Hyundai, Kia to reflect $2 bn quality costs in Q3 earnings

Hyundai Motor Co. and its affiliate Kia Corp., South Korea’s top two automakers, plan to reflect 2.9 trillion won ($2 billion) more in quality costs related to faulty engines in their third-quarter results, dampening investor hopes for record profits.

Hyundai and Kia will earmark 1.4 trillion won and 1.5 trillion won in provisional expenses for the faulty Theta engines in their earnings for the July-September period, respectively, the carmakers said in separate regulatory filings on Tuesday.

The costs are expected to slash Hyundai’s third-quarter operating profit to around the high-1 trillion won level from a consensus forecast of more than 3 trillion won and Kia’s profit to some 1 trillion won from a forecast of 2.3 trillion won.

The two automakers have already reflected such costs three times before in their quarterly earnings – 3.4 trillion won in the third quarter of 2020, 920 billion won in 2018 and 460 billion won in the same period of 2019.

Hyundai Motor Group, to which Hyundai and Kia belong, announced in 2019 that it will offer a lifetime warranty for about 4 million vehicles equipped with the Theta 2 engines after massive recalls and in line with a US class action lawsuit agreement.

“We decided to set aside additional provisions as the lifetime warranty raised the number of engine replacements more than expected,” said a group source.

AUTOMOTIVE CHIP SHORTAGE, WEAK WON CURRENCY

The extra costs came as customers maintained their old cars longer than usual due to the ongoing automotive chip shortage that has been disrupting global car production, industry sources said. A weaker South Korean won currency also boosted the provisional expenses abroad, they added.

The group, however, said the cost per car fell 21% compared to those in 2019.

The Theta engine marked a milestone in Hyundai’s engine development history. The company exported the engine to other countries such as German and Japan.

The Theta 2, unveiled in 2009, was well received due to its powerful performance while meeting stricter emission regulations.

But Hyundai 2015 recalled some 470,000 Sonata sedans equipped with the Theta 2 engines due to problems including engine failure during driving in the US. The carmaker expanded the recall to include 1.7 million vehicles in the US and 170,000 units in South Korea.

From Hyundai, those models were the Sonata sedan as well as the Tucson and Santa Fe sport utility vehicles. Kia’s Optima mid-sized sedan and SUVs including the Sorrento and the Sportage were among those recalled.

Write to Il-Gue Kim and Hyung-Kyu Kim at black0419@hankyung.com
Jongwoo Cheon edited this article.