MPG Gate – Korean Auto Manufacturers Overstate Mileage Estimates

Do you check the mileage estimates when you buy a new car? Did you buy a car recently? If you did and you purchased a Kia or Hyundai over the past two years, some of those mileage numbers were wrong.

On Friday November 2nd, we learned that the EPA discovered Hyundai/Kia overstated gas mileage on several of their models from 2011 to 2013.

They have agreed to reimburse owners of the affected models through a prepaid card that will reimburse them for the difference in the combined fuel consumption rating. And they will add another 15% as an acknowledgement of ‘inconvenience’.

There has been suspicion over the Korean carmakers mileage claims for some time and those complaints prompted the EPA to open an investigation. The audit found almost 35% of their cars to have over represented mileage performance. As a result, the two automakers will have to reduce mileage posted on the window stickers of most of their models anywhere from 1 to 6 miles per gallon down.

Affected models for Hyundai include:

  • Elantra, Sonata Hybrid, Accent, Azerra (not sold in Canada), Genesis, Tuscon, Veloster, Elantra coupe, Elantra GT and the Sante Fe Sport

Affected models for Kia include:

  • Rio, Sportage, Sorento, Soul, Soul ECO and Optima HEV

Depending on the cost per owner, the bill to these companies will be hundreds of millions of dollars (a CLSA estimate pegged the annual cost at $81 million/year). That of course does not take into account the cost of class action lawsuits and any sales impact to the brands in the coming months. Share prices fell on Monday by 7% but clawed some of that back on Tuesday.

This crisis do not have to cripple the companies. Look at how Audi moved past the Audi 5000 issue in the 80s (but it took them 5 years). And whereas Toyota has made progress since the 2009 recall, with the Tsunami and subsequent quality errors, they haven`t had a chance to put bad news behind them. What should these manufacturers do? Here are a few ideas:

 1. Admit the mistake

Be out front of the error. Be upfront, candid and own the mistake. It seems as though the announcement (or discovery) came around the same time the EPA made their announcement so they were not that forthcoming. They did admit being at fault but said it was a ‘measurement’ error. Whether that’s true or not, it seems odd a company of this size could get it right on some models and wrong on others. I would give them an F.

2. Compensate affected owners … generously

Today’s owners are tomorrow’s buyers. That makes this segment the most important in the long term (more so than current prospects). So treat these people well, especially those directly affected. Ensure people feel that you are more than compensating them for their loss. It appears they are doing so by working with owners to calculate their mileage individually and with the 15% inconvenience premium. I would give them a B.

3. Talk to existing owners

Hyundai has the #1 repurchase rate in the industry this year (JD Power and Associates, 2012) http://ca.autoblog.com/tag/jd%20power/. All owners need to be contacted directly (i.e. direct mail, short broadcast run, when they come into the dealer) to explain what happened, apologize for the error, talk about what they’re doing to cover the incremental cost to affected owners and what plan they have in place to ensure this never happens again. This point doesn’t need to be belaboured, but each owner should get the story from the manufacturer. Satisfied current owners make future sales more likely.

4. Monitor sales impact and track to brand reputation  

JD Power also discovered this year that more buyers base purchase their decision to b on brand reputation than ratings and reviews. Toyota sales dropped 15% the first month after it`s 2009 and 2010 recall crisis (Forbes). Depending on how step the decline is in these measures will determine how much the next two suggestions need to be worked.    

5. Revise the marketing message

Fuel mileage has been a centrepiece of their advertising for some time. Given the strength of that message has been diluted and because it will be a hot (negative) topic for some time, they need to illuminate other brand and model attributes in their communications right down to dealership sales scripts.

6. Prime the Pump

When my wife and I bought our Sonata this spring one of the features that hooked us was 0% financing for up to 72 months. I suspect they will need to bring back incentives so as not to lose too much momentum in the market. If this error causes people to re-think the brand`s overall value, they need to come up with ways to fill that gap and get people into dealerships.

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