to that, Hyundai is moving fast,” said Seo Sung-moon, an analyst at Korea Investment and Securities. “The impact of this incident seems to be limited.”

By Joo Kyung-don [kjoo@joongang.co.kr]