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A driver fills up a 2012 Kia Rio.

Moe Doiron/The Globe and Mail

Within minutes of celebrating the good news found in the latest sales reports, Hyundai and its Kia cousin – together, these two brands make up the fifth-largest car company in the world – held a joint news briefing to confirm the bad news – bad news that had been bouncing around the blogosphere for months and could be found in legal documents filed in California last summer: both Hyundai and Kia were posting incorrect fuel economy numbers on new models, dating all the way back to 2010.

Oops. With that, a pillar of the brand promise of both had been undermined. Hyundai Motor Co., which owns the Kia brand, has for several years now been touting fuel economy as proof of the company's technological prowess. For instance, in a presentation last year designed to position Hyundai as a legitimate head-to-head rival of the best car companies in the world, Hyundai Auto Canada president and CEO Steve Kelleher argued that direct comparisons do a good job of telling the modern Hyundai story.

Flipping through chart after chart, Kelleher compared Hyundai models to key rivals. The Accent subcompact versus Ford's Fiesta? The Fiesta is fuel-efficient, he said, but to get the most fuel-thrifty model – and one with comparable fuel economy to every Accent – a buyer would need to purchase the Fiesta SE with a fuel economy package and automatic transmission. Extra cost at the time: $5,455, or $18,049 for the Ford versus $13,100 for the Accent L.

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The Elantra L? Kelleher at the time said it gets better city fuel economy (6.8 litres/100 km versus the Cruze's 7.2) despite listing for $4,500 less.

"We're the only car company with direct fuel injection across the line," he says, pointing out that this is the sort of engine technology that is core to Hyundai's fuel economy and performance brand promise.

Except that Elantra, Hyundai now admits, actually gets 7.1 litres/100 km in the city. In fact, Hyundai Auto Canada Corp. and Kia Canada Inc. said last week they are correcting the fuel consumption ratings for approximately 172,000 vehicles sold between 2010 and 2012.

What happened? Procedural errors. The joint testing operations in South Korea led to incorrect fuel consumption ratings. Hyundai and Kia have revised upward their average combined fleet fuel consumption ratings by 0.3 litres/100 km for the 2013 model year.

"I sincerely apologize to all affected Hyundai and Kia customers, and I regret these errors occurred," said Dr. W. C. Yang, Hyundai/Kia's chief technology officer.

Hyundai/Kia was responding to audit results from the U.S. Environmental Protection Agency. U.S. EPA certification is accepted by Environment Canada for auto imports into Canada.

"We are very sorry about the errors and we are committed to making sure the owners of every affected Hyundai vehicle are fully compensated," said Kelleher, adding that current and former Hyundai and Kia owners will be reimbursed for the fuel value of the difference in the combined fuel consumption rating, plus an extra 15 per cent. That is, Hyundai and Kia dealers use odometer readings to determine how much owners might have saved had they achieved the advertised fuel economy and then give those owners a pre-paid credit card for that amount – plus 15 per cent.

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"Kia Canada deeply regrets that this situation has occurred and will ensure all affected Kia customers will quickly receive fair compensation," added William Lee, president and CEO of Kia Canada Inc.

Hyundai and Kia also say they that more than 900,000 vehicles sold in the U.S. were similarly involved.

"Given the importance of fuel efficiency to all of us, we're extremely sorry about these errors," Hyundai's top U.S. executive, John Krafcik, said in the statement. "When we say to Hyundai owners, 'We've got your back,' that's an assurance we don't take lightly. We're going to make this right for everyone, and we'll be more driven than ever to ensure our vehicles deliver outstanding fuel economy."

But this bad news wasn't unexpected. Trade journal Automotive News reports that just last July a group called Consumer Watchdog was suing Hyundai over fuel-economy claims. Hyundai denied the claims in July.

This fuel economy flap comes on the heels of the latest reliability ratings from Consumer Reports, which said most Hyundai and Kia models have "average" reliability. The Kia brand is ranked 10th overall in the 2012 Annual Auto Reliability Survey, while Hyundai came in ranked 17th out of 28 brands ranked. A middling performance at best. On top of that, this past summer J.D. Power and Associates' latest Initial Quality Study ranked both brands below the industry average for quality, though the three-year J.D. Power Vehicle Dependability Study has Hyundai above average (with Kia below average).

Could rapid, no explosive, growth be a factor in these latest unhappy developments? Consider: last year, Hyundai Canada sold nearly 130,000 vehicles in Canada, a massive jump from just less than 81,000 in 2008. This 60 per cent increase in Canadian sales is mirrored around the world and continues in Canada today.

