Published January 8, 2013, Los Angeles Daily Journal – You would think that billion dollar companies that grace the halls of the New York Stock Exchange, the Wall Street Journal and the Fortune 500 would have the good sense to govern themselves with principles of honesty and integrity. If they don’t do it because it’s the right thing to do, you would expect that they would at least do it protect the reputation they worked so hard to build.
Yet, pursuit of the almighty dollar is a temptation too great to resist for some, resulting in company-wide scandals that harm the innocent and cost shareholders millions. With committees overseeing nearly every act of corporate governance, and teams of lawyers there to monitor it all, it is hard to imagine that any act of malfeasance could make its way through without incident. But, at times the pressure to perform outstrips the mandate to play by the rules, causing industry-wide calamities that stir a nation and shake consumer confidence.
If there is any doubt about it, consider that the U.S. Environmental Protection Agency (EPA) recently concluded its investigation into claims that Hyundai and Kia misrepresented the gas mileage claims for their vehicles. After receiving numerous complaints from consumers, the EPA launched an investigation that revealed that Hyundai and Kia overstated fuel efficiency numbers on 900,000 of their vehicles by as much as 6 miles per gallon.
The findings implicated eight Hyundai models (Elantra, Sonata, Accent, Azera, Tucson, Veloster, Santa Fe and Genesis) built between 2011 and 2013, and five models of its subsidiary Kia (Optima, Rio, Sorento, Soul and Sportage) built during the same time period.
Hyundai initially denied any wrongdoing, issuing a statement that “this case has no merit, as our advertising is accurate and in full compliance with applicable laws and regulations.” Yet, when the EPA’s data indisputably showed that the company’s fuel economy claims were false, Hyundai finally came clean. As the company stated, “Given the importance of fuel efficiency to all of us, we’re extremely sorry about these errors.”
The company blamed “procedural errors” at testing operations in Korea for the problem. But, given that Hyundai Motor Group is the fourth largest automaker in the world (after Toyota, General Motors and Volkswagen), it is hard to believe procedural errors are to blame. This is particularly true given that Hyundai recently launched a marketing campaign centered on its fuel economy claims.
In 2011 (the same year the false claims began), Hyundai launched the “Save the Asterisks” campaign, which stated that most of Hyundai’s models achieved 40 mpg; unlike its competitors who only offered 40 mpg on specialized, low-volume models. As the EPA discovered, however, none of Hyundai’s models actually achieved 40 mpg.
Yet, the marketing campaign worked. As reported by Automotive News, Hyundai’s sales in 2011 were up 20 percent, and Kia’s sales (its subsidiary) were up 36 percent. But, with 900,000 misrepresented vehicles now in consumer hands, the companies are left to manage a public relations crisis.
Just how bad is it? Consider that the average American drives 13,476 miles per year, and keeps their car for an average of 5.95 years. Taking the Kia Soul as an example, which was represented as being capable of 35 mpg, but actually gets 29 mpg, a consumer would spend $2,057 more on gas over the life of the car than expected. Now, consider that there are 900,000 consumers who are similarly situated – all of whom are entitled to compensation for the misrepresentation. Factor in that many state statutes have attorneys’ fees clauses for consumer fraud claims, and it is easy to see how the claims could run into the billions.
Financial pundits have shared concern about the loss the companies will incur. In the days following the companies’ admission that they lied to consumers about their cars’ fuel economy standards, Hyundai’s stock fell seven percent, causing a $3.1 billion loss in market value. And Moody’s reports that “the impact on the companies’ brand recognition and sales performance in North America could be more material, given that high fuel efficiency has been one of their key selling points and the region is the group’s largest market.”
Surprisingly, this is not the first time Hyundai and Kia have come under fire for misrepresenting their vehicles to consumers. In 2001, the Korean Ministry of Construction and Transportation discovered that Hyundai and Kia misrepresented their vehicles’ horsepower ratings by as much as 10 percent. The misrepresentation resulted in a class action lawsuit that was settled for $125 million. The fuel economy scandal looks to be more far reaching, and costly.
While the profit-driven misdeeds of Hyundai and Kia are troubling, the two Korean manufacturers are far from the only ones putting profit before morality. Earlier this year, three executives of the Japanese auto parts company, Furukawa Electric Company, pled guilty to conspiring with other automotive companies to price-fix the cost of their components. The company paid a $200 million fine to the U.S. Department of Justice (DOJ).
The Furukawa criminal convictions led to an industry-wide investigation by the DOJ that sprawled over four continents, including Asia, Europe and Australia. So far, nine companies have paid multi-million dollar fines, and eleven executives have pled guilty to criminal charges. Another eleven companies are still being investigated by the DOJ, which has issued several search warrants and conducted numerous raids.
Wall Street’s fictional character Gordon Gekko famously said, “Greed is good. Greed is right. Greed works.” Well, greed also kills. Greed destroys reputation, and inflicts untold damage on the innocent, all of whom deserve it the least. For Hyundai and Kia, it is the consumers who were sold goods that were not as advertised; it is the dealers who will struggle to maintain a shrinking market share; and it is the shareholders who will watch their values diminish overnight.
It is a shame how little some have learned in the two hundred years since Sir Walter Scott first imparted his words of wisdom upon us. But, perhaps it is the struggle of good versus evil that makes life so interesting, dynamic and, yes, unpredictable.