Hyundai, Kia fined $300mn for overstating fuel efficiency

From left: Cynthia Giles, Assistant Administrator for EPA’s Office of Enforcement and Compliance Assurance, EPA Administrator Gina McCarthy, Attorney General Eric Holder, and Sam Hirsch, Acting Assistant Attorney General for the Environment and Natural Resources Division, speak at a press conference to announce the settlement between the US government and Hyundai and Kia, at the Justice Department headquarters in Washington yesterday.

Under the civil accord, which involved the sale of 1.2mn cars and SUVs, the companies will also spend around $50mn to prevent future violations, and forfeit emissions credits estimated to be worth more than $200mn

Dow Jones

Seoul/Washington

Korean auto makers Hyundai Motor and Kia Motors agreed to pay a combined penalty of $300mn for overstating fuel-economy claims, the largest such punishment ever, in a settlement that could create a pricey precedent for other car companies.

Hyundai and Kia, affiliates of Hyundai Motor Group, will pay a combined $100mn in civil fines and forfeit regulatory credits valued at $200mn to settle a two-year long probe by the US Environmental Protection Agency and the Justice Department, the agencies said.

Ford Motor is among other auto makers facing potential fines for similar practices.

In November 2012, Hyundai admitted after an audit of its mileage claims by the EPA that it had overstated the fuel efficiency for about 1.2mn vehicles, or about a quarter of its 2011-2013 model vehicles sold in the US. The vehicles involved included popular models such as the Accent and Elantra compact cars, the sporty Veloster coupe and the Santa Fe sport utility. Kia admitted overstating mileage claims for its Rio and Soul models.

The EPA said the overstatements ranged from between 1 and 6 miles per gallon.

During fuel-economy tests, Hyundai and Kia engineers “allegedly chose favourable results rather than average results from a large number of tests,” the EPA said in a statement.

At the time, Hyundai and Kia said the overstatements were the result of mistakes by engineers running mileage tests; the companies then lowered the mileage claims and offered compensation to owners of the affected cars. The actions undermined claims that several of its best-selling models were rated at 40 miles per gallon in highway driving, a cornerstone of Hyundai’s US marketing efforts at the time.

“Hyundai has acted transparently, reimbursed affected customers and fully co-operated with the EPA throughout the course of its investigation, “ David Zuchowski, chief executive of the Hyundai brand in the US, said in a statement. “We are pleased to put this behind us, and gratified that even with our adjusted fuel economy ratings, Hyundai continues to lead the automotive industry in fuel efficiency and environmental performance.”

Under the agreement with US regulators, Hyundai and Kia will surrender 4.75mn of the greenhouse gas credits they built up under the US corporate average fuel-economy system for 2012 and 2013 models. These are effectively bonus points that allow the companies to sell larger, less efficient but usually more profitable models such as sport-utility vehicles or luxury cars. The EPA valued these credits at more than $200 million.

Hyundai-Kia also agreed to set up an independent certification group to oversee fuel-economy testing and audit their 2015 and 2016 fleet mileage claims as part of a $50mn commitment to avoid future violations.  The EPA and Justice Department pursuit of Hyundai fits into a broader push by the Obama administration to show toughness toward corporations that flout federal laws. The administration is under fire from both Republicans and Democrats on Capitol Hill for moving too slowly to force auto makers to launch safety recalls.

In March, the Justice Department and the Transportation Department got a $1.2bn payment from Toyota Motor to settle a criminal investigation related to delayed recalls. The Transportation Department fined General Motors $35mn in May for failing to properly disclose its knowledge of defective ignition switches. GM still faces a criminal investigation by Justice Department.

“Businesses that play by the rules shouldn’t have to compete with those breaking the law,” EPA administrator Gina McCarthy said in a statement.

The settlement is subject to a court review. The California Air Resources Board joined the federal agencies as a plaintiff in the civil action and will get $6.3mn of the fines, the EPA and Justice Department said.

The settlement with Hyundai could set a template for other enforcement actions involving overstatement of fuel economy claims. Following Hyundai’s 2012 restatement, the EPA stepped up audits of auto makers’ mileage claims. Ford Motor, Daimler AG’s Mercedes-Benz unit and BMW AG’s Mini brand have subsequently reduced mileage claims for various models after EPA audits.  Ford in June admitted to overstating mileage claims for six 2013 and 2014 models, and agreed to pay owners of those vehicles as much as $1,050 to repay them for the gap between the claimed fuel savings and the actual mileage.

Ford had previously admitted that it had overstated the mileage claim for its C-Max hybrid, which was advertised with a combined fuel efficiency rating of 47 miles per gallon at the time of its launch in 2013. After two revisions, the C-Max is now advertised at 40 miles per gallon. Ford officials said the overstatements were the result of mistakes, not a deliberate effort to gain a marketing edge.

The Hyundai case also exposed weaknesses in the US system for regulating fuel economy and greenhouse gas emissions. While the EPA tests some vehicles at its own laboratory in Ann Arbor, Mich., most of the mileage claims consumers rely on when choosing a vehicle are derived from tests run by the manufacturers.

Mileage claims for new vehicles are certified through a complex series of laboratory tests designed to mimic city and highway driving. The EPA in 2008 and in 2011 overhauled the test procedures in an effort to bring advertised fuel-efficiency figures closer to the mileage consumers were getting in real-world driving.  In the wake of the 2008 spike in oil prices, vehicle mileage became a top concern for many consumers. Auto makers touted claims of superior mileage, particularly for gas-electric hybrids, in an effort to persuade consumers that savings at the pump would pay back the extra cost of new technology under the hood.

That challenge has gotten tougher as fuel prices in the US have eased below $3 a gallon in many parts of the country, and more consumers have opted for sport-utility vehicles and pickup trucks.

The EPA’s latest survey of industry fuel-economy trends found that the average fuel efficiency of 2013 models had improved to a record 24.1 miles per gallon, but that the pace of improvement would likely slow in the coming year.

Hyundai also has faced accusations in its home country of exaggerating mileage claims and in August agreed to pay the equivalent of $54.3mn to settle a lawsuit brought by a consumer group seeking compensation for overstated fuel efficiency.