[Asia Economy Reporter Suyeon Woo] Hyundai Kia Motors has taken a 'big bath' of 3.39 trillion KRW to put an end to the Theta II engine quality controversy. Chung Euisun, Chairman of Hyundai Motor Group, emphasized quality management to restore customer trust and expressed his determination to maintain the 'quality management' policy that has been passed down through generations.
Hyundai Kia Motors announced on the 19th that it has additionally set aside a provision of 3.39 trillion KRW in the third quarter of this year for quality costs related to the Theta II engine recall and long-term customer protection measures. The quality costs reflected in the third quarter earnings amount to 2.13 trillion KRW for Hyundai Motor Company and 1.26 trillion KRW for Kia Motors.
Recalculation of Theta II Engine Recall Period and Costs
In the third quarter of last year, Hyundai Kia Motors decided to apply a lifetime warranty program to 4.69 million vehicles equipped with Theta II engines in South Korea and the United States. Accordingly, provisions exceeding 1 trillion KRW were accumulated in two installments: 460 billion KRW in the third quarter of 2018 and 920 billion KRW in the third quarter of last year.
However, since the engine replacement rate for the recall was higher than initially expected and the vehicle operation period for the lifetime warranty was estimated to be longer, the recall costs had to be realistically recalculated. Hyundai Kia Motors extended the operation period of Theta II engine vehicles from 2011 to 2014 from the previous 12.6 years to 19.5 years to recalculate quality costs and also considered the increased customer claim rate for vehicles from 2015 to 2018.
Additionally, costs for installing the engine vibration detection system software (KSDS) were added for other engines currently receiving complaints (Theta II MPIㆍHEV, Gamma, Nu). The number of recall target vehicles increased from 4.2 million with the existing Theta II GDi engine to a total of 7.47 million including other engine vehicles.
"Customer Trust Recovery First" Quality Management Continued into Second Generation
With Chairman Chung’s big bath quality cost measure, Hyundai Kia Motors has eliminated quality-related risks for the next 20 years until 2037. Despite the inevitability of a large deficit in the first earnings announcement since his inauguration, this measure was taken to prioritize restoring customer trust and to put an end to the ongoing quality controversies that have continued to hamper the company.
In his inauguration speech on the 14th, Chairman Chung emphasized, "The first step toward customer satisfaction is to help customers focus on their original lives through perfect quality." This is interpreted as Chairman Chung’s intention to continue the quality management philosophy of his father, Honorary Chairman Chung Mong-koo. He also mentioned in a meeting with reporters shortly after his inauguration, "I think the parts where (Honorary Chairman Chung) always emphasized quality are his management instructions."
Honorary Chairman Chung has always emphasized quality as the highest value. To this end, he established a standard factory construction system capable of producing vehicles with uniform quality worldwide and traveled production sites around the world to find and solve quality issues.
This philosophy of the father was passed on to the son. Chairman Chung chose 'resolving the quality cost controversy' as his first task after inauguration. He took on the most sensitive topic that could reveal poor performance on the surface and confronted it head-on.
Next year, Hyundai Kia Motors is preparing major projects such as launching electric vehicle-exclusive platform vehicles, expanding exports of hydrogen commercial vehicles and hydrogen fuel cell systems. This big bath appears to be a preemptive measure to clear old issues and move forward into a new era.
Researcher Soohong Jo of NH Investment & Securities said, "Although a deficit in the third quarter is inevitable due to this large provision, the virtuous cycle effect from successful new car launches is expanding both domestically and overseas," and added, "There is no change in the outlook for performance improvement next year."
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