Upcoming third-quarter earnings for Hyundai and Kia will reflect some $2 billion in provisions related to engine recalls. That cash represents huge chunks of the profit that each Korean automaker will report. Hyundai says that more customers have taken them up on engine replacement than they expected.
First reported by Reuters, Hyundai is setting aside 1.36 trillion won while Kia sets aside 1.54 trillion won. Those figures make up more than half of Hyundai’s estimated Q3 net profit and over three-quarters of Kias. In total, the provision makes up some $2 billion specifically set aside to handle the outcome of the previous engine recalls. That figure is on top of another 3.6 trillion won (approximately $2.5 billion today) it set aside for similar issues in 2020.
Hyundai and Kia say that instead of trading in their vehicles for new ones, customers are hanging onto them longer. A study from S&P Global Mobility backs that up, citing an increase in the average age of a U.S. registered car growing from just under 10 years in 2002 to more than 13 today. That’s significant due to a recall of some 1.7 million Kias and Hyundais back in 2015 and 2017.
When that recall took place, both automakers offered a lifetime engine warranty in an effort to repair their relationship with customers. Now, those same customers are still taking the brands up on that warranty when things go sideways. It might be about to take a toll on investors too.
Speaking to analysts, Cha Seong-ju, head of the quality division at Hyundai Motor Group said: “We sincerely apologize for repeated quality issues and additional costs related to the Theta II GDI engine recall… We will put our utmost efforts to secure engine quality… and manage quality-related costs in order to prevent a repetition of quality issues.”
On top of the additional provision made, the Korean won isn’t doing particularly well against the US dollar right now. Ultimately though, there was little chance that Hyundai and Kia, who are among the top ten automakers by volume, could escape paying a heavy penalty in this instance.
The Theta GDI engine at the heart of these recalls has factored into many Kia and Hyundai products from the last decade including the Sonata, the Santa Fe, and the Optima.
