Hyundai, Kia Q3 earnings prospects turn foggy due to huge quality expenses

Hyundai Motor Co. and Kia Corp.’s record-breaking earnings streak will likely snap this quarter as they have decided to reflect the loss reserves worth 2.9 trillion won ($2.05 billion) in total to cover recalls related to the quality defects of Theta 2 GDi engines into its third-quarter income statement.

According to their respective disclosures on Tuesday, the two South Korean carmakers will reflect a combined 2.9 trillion won in loss reserves – Hyundai Motor 1.36 trillion won and Kia 1.54 trillion won.

This is the fourth time after their income statement reflected the loss reserves related to Theta 2 engine quality issues worth 460 billion won in the quarter of 2018, 920 billion won in the third quarter of 2019, and 3.39 trillion won in the third quarter of 2020.

With the reflection, Hyundai Motor and Kia’s record-breaking earnings streak is expected to end.

Hyundai Motor was earlier estimated to have earned record 3.06 trillion won in operating profit with sales of 35.39 trillion won in the third quarter amid an ease in automotive chip shortages and favorable forex conditions, according to Yonhap Infomax. But with the huge loss reserves, its operating profit will reduce to 1.6 trillion won.

Kia also was forecast to report a record result of 2.3 trillion won in operating profit on sales of 22.17 trillion won in the same quarter, but the quality issue will likely cut its operating profit to below 1 trillion won for the first time since the fourth quarter of 2020.

Hyundai and Kia emphasized that the decision was made to better respond to the quality issue from the perspective of customers. A rise in engine replacement and strengthening U.S. dollar also affected the huge amount of reflected costs.

The automobile industry reacts positively to the decision, saying Hyundai and Kia have addressed the quality risk that could last for long.

Hyundai Motor Group made a big advancement in dependability with high scores at J.D. Power’s 2022 vehicle dependability study. Kia ranked top in the annual vehicle quality ranking, Hyundai third, and Genesis fourth.

Hyundai Motor shares closed unchanged at 168,000 won in Seoul trading on Wednesday, and Kia 0.14 percent lower at 69,000 won.

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