Auto Maker Deception Shows Risk Management Weakness

Auto Maker Deception Shows Risk Management Weakness

When it comes to the auto industry, gas mileage is a major marketing bragging point when oil prices are high. Prove that your vehicle can go farther on a single gallon and you have the attention of millions of potential buyers, with good reason.

It’s hard work to make a car more fuel efficient and the manufacturers that can pull it off have a big advantage. Unless they just make the mileage data up. South Korean car manufacturers Hyundai and Kia admitted having done just that. About a third of the vehicles the two brands (both are owned by Hyundai Motor Group) sold since 2010 — 900,000 — had listed fuel economy numbers higher than was the actual case. And both companies have heavily used their supposed superior fuel economy as major points in their marketing.

It’s an example for those with a business management degree but an often overlooked area of risk management: reputation. There’s a saying that the only thing you have are your reputation and your word. That is as true for organizations as it is for individuals. Once you’ve lost the reputation, it is difficult to recover. Hyundai Motor Group was supposed to do as all other auto manufacturers are required to in the United States, which is run standardized tests to get ideal mileage figures and then make them public so consumers can compare different vehicles in an even-handed manner.

The company has admitted to “procedural errors” in the testing that led to the wrong mileage displayed for top selling models. The numbers were between 1 and 6 miles per gallon higher than they should have been. Hyundai is officially “extremely sorry” for the wrong data, and the Environmental Protection Agency reportedly is not planning action.

Instead, Hyundai will change the mileage on car stickers, run newspaper ads explaining the mistake, and offer some reimbursement to consumers who had purchased vehicles. So, no major fine — at least, not yet. (The EPA is still investigating.) However, the reputational damage is enormous.

Single-handedly, Hyundai has created the potential for consumers to perceive it as untrustworthy. Perhaps there was a mistake in undertaking these tests that the company had performed year in and year out. Maybe not. But convincing consumers that the action was innocent will be a tall, expensive, and drawn-out order. Risk management usually looks at big issues, such as compliance with federal law, agency requirements, and even demands by industry groups.

But as Hyundai’s experience shows, there can be a long chain of events involved in compliance, and managers need to undertake a systemic approach to ensuring that all the steps are properly taken. Otherwise, the risk of non-compliance, and the potential for regulatory or consumer reaction, can become significant.