[Concall] Kia "Semiconductor Shortage Expected to Improve After Q3... Limited Impact from Russia Situation"

by Choi Daeyul

Published 25 Apr.2022 17:44(KST)

Kia Yangjae Office

[Asia Economy Reporter Choi Dae-yeol] Joo Woo-jung, Vice President and Head of Finance at Kia, said on the 25th, "The semiconductor issue is unlikely to subside easily after the second quarter and will probably continue to be a disruptive factor in the second half of this year," adding, "However, compared to the early-month forecast, the current situation shows that a significant portion of the early-month disruptions has been compensated for."

Joo made these remarks during a conference call held after the announcement of the first-quarter earnings. He said, "We expect the control unit sector to overcome major difficulties around May, and the powertrain sector to also get past significant challenges starting from the third and fourth quarters."

He anticipated that the impact of the Russia situation would be limited. Kia ranks around second in the Russian finished car market, with a considerable volume produced under consignment at Hyundai's local factory or exported from Korea. While there may be adjustments to the local production and sales plans initially expected due to the Russia situation, it is considered manageable when viewed from the perspective of the global market as a whole.

Joo said, "Although there are disruptions in direct production within the Russian market and in export volumes from Korea, the current situation allows for reallocating semiconductors, which were previously in short supply, to other regions. Therefore, even if there are some volume disruptions, they can be compensated for in other regions, which is positive from a profitability standpoint."

Kia's first dedicated electric vehicle EV6

Although raw material prices have surged, increasing material costs, this is seen as offsettable by exchange rates. Furthermore, as production disruptions have prolonged, creating a supplier-favorable market, it is expected that responses such as reducing incentives (sales promotion funds) or raising sales prices will be possible.

Joo stated, "Raw material prices are higher than initially planned at the beginning of the year, so material costs will be more burdensome after the second quarter," but added, "We are reasonably implementing price increases across all regions to offset the rise in material costs." He continued, "We had projected incentives for this year to be at last year's average level, but currently, they have been reduced by more than 25%. Since there is a shortage of (sales) volume, there is no reason to increase incentives, so we are saving a significant portion of costs."

Regarding exchange rates, he said, "The amount exposed to exchange rate risk, including the dollar, is estimated at about 22 billion KRW per 1 KRW change, and the initially expected exchange rate was around 1,130 KRW." He added, "There is a possibility that raw material price increases will be more severe than initially expected, but this also means that market difficulties may arise, leading to a greater depreciation of the exchange rate." This implies that while material cost fluctuations exist, a significant portion is offset by exchange rates. Overall, Joo explained that the business plan set at the beginning of the year is still considered valid.

Regarding overseas production of electric vehicles, Jeong Seong-guk, Executive Director in charge of IR at Kia, responded that they will respond by converting existing lines rather than building dedicated plants in the U.S. He said, "We will convert existing production lines in major regions such as the U.S., Europe, and India according to regulations and demand environments in each country." On the profitability of electric vehicles, he expected that achieving the initially planned mid-to-high 5% range this year and 8% by 2025 is fully feasible. Regarding the rise in battery raw material costs, he said, "We will partially reflect the increase while reducing costs through technological and process improvements to ensure that profitability is not significantly affected."