Engine Failures Cost Hyundai, Kia Nearly $3B

South Korean automaker Hyundai Motor Group warned on Monday that its third-quarter earnings will include a charge of 3.36 trillion won ($2.94 billion) related to provisions for engine failure issues.

Of that total provision, Hyundai will account for 2.1 trillion won ($1.84 billion) and its affiliated company Kia Motors will be responsible for 1.26 trillion ($1.1 billion). Hyundai owns about 34% of Kia.

Hyundai and Kia have now incurred charges of nearly $5 billion in connection with their engine quality problem. Much of these costs are related to the replacement of old engines in vehicles. The matter relates to failures in the Theta II GDI engines that were used in both Hyundai and Kia vehicles and which led to the recall of almost 1.7 million vehicles in 2015 and 2017.

The quality control problem in the engine was determined to raise the risk of crashes. However, in 2017, safety regulators in the U.S. began probing Hyundai to determine if the company had enacted the recalls in a timely manner and if they had recalled enough cars.

It is unclear if Hyundai will have to incur more provisions related to the faulty engines.

"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," said Sean Kim, an analyst at Dongbu Securities in Seoul. "I am worried."

Kim said he expected Hyundai and Kia to record losses for the July-to-September quarter due to the provisions.

The Lemon Firm, a California-based consumer law firm, reported that drivers of vehicles with the Theta engine have suffered engine knocking, excessive oil consumption, engine stalling, engine failure and spontaneous fires.

“California consumers stuck with this unfortunate engine have complained to Hyundai and Kia for years about the incessant problems; to no avail,” Lemon said. “While Hyundai and Kia have applied a series of ‘band-aid’ fixes to the dangerous issues, their customers continue to suffer through a myriad of engine issues.“