[Kia Motors Conference Call] Even After Absorbing Quality Costs... 3Q Operating Profit 195.3 Billion KRW (Comprehensive)

Hyundai Motor Group headquarters./Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Kiho Sung] Kia Motors recorded an operating profit of 195.3 billion KRW in the third quarter of this year despite reflecting quality reserves. This performance is considered favorable compared to Hyundai Motor Company, which posted an operating loss due to quality reserves.

Quality reserves of 1.0131 trillion KRW reflected in Q3

On the 26th, Kia Motors announced at its Seoul earnings presentation that its third-quarter results were ▲sales of 16.3218 trillion KRW (up 8.2% year-on-year) ▲operating profit of 195.3 billion KRW (down 33.0%) ▲ordinary profit of 231.9 billion KRW (down 48.0%) ▲net profit of 133.7 billion KRW (down 59.0%). Quality reserves of 1.0131 trillion KRW were reflected in the third quarter.

Haein Lee, head of Kia Motors IR team, stated, "Third-quarter sales decreased due to lower sales volume and a slight decline in the KRW-USD exchange rate," but added, "However, sales increased by 8.2% year-on-year to 16.3218 trillion KRW due to improved sales mix centered on new models such as K5, Sorento, Carnival, and recreational vehicles (RVs), resulting in higher unit prices."

Operating expenses increased by 30.5% year-on-year to approximately 2.747 trillion KRW, mainly due to additional quality reserves related to engines being significantly reflected in warranty costs, despite company-wide cost-cutting efforts to overcome uncertain business conditions. The selling and administrative expense ratio rose by 2.9 percentage points to 16.8%. As a result, the operating profit margin fell by 0.7 percentage points to 1.2% compared to the previous year.

Earlier, Hyundai Motor Group announced on the 19th that it would reflect quality cost reserves, including compensation costs related to Theta engine defects, in its third-quarter results. The reserves amounted to 2.1 trillion KRW for Hyundai Motor and 1.26 trillion KRW for Kia Motors, totaling 3.36 trillion KRW for both companies.

A Kia Motors official commented on the third-quarter results, saying, "Although large-scale quality costs occurred, we minimized the decline in operating profit through the expansion of high-profit new models and RV sales recognized for their product competitiveness, as well as company-wide efforts to reduce fixed costs. The engine-related reserves were conservatively reflected considering proactive customer protection and potential future increases in quality costs. Excluding these costs, the third-quarter operating profit achieved a level exceeding market expectations through structural improvements."

Sales decreased by only 0.4% year-on-year

Kia Motors’ third-quarter sales (July to September) this year were 696,402 units globally, down 0.4% year-on-year, consisting of ▲136,724 units sold domestically, up 3.2% year-on-year, and ▲562,678 units sold overseas, down 1.3% year-on-year.

Domestic sales increased year-on-year due to stable sales of the K5 and Sorento, along with the full-scale effect of the new Carnival model.

Overseas sales recovered mainly in advanced markets such as the United States and Europe as COVID-19 lockdown measures eased, but emerging markets showed slow recovery, resulting in a slight overall decrease.

By major overseas regions, sales were ▲196,891 units in North America, down 5.5% year-on-year in Q3 ▲128,175 units in Europe, up 4.2% ▲38,023 units in India, up 175.7% ▲63,350 units in China, up 15.1% ▲136,239 units in other markets including Russia, Latin America, Africa/Middle East, and Asia, down 19.7%.

The cost of sales ratio improved by 2.1 percentage points year-on-year to 82.0%, thanks to increased sales of high-profit models.

A Kia Motors official explained, "Despite the easing of lockdown measures in major countries, the impact of COVID-19 continues, leading to an overall decrease in sales. However, sales increased mainly in advanced markets, resulting in expanded market share in key regions."

"Recent focus on major new model launches marks entry into 'Golden Cycle'"

Kia Motors forecasted that global automobile demand is gradually recovering from the negative impact of COVID-19, showing signs of sales recovery. However, uncertainties in business conditions are expected to persist due to the resurgence of COVID-19 and the strengthening of global protectionism.

Nonetheless, Kia anticipates structural improvements enabling mid- to long-term profitability enhancement without being limited to specific models or regions, supported by ▲entry into the ‘Golden Cycle’ with concentrated launches of major new models ▲improved product mix with a significantly higher proportion of high-profit models such as RVs ▲price increases and reduced incentives.

By key regions, Kia plans to promote stable sales centered on new models such as Carnival, Sorento, and K5 in domestic and U.S. markets, and to continue sales growth in India led by new models like Sonet, which ranked first in its segment immediately after launch.

A Kia Motors official stated, "Fundamental corporate restructuring is expected to continue comprehensively through mix improvement driven by strong new model sales, sales recovery in advanced markets such as domestic, U.S., and Europe, successful entry into the Indian market, and company-wide cost reduction efforts."

They added, "We will accelerate sales expansion domestically with new models such as Carnival, Sorento, and K5, tighten the reins on sales recovery in North America and India with high-profit new models, and steadily expand sales of eco-friendly vehicles in the European market."