Upcoming third quarter results for Hyundai and Kia will reflect some $2 billion of provisions related to engine recalls. This money represents huge chunks of the profit each Korean automaker will bring in. Hyundai says more customers have replaced them than expected.
First reported by Reuters, Hyundai is setting aside 1.36 trillion won while Kia is setting aside 1.54 trillion won. Those numbers represent more than half of Hyundai’s estimated third-quarter net profit and more than three-quarters of Kias. In total, the provision represents some $2 billion specifically set aside to deal with the outcome of previous engine recalls. That figure is on top of another 3.6 trillion won (about $2.5 billion today) he set aside for similar issues in 2020.
Hyundai and KIA say that instead of trading in their vehicles for new ones, customers hang on to them longer. A study by S&P Global Mobility confirms this, citing an increase in the average age of a registered car in the United States from just under 10 years old in 2002 to over 13 years old today. It is important because of a recall of some 1.7 million Kia and Hyundai in 2015 and 2017.
When this recall occurred, both automakers offered a lifetime engine warranty in an effort to repair their relationship with customers. Now those same customers still accept marks on that warranty when things go wrong. It could also be about to hurt investors.
Speaking to analysts, Cha Seong-ju, head of Hyundai Motor Group’s quality division, said, “We sincerely apologize for the repeated quality issues and additional costs related to Theta II GDI engine recall…We will make every effort to ensure engine quality…and manage quality-related costs to avoid recurrence of quality issues.
In addition to the additional provision made, the Korean won is not doing particularly well against the US dollar at the moment. Ultimately, there was little chance that Hyundai and Kia, which are among the top ten automakers by volume, could escape a hefty penalty in this case.
The Theta GDI engine at the heart of these recalls has been featured in many Kia and Hyundai products of the past decade, including the Sonata, Santa Fe and Optima.