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Last month, Hyundai Canada had its best October ever, with sales up 4.5 per cent. This was the 46th straight month of Hyundai's growth. The company's Elantra compact exploded in October, with sales up 42.2 per cent, while on the year Elantra sales are up nearly 20 per cent. Indeed, the Elantra is Canada's second best-selling car.

Kia's sales, meanwhile, were up 24.1 per cent last month, also the 46th straight month of rising sales, while sales on the year are up nearly 20 per cent. In releasing its latest results, Kia noted that its brand was included among the Top 100 Best Global Brand, in a study released by Interbrand. Kia's brand value is estimated at $4.1-billion (U.S.), which firmly positions the auto maker 87th on the list. In the same study, Hyundai is ranked No. 53 overall, with a value of just less than $7.5-billion.

By any measure, Hyundai/Kia is a force. Combined Canadian sales of the two are at 186,440 through the end of October. Hyundai and Kia together are bigger in Canada than Toyota and its Lexus brand, as well as Honda and its Acura brand. Hyundai/Kia, in fact, represent the fourth-largest auto company in Canada by sales, behind Ford, Chrysler/Fiat and General Motors.

Except officials at both Hyundai and Kia are fiercely defensive when the conversation turns to their individual brands. While much of the research and development work for both brands is done in the same R&D centre, witness the issues that have emerged around fuel economy claims for both brands – the ones that have given both brands a black eye.

Company officials insist that they position the brands differently. Everything under the sheetmetal is shared, but styling, features, packaging, advertising, and all the rest are unique to each brand. Hyundai is being positioned as something of a Toyota-like brand, while Kia is oriented towards a younger buyer. Think of Kia as something akin to a mixture of Honda and Nissan.

The Hyundai side of this conglomerate is further along on the path to so-called global greatness. Just a decade ago, Hyundai essentially brought Kia out of bankruptcy. So it should be no surprise to find that Hyundai came out on top in a recent brand loyalty study from J.D. Power and Associates. The study measures customer-loyalty rates by vehicle brand.

The idea here is to uncover who's remaining loyal to which brand. J.D. Power noted that, for 2012, the industry brand loyalty average is 49 per cent, with Hyundai ranked first with a 64 per cent loyalty rate. Hyundai, noted Power, is doing well retaining the loyalty of women and younger customers. This speaks well for the Hyundai's future.

Hyundai is also a profit-spinning machine. Late last month, Hyundai said net profit jumped 17.4 per cent in the nine months to Sept. 30 from a year earlier. Hyundai is earning big returns because its products are being better recognized for quality, design and technology. Worldwide, Hyundai sales were up nearly eight per cent through the first nine months of the year. Kia's third-quarter net profit was up 28 per cent, for the record.

The point is, Hyundai/Kia is a global force in the auto industry, an immensely profitable one with grand ambitions. Both brands will survive the recent embarrassment and fallout over incorrect fuel economy numbers dating back to 2010. In fact, both brands have grand plans to expand into new and uncharted segments of the market.

Hyundai has already started down this road, introducing the big Equus luxury sedan and the smaller Genesis sedan and coupe premium cars. Kia Canada, meanwhile, is looking to introduce an all-new luxury flagship sedan that has already gone on sale in Korea. Using the platform shared with the Genesis and Equus, the Kia K9 is a rear-wheel drive sedan, "our first rear-wheel-drive large sedan for more than a decade and sets new standards for advanced design, new technologies and driving performance," says Soon-Nam Lee, Kia's overseas marketing director, in a product release.

Kia chief designer Peter Schreyer adds, "The K9 is a clear signal of our intention and determination to compete head-to-head with the European luxury brands. And for Kia, our customers, and for me – this car is like a dream come true."

I've driven the K9 and it's impressive. Kia's return from the dead is impressive. Hyundai's astonishing turnaround over the past two decades is equally amazing. But I will say that this latest fuel economy embarrassment, as well as the so-so results in Consumer Reports' latest reliability study, are warning flags that the Hyundai/Kia monster should not ignore.

It takes years and years to build a car brand, but real damage can be done almost overnight.

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About the Author
Senior writer, Globe Drive

In 25 years of covering the auto industry, Jeremy Cato has won more than two-dozen awards, including three times being named automotive journalist of the year. Jeremy was born in Montreal and grew up in the San Francisco Bay Area. More

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