Hyundai, Kia may face negative brand

Hyundai, Kia may face negative brand perceptions: investment banks HONG KONG (Yonhap) -- Hyundai Motor Co. and its sister carmaker Kia Motors Corp. could face negative brand perceptions, after they admitted to inflating their fuel economy ratings, although the direct financial loss from the case will be limited, foreign investment banks said Monday. The two leading South Korea automakers publicly announced Sunday that they made procedural errors at testing operations, which led to incorrect fuel economy ratings for approximately 900,000 units of cars sold in the U.S. between 2010 and 2012. The average fuel economy for the 13 U.S. models sold by Hyundai Motor and Kia Motors was unintentionally but wrongly indicated as 27 miles per gallon (mpg), up 3 percent from the actual 26 mpg, the companies said in a full-page statement carried by the U.S. newspapers. Goldman Sachs said the event has negative implications beyond the possible compensation amount. "We project the reimbursement amount to be less than 1 percent of 2012 earnings. However, we believe this event could potentially introduce substantial risk to fundamentals and valuations beyond this amount," said Seung Shin, an analyst at Goldman Sachs. "Reduced miles per gallon will affect resale value of Hyundai Motor and Kia Motors cars," Shin said. "Damaged brand value will affect future market share and pricing of Hyundai Motor and Kia Motors models." BNP Paribas also said the two companies may see their reputation damaged. "While maintaining our positive view based on attractive valuations and expectations for the fourth quarter of 2012 earnings recovery, we now find improvements in brand perception at risk due to the faulty mileage claims, which are at the core of the brand's success during difficult times," said James Yoon at BNP Paribas. "We think the potential financial loss is immaterial compared to the potential reputational loss of brand equity. We believe this could be a game-changing event in the success story of both Hyundai Motor and Kia Motors." Bank of America Merrill Lynch agreed a potential risk exists in the brand perceptions but said it will not have a substantial impact. "We see a few potential risks -- their brand perception, competitors actively utilizing the announcement, further loss in the case of consumers raising legal actions and weaker sales in other regions with the issue spreading out," said Andy Lee, an analyst at Bank of America Merrill Lynch. "However, we believe the further impact would be limited, as the average difference in fuel economy is just 1 mile per gallon, the companies initiated compensation package promptly, and other regions had tested the fuel efficiency with monitoring by relevant governments."