Hyundai Motor and Kia warn of $2 billion engine retainer to hit third-quarter profits

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  • Hyundai will take 1.36 trln won, Kia 1.54 trln
  • Provisions related to the 2015 and 2017 engine recalls
  • Engine replacement requests higher than expected

SEOUL, Oct 18 (Reuters) – Hyundai Motor (005380.KS) and its subsidiary Kia Corp (000270.KS) will book a combined provision of 2.9 trillion won ($2 billion) in their third-quarter results as they continue to suffer the effects of engine recalls from years ago, they said on Tuesday.

The costs, of which Hyundai was 1.36 trillion won and Kia 1.54 trillion won, accounted for more than half of Hyundai’s estimated third-quarter net profit and 77% of Kia’s profit, according to Refinitiv data.

The provisions are due to an increase in the number of engine replacement requests, as more and more American customers chose to drive their old cars rather than buy a new one amid tight vehicle production caused by a global shortage of chips, the South Korean group said in a statement.

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Hyundai and Kia, among the world’s top 10 automakers by vehicle sales, recalled nearly 1.7 million vehicles in 2015 and 2017 in one of their biggest US recalls, citing an issue with their Theta GDI engine which increased the risk of accidents.

After the recall, the duo offered an unprecedented lifetime warranty on the engine as part of efforts to improve their tarnished reputation.

Korea Investment & Securities analyst Kim Jin-woo said the provisions – unlike a recall – are unlikely to have a major impact on companies’ brand value and credibility, and called the cost of “reasonable” given that it took post-COVID trade into account. environment.

Apologies

“We sincerely apologize for the repeated quality issues and additional costs related to the recall of the Theta II GDI engine,” Cha Seong-ju, head of the quality division at Hyundai Motor Group, told analysts.

A sign shows directions to the Hyundai Motor Manufacturing Alabama automobile plant in Montgomery, Alabama, U.S. July 15, 2022. REUTERS/Joshua Schneyer

“We will do everything we can to ensure engine quality…and manage quality-related costs to avoid repeat quality issues.”

Hyundai said it has increased provisions to account for new engine replacement requests that exceed its previous forecast due to an increase in the overall lifespan of passenger vehicles.

The lifespan of U.S. passenger vehicles has fallen from 12.4 years in 2020 to 13.1 years this year, according to S&P Global Mobility.

Reuters Charts

The automotive group also took into account the recent weakness of the Korean won against the US dollar, leading to additional costs.

In 2020, Hyundai and Kia together made 3.6 trillion won in provisions related to engine issues.

Hyundai Motor is due to report its July-September results next Monday, while Kia has yet to announce when it will release its third-quarter results.

($1 = 1,422.8200 won)

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Reporting by Heekyong Yang and Joyce Lee Editing by Mark Potter and Miyoung Kim

Our standards: The Thomson Reuters Trust Principles.

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