SEOUL Hyundai Motor Co's (005380.KS) and Kia Motors Corp's (000270.KS) admission that they overstated the fuel economy of some cars will be a crucial test for the two, and may taint the reputation of the automakers that had enjoyed a decade of unbroken success in the United States.
Shares in the two South Korean automakers tumbled 7 percent on Monday as investors fretted about the blow to their brands, the potential for lawsuits, as well as the cost of compensating customers.
The overstating affects more than a million vehicles. The U.S. Environmental Protection Agency (EPA) found the errors in 13 Kia and Hyundai models from the 2011 to 2013 model years.
Hyundai and affiliate Kia said on Friday the errors stemmed from procedural differences in their mileage tests compared to the EPA tests. The automakers will reimburse current owners for extra fuel costs and issued a full-page newspaper ad for Sunday to apologise.
For some analysts, the news was potentially dire.
"This could be a game-changing event in Hyundai's success story," said James Yoon, an analyst at BNP Paribas, said in a report. "We think the potential financial loss is immaterial compared to the potential reputation loss of brand equity."
But others noted that unlike damaging recall scandals that had affected rivals Toyota Motor Corp (7203.T) and Ford Motor Co (F.N), Hyundai and Kia had been quick to admit to mistakes and announce a compensation plan.
"Those were more serious issues related to safety... Thus the impact on brand-value and U.S. sales may be smaller than those of competitors," Citi analyst Ethan Kim said in a note on Monday, adding that investors would have to wait until November and December sales figures to gauge the impact.
Analysts said the EPA finding could lead to tens of millions of dollars in compensation, adding that while lawsuits could not be ruled out, quick action from the automakers might reduce this threat.
Hyundai and Kia will lower the mileage labels on most vehicles by one to two miles per gallon (mpg), and the largest adjustment will be six mpg highway for the Kia Soul, the EPA said.
In its marketing, Hyundai has touted the fact that many of its models get 40 mpg on the highway. In the "Save the Asterisks" campaign, Hyundai poked fun at rivals who offered 40 mpg only on specialized, low-volume models.
Now three Hyundai models, the Elantra, Accent and Veloster, as well as the Kia Rio fall short of that mark as will the Hyundai Sonata and Kia Optima hybrids.
Shares in Hyundai Motor fell nearly 7.5 percent to their lowest level in more than a year. Kia shares were down as much as 7.3 percent.
Shares of Hyundai and Kia have lost ground in recent months due to concerns that a strengthening won and tight supply of its cars may slow earnings growth next year.
(Editing by Eric Meijer and Edwina Gibbs)