Hyundai Motor (005380.KS) and its affiliate Kia Motors (000270.KS) said on Thursday they aim to raise the average fuel economy of their vehicles by 25 percent by 2020 to meet emissions regulations in South Korea, the United States and Europe.

The announcement came after the South Korean duo on Monday agreed to pay $350 million in penalties to the U.S. government for overstating fuel economy ratings.

At home, they have also struggled to fend off imported rivals which have surged in popularity thanks to their fuel-efficient, diesel-powered engines.

In a statement, the South Korean automakers said they would develop next-generation engines and transmissions, reduce the weight of key models and expand their line-up of environmentally friendly vehicles to reach the target.

"In the first half of this year, group chairman Chung Mong-koo ordered to secure world-leading competitiveness in fuel economy by 2020," Hyundai said in a statement.

Hyundai and Kia, which share key components, said they will replace 70 percent of their 10 gasoline and diesel engines with next-generation engines, while expanding the use of turbo-charged gasoline engines.

They also will develop more advanced transmissions.

The companies, which have steel making affiliate Hyundai Steel (004020.KS), said they will also expand use of advanced, high-strength steel to make vehicles lighter.

Hyundai and Kia, which together rank fifth in global vehicle sales, plan to launch a compact, hybrid-dedicated vehicle and the plug-in hybrid version of the Sonata sedan next year as part of efforts to beef up its eco-friendly cars.

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