Hyundai Kia Motors Faces 3Q Earnings Cloud... Additional 3.36 Trillion KRW Provision for Quality Costs Reflected (Comprehensive)

[Asia Economy Reporter Suyeon Woo] Hyundai Kia Motors will reflect a provision of 3.36 trillion KRW in the third quarter earnings this year to set additional costs for the lifetime warranty of the Theta II GDi engine. Considering the previous provisions of 460 billion KRW in the third quarter of 2018 and 920 billion KRW in the third quarter of 2019, the total cost for the Theta II engine quality is expected to reach 5 trillion KRW.

On the 19th, Hyundai Kia Motors announced that it will set an additional provision of 3.36 trillion KRW as quality costs for the lifetime engine warranty of the Theta II GDI engine in the U.S. and domestic markets. Hyundai Motor will reflect 2.1 trillion KRW and Kia Motors 1.26 trillion KRW in the third quarter earnings this year.

On the same day, Hyundai Kia Motors held an investor relations (IR) briefing to explain the quality cost-related matters in advance ahead of the third quarter earnings announcement scheduled for the 26th. It is unusual for Hyundai Kia Motors to hold such a briefing before the quarterly earnings announcement, which is interpreted as a proactive response to customer and market concerns.

Previously, Hyundai Kia Motors reflected provisions related to the Theta II GDi engine recall in the earnings twice: 460 billion KRW in the third quarter of 2018 (Hyundai Motor 300 billion KRW, Kia Motors 160 billion KRW) and 920 billion KRW in the third quarter of 2019 (Hyundai Motor 610 billion KRW, Kia Motors 310 billion KRW). Including the additional provision for this third quarter, Hyundai Kia Motors will have set a total provision of 4.74 trillion KRW for the Theta II GDi engine recall.

A Hyundai Kia Motors official explained, "Since the provision was reflected last year, the number of engine replacement cases has continued to be higher than expected, and a realistic reassessment of the vehicle operation period used in calculating the lifetime warranty provision was necessary, making the additional provision unavoidable."

Hyundai Kia Motors, Q3 Quality Costs Related to Theta3 Engine / Data = Hyundai Kia Motors

According to Hyundai Kia Motors, the replacement rate of vehicles equipped with the Theta II engine from 2011 to 2014 was higher than expected, and the expected vehicle operation period until scrappage under the lifetime warranty increased from the original 12.6 years to 19.5 years. Models from 2015 to 2018 have also seen more customer claims than expected, necessitating additional costs for quality improvement.

Furthermore, for other engines currently receiving customer complaints (Theta II MPI·HEV, Gamma, Nu), Hyundai Kia Motors is considering proactively implementing a KSDS (Engine Vibration Detection System Software) installation campaign to enhance customer quality satisfaction and plans to set additional provisions related to this.

Hyundai Kia Motors emphasized that it will improve thorough quality management and the accuracy of cost forecasting to prevent similar quality cost issues from recurring in the future, and plans to transparently disclose information and communicate with investors and customers.

An industry insider analyzed, "Since the expected vehicle operation period applied is 19.5 years, this provision can be seen as resolving the risks related to this quality issue that may arise until 2037."