For Honda Motor Co. (7267) it was a rude moment when Hyundai Motor Co. (005380) unfurled a banner at the 2010 Detroit auto show touting the Korean brand as America’s most fuel-efficient. Honda’s U.S. sales chief vowed that Hyundai’s apparent victory would “motivate us even further.”
Now it’s payback time. Just as Honda ramps up sales of a new Accord sedan and prepares a modified Civic small car, Hyundai and its affiliate Kia Motors Corp. (000270) are regrouping after admitting to the most extensive overstatement of fuel-economy ratings ever found by the U.S. Environmental Protection Agency.
“The timing is beautiful for Honda,” said Jake Fisher, director of automotive testing for Consumer Reports, in a phone interview. “They’d been seen as falling behind in fuel efficiency, not keeping up with Hyundai and others.’”
Hyundai’s reversal may help a number of automakers. Toyota Motor Corp. (7203), Nissan Motor Co. (7201) and Ford Motor Co. (F:US) are promoting fuel-efficient new models. Still, no automaker stands to benefit from Hyundai’s misstep as much as Honda. Hyundai sales may slide as much as 11 percent for the next few months, according to Strategic Vision, a San Diego-based consumer-research company that annually surveys 350,000 carbuyers.
At the same time, Honda’s cars and sport-utility vehicles are those most often considered as alternatives for Hyundai buyers, ahead of other brands, said Alexander Edwards, president of Strategic Vision’s auto division.
Honda’s American depositary receipts gained 3.4 percent to $31.95 at the close in New York.
“For people who think ‘this isn’t for me,’ as a result of the fuel-economy issue, Honda does look like an attractive brand known for fuel economy,” said Jessica Caldwell, an analyst for Edmunds.com, the Santa Monica, California-based auto pricing and data website. “Honda should benefit most.” Ford may also benefit, she said.
As gasoline prices soar, fuel economy has emerged as a draw for car buyers. U.S. gasoline prices reached an average of $4.11 a gallon in July 2008 and approached the $4 level again this year. U.S. regulations requiring automakers to double vehicle efficiency by 2025 ensure that rising, and accurate, mileage ratings will remain an industry priority.
The EPA this month said Hyundai and Kia would put new mileage labels on “the majority of their 2012 and 2013 models,” reducing average mile per gallon ratings by 1 to 2 miles for most of the affected vehicles. Kia’s Soul wagon was the farthest off, revising highway mileage downward by 6 miles (9.7 kilometers) per gallon.
While the companies have apologized to customers and are offering pre-paid fuel cards to reimburse owners for the discrepancy, at least three lawsuits have been filed on behalf of disgruntled customers for the inflated mileage claims.
Honda executives say they’re not likely to make similar errors.
“We’ve been conservative in our EPA estimates,” said Mike Accavitti, Honda’s head of U.S. marketing, in a phone interview from Boston. “We triple check everything so customers are satisfied with the mileage they get in the real world.”
Prior to Hyundai’s 2010 show banner, Honda led U.S. fuel- economy rankings for 33 years, based on Environmental Protection Agency data, and with the new models it plans to do so again.
“There’re a few jewels in the Honda crown that we protect at all costs, and number one is trust,” said Robert Bienenfeld, Honda’s U.S. senior manager for environment and energy strategy. “Integrity is critical when you give out fuel economy ratings.”
Accavitti and Bienenfeld declined to criticize Hyundai and Kia.
Along with Honda’s new models, the timing of the Hyundai- Kia mileage revisions coincides with the release of Ford’s 2013 Fusion sedan, a midsize competitor to Hyundai’s Sonata, and Toyota’s addition of an Avalon hybrid sedan boasting a combined 40 mpg in city and highway driving.
While Toyota’s hybrid lineup, including the top-selling Prius, make it a fuel economy leader for customers, “Honda is a younger brand, compared with Toyota, and Kia and Hyundai have been more attractive to younger people than Toyota,” Caldwell said.
Hyundai’s U.S. sales accelerated from late 2009 with the arrival of a restyled Sonata sedan, a competitor to Accord and Toyota’s Camry. A series of follow-on releases included Hyundai’s Elantra, Accent subcompact and Veloster hatchback, and Kia’s midsize Optima sedan and Soul wagon, all with edgier styling and claiming segment-leading fuel economy.
That helped the Seoul-based affiliates boost their combined U.S. sales from 675,139 vehicles in 2008 to 1.13 million in 2011. Through October, the companies that share engines, platforms and a chairman boosted sales 12 percent to 1.07 million vehicles.
“People bought into the whole program: cool-looking cars that also offered great value, including high fuel economy,” Caldwell said. “Now it turns out that one part of that formula wasn’t true.”
Hyundai and Kia’s growth came as Honda struggled with poor reviews for models including its 2012 Civic and worked to restore assembly operations in 2011 following natural disasters in Asia that cut parts supplies.
Toyota, like Honda, also had to overcome production disruptions related to Japan’s earthquake and tsunami last year, and work to restore its reputation for quality after record recalls in 2010 to fix gasoline pedal-related flaws.
“Hyundai definitely got a benefit from its new products that came out when Toyota and Honda were having some problems,” Caldwell said. “The timing makes this an interesting reversal of fortune story.”
Hyundai and Kia said Nov. 2 the flawed mpg ratings were the result of how engineers in South Korea conducted the EPA’s “coastdown” test. The test, in which a vehicle accelerates to about 80 miles an hour on a flat, straight road, is put into neutral and then allowed to coast down to about 9 mph, wasn’t done correctly, the companies said.
“These were just honest procedure errors in a very complex testing process,” Sung Hwan Cho, president of Hyundai’s U.S. technical center, said on a conference call with reporters on Nov. 2.
The EPA’s fuel-economy tests “are clear and well understood by Honda engineers,” Bienenfeld said.
The company’s engineers do initial fuel-efficiency evaluation at Honda’s research units in Japan and the U.S., followed by official certification tests before vehicles go on sale, and basic evaluations of vehicles coming off the production lines at each factory, he said.
“While there’s going to be some variation between how individual customers drive, the tests should be repeatable in every lab,” Bienenfeld said.
“We need to make sure people aren’t gaming the system,” he said, declining to comment on Hyundai and Kia.
Already, Hyundai’s revisions this month put the Civic back ahead of the Elantra compact in fuel efficiency.
The Hyundai Elantra’s initial label rating of 29 mpg in city driving, 40 mpg on the highway when it was released in late 2010, was lowered to 28 city and 38 highway mpg.
By comparison, Honda’s 2012 Civic has a 28 city and 39 highway mpg rating.
In its reviews of the cars, Consumer Reports found that the Elantra averaged 29 mpg in combined city and highway driving, compared with 30 mpg for Civic.
Honda this month will release a modified Civic as a 2013 model, with a new interior and exterior-styling changes aimed at addressing shortcomings that drew a withering Consumer Reports review last year. The company’s 2013 Accord that came out late this year has received mostly favorable reviews for improved ride and handling, interior materials and fuel economy.
“The Accord was off to a great start without any of this news about Hyundai and Kia. The car speaks for itself,” said Bienenfeld. “The Civic will also stand on its own. Elantra was the fuel economy leader. Now we have a new Civic coming out, so it doesn’t hurt.”
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