Automakers Hyundai, Kia warn of $2.9 billion hit to earnings over quality woes

Hyundai Motor and affiliate Kia Motors warned of a fresh $2.9 billion provision expense related to engine issues, after years-long quality problems that have tarnished the credibility of the South Korean automakers.

Hyundai Motor Group said on Monday their third-quarter earnings would reflect quality-related costs of a combined 3.36 trillion won ($2.94 billion), of which Hyundai accounted for 2.1 trillion and Kia for 1.26 trillion.

The latest provisions reflect higher-than-expected replacement rates for Theta II GDI engines of old vehicles subject to recalls, as well as growing consumer complaints over other engines not subject to recalls, Hyundai said.

Hyundai and Kia, together the world's No.5 automaker, recalled nearly 1.7 million vehicles with Theta II engines in 2015 and 2017 in one of their biggest recalls in the United States, citing an engine failure that boosts crash risks.

In 2017, US safety regulators began to investigate if the recalls had covered enough vehicles and were done in a timely fashion. That followed concerns reported by a South Korean whistleblower, a former quality official at Hyundai, to the US National Highway Traffic Safety Administration (NHTSA).

Hyundai was being investigated by US prosecutors over whether vehicle recalls were conducted properly, Reuters reported in 2018.

Over the past years, the two firms have earmarked a series of provisions for engine-related issues in the United States and South Korea and to settle US class action litigation.

"Hyundai has repeatedly said it does not see any more costs related to the Theta II engine issues, and the latest recall would deal a fatal blow to Hyundai's credibility," Sean Kim, an analyst at Dongbu Securities said. "I am worried."

He expected Hyundai and Kia to swing to losses for the quarter from July to September, hit by the provisions.

Hyundai Motor closed down 2.3% and Kia Motors ended down 1% before the announcement in a flat wider market.