"Hyundai Motor and Kia Hampered by Ongoing Quality Costs"

3rd Quarter 3 Trillion Won Provision Set
"Aging U.S. Auto Market... Future Provision Setting Inevitable"

[Asia Economy Reporter Yoo Hyun-seok] Hyundai Motor Company and Kia continue to be hampered by ongoing quality costs. The provision for the Theta2 engine, amounting to a total of 3 trillion KRW, has emerged, effectively dashing the record-breaking performance expected in the third quarter. Since both companies have implemented a lifetime warranty for the Theta engine, related issues may continue to arise, increasing the likelihood of performance uncertainties in the future.

According to the completed vehicle industry on the 23rd, Hyundai Motor and Kia plan to reflect quality costs of approximately 1.36 trillion KRW and 1.54 trillion KRW, respectively, in the third quarter to set aside provisions for the Theta GDI engine. This is the first time in two years since the third quarter of 2020 that provisions have been accumulated. Previously, in the third quarter of 2019, Hyundai Motor and Kia expanded the application of the Engine Vibration Detection System (KSDS) to vehicles equipped with the Theta2 engine and decided to provide a lifetime warranty for the engine.

Until now, Hyundai Motor and Kia were expected to achieve record-high operating profits in the third quarter. Operating profits of 3 trillion KRW and 2 trillion KRW were forecasted for Hyundai Motor and Kia, respectively. However, due to the reflection of quality cost provisions, Hyundai Motor is estimated to record operating profits in the 1.6 trillion KRW range, and Kia is expected to record less than 1 trillion KRW.

The reflection of provisions is expected to continue going forward. The aging of the U.S. automobile market, which is currently ongoing, increases the possibility of additional provisions. According to S&P Global Mobility, the average vehicle age in 2021 was 12.2 years. After surpassing 12 years for the first time in 2020, it increased again last year. The prolonged semiconductor supply shortage has hindered the smooth supply of new cars, which appears to have influenced the increase in the usage period of used cars and the reduction in scrappage rates.

In this situation, since Hyundai Motor and Kia have implemented a lifetime warranty for the Theta engine, the engine replacement rate is inevitably expected to rise. According to DB Financial Investment, quality costs such as engine-related recalls and provisions, which began in 2017, have accumulated to nearly 9 trillion KRW by the third quarter of this year. Kim Pyeong-mo, a researcher at DB Financial Investment, said, "If the rapid aging of cars in the U.S. continues, the engine replacement rate will inevitably increase as well," adding, "If the engine replacement ratio exceeds the current assumption, additional provision accumulation in the future is also expected to be unavoidable."

Credit rating agencies also point out that repeated quality issues structurally burden Hyundai Motor and Kia's profitability and cash flow. Korea Ratings stated, "The recurring occurrence of quality costs is a structural factor burdening profitability," and added, "It weakens the predictability of Hyundai Motor and Kia's profitability and the reliability of quality cost estimates." Furthermore, they noted, "Although quality costs do not immediately involve cash outflows, actual cash outflows will occur in the future along with warranty repair work such as engine replacements."

This content was produced with the assistance of AI translation services.