Hyundai Motor and Kia Set All-Time High Records, Expect Even Better Q2 (Comprehensive)

Hyundai Motor Company and Kia recorded an earnings surprise in the first quarter of this year, setting a new record for the highest quarterly performance ever. As a result, Hyundai Motor and Kia surpassed leading domestic companies such as Samsung Electronics, LG Electronics, and POSCO, ranking first and second in operating profit among publicly listed companies in Korea. This was thanks to the resolution of pent-up demand caused by semiconductor supply shortages and increased sales focused on luxury cars and sport utility vehicles (SUVs). It is expected that the performance will improve further from the second quarter onward as the decline in raw material prices, which peaked in the fourth quarter of last year, is fully reflected.

On the 26th, Kia announced that its sales revenue for the first quarter of this year reached 23.6907 trillion won, with an operating profit of 2.874 trillion won. Sales revenue increased by 29.1% and operating profit by 78.9% compared to the previous year. The day before, Hyundai Motor also announced sales revenue of 37.7787 trillion won and operating profit of 3.5927 trillion won, up 24.1% and 86.3%, respectively.

This performance by Hyundai Motor and Kia marks a record-breaking achievement of the highest performance for two consecutive quarters and far exceeded market expectations as an earnings surprise. Based on operating profit margin, Hyundai Motor achieved 9.5% and Kia 12.1% in the first quarter, surpassing their annual operating profit margin targets announced earlier this year (Hyundai Motor 7.5%, Kia 9.5%).

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There are three main factors behind Hyundai Motor and Kia achieving record-breaking performance for two consecutive quarters. First, the semiconductor supply shortage that suppressed overall demand in the automotive market last year was almost resolved this year. As the pent-up demand was gradually resolved, sales volume increased significantly. In the first quarter of this year, Hyundai Motor's global wholesale sales rose 13% year-on-year to 1,022,000 units, and Kia's increased 12% to 768,000 units. Notably, sales growth was clear mainly in the domestic and North American markets.

Second, sales of high-end brand Genesis and SUVs, as well as D-segment and higher-priced models, increased. The sales mix improved with a focus on high-priced vehicles, enhancing profitability. In the first quarter of this year, the combined sales proportion of SUVs and Genesis for Hyundai Motor was 55.5%, accounting for more than half. For Kia, the combined proportion of recreational vehicles (RVs) and D and E segments was 72.7%. In other words, Hyundai Motor sold more than 5 out of every 10 vehicles globally as either Genesis or SUVs. Kia sold 7 out of every 10 vehicles as RVs or mid-to-large cars in the D and E segments.

Lastly, the 'getting the right price' strategy by reducing sales incentives is proving effective in the market. Vehicles with strong brand and product competitiveness sell without additional incentives to dealers. Globally, Hyundai Motor and Kia maintain incentive levels at the industry's lowest. In the first quarter of this year, Kia's operating profit benefited by 189 billion won from reduced incentives alone. Joo Woo-jung, Vice President and Head of Finance at Kia, said, "It is quite meaningful that we are managing low incentives in the global market based on strong product power and improved brand strength."

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Following record-breaking performance in the first quarter, Hyundai Motor and Kia expressed strong confidence in further performance improvement in the second quarter. The prices of raw materials used in batteries, such as nickel and lithium, peaked in the fourth quarter of last year and have been declining, which is a positive factor. This stabilization of raw material prices has not yet been reflected in this quarter's results. Once the decline in raw material prices is fully reflected from the second quarter onward, the improvement in performance is expected to become more pronounced. Head Joo said, "As lower raw material prices are reflected, the burden of material costs will decrease, improving the profitability of electric vehicles."

They have also already devised strategies to respond to the U.S. Inflation Reduction Act (IRA). The 2-3 year transitional period before electric vehicles are produced at local factories in the U.S. is a challenge. Hyundai Motor and Kia plan to increase the proportion of fleet (corporate, rental, and used car sales) and lease (long-term rental) vehicles, which can receive subsidies even if they are not locally produced electric vehicles. Some concerns exist that fleet or lease sales have lower profitability. However, thanks to strong product competitiveness, fleet sales are possible without additional commission payments, so there is no issue with profitability.

As Hyundai Motor and Kia achieved record-breaking quarterly performance for two consecutive quarters, there have been calls in the market to revise the annual targets (guidance). While confident in continued strong performance after the second quarter, Hyundai Motor and Kia have taken a conservative stance on revising annual targets. Kanghyun Seo, Vice President and Head of Planning and Finance at Hyundai Motor, said, "In the short term, we expect the good trend to continue through the second quarter, but it is premature to revise the annual guidance. We will consider it after reviewing the situation from the third quarter onward."

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