Hyundai Motor-LG Energy Solution to Share KRW 1 Trillion Kona Recall Cost in 3:7 Ratio (Comprehensive Report 2)

Agreement on Sharing Up to 1.4 Trillion KRW for Kona EV Recall Costs
Hyundai Motor Estimated to Cover 30%, LG Energy Solution 70%

Kona Electric Car

[Asia Economy Reporters Changhwan Lee, Daeyeol Choi] Hyundai Motor Company and LG Energy Solution have recently reached a broad agreement on the recall costs for the Kona EV (electric vehicle), which was recently decided for recall.

Including the existing battery management system (BMS) update recall, the total cost of the recall due to Kona EV fires is estimated to reach up to 1.4 trillion KRW, with Hyundai bearing about 30% and LG Energy Solution bearing about 70% of the cost.

On the 4th, Hyundai Motor announced a revision of its provisional operating profit for last year from 2.7813 trillion KRW to 2.3946 trillion KRW based on consolidated financial statements. A provision of 386.6 billion KRW related to the Kona EV recall was reflected in the fourth quarter results of last year.

LG Chem, the corporation before the spin-off of LG Energy Solution, also revised its provisional results for last year on the same day, lowering its operating profit from 673.6 billion KRW to 118.6 billion KRW. An additional 555 billion KRW was reflected as recall costs for battery replacement.

According to industry sources, LG Chem had already reflected an additional provision of over 100 billion KRW following the Ministry of Land, Infrastructure and Transport's recall announcement last month. The total provision LG Energy Solution reflected for this recall is estimated to be around 660 billion to 680 billion KRW. The two companies have not disclosed the specific cost-sharing ratio related to battery replacement.

Hyundai Motor previously announced a global recall of a total of 81,701 units of Kona EV, Ioniq EV, and Elec City buses produced from November 2017 to March 2020.

According to the Ministry of Land, Infrastructure and Transport, among the batteries used in these three models, some high-voltage batteries produced in the early period (September 2017 to July 2019) at LG Energy Solution's Nanjing plant in China were found to have a risk of fire due to internal short circuits caused by cell manufacturing defects.

The two companies have been negotiating the cost allocation for the recall until recently and have recently reached an agreement and reflected it in their financial statements.

The provisions related to the recall disclosed in today's announcement amount to about 1.1 trillion KRW. However, based on Hyundai's share, the total recall cost is estimated to be about 1.4 trillion KRW, which is higher than the 1 trillion KRW initially announced by Hyundai.

This appears to be due to differences in the basis on which the provisions were made. Hyundai reflected the provision based on battery sales prices, while LG Energy Solution reflected it based on cost.

Initially, industry insiders expected the tug-of-war over cost burden to continue for some time as the final cause of the Kona EV fires had not been concluded. Some even suggested that litigation might be necessary.

However, both companies are analyzed to have rushed to reach an agreement, as prolonged discussions could lead to a decline in customer trust and damage to brand image.

Hyundai Motor stated, "We will make every effort to ensure swift market action through close cooperation between the two companies," and added, "We will prioritize customer safety and continue to actively pursue customer protection policies and do our best to restore trust in quality."

LG Energy Solution explained, "We plan to actively cooperate with the recall with consumer safety as the top priority," and added, "We have agreed that both companies will share the necessary costs for this."