Kia Achieves 10.9% Operating Profit Margin Despite Lambda 2 Engine Setback

[Korea Financial Times, Gwak Horyung] On the 25th, Kia announced a one-time quality-related cost of KRW 631 billion for extending engine warranties in North America during the 3rd quarter of this year. As a result, their operating profit for this quarter was KRW 2.8813 trillion. While the operating profit margin of 10.9% maintained a world-class level, it's somewhat disappointing considering it could have been 13% without the one-time cost.

Hyundai Motors, which reported earnings the day before, also took a KRW 320 billion provision for extended engine warranty costs in North America. Their operating profit was KRW 3.58 trillion with an 8.3% operating profit margin. Without these related costs, operating profit would have been KRW 3.9 trillion with a 9.1% margin.

The engines in question are the ‘Lambda 2 engines’ used in vehicles produced in the 2010s. This is a 3000cc high displacement engine that was mainly used in mid-size and larger vehicles. It has now been replaced by a third generation engine, the ‘Smartstream’, and is no longer in production.
The warranty extension covers all 2013-2019 Grand Santa Fe (known as Maxcruz in Korea) models sold in North America for Hyundai Motors. For Kia, it mainly applies to 2014-2017 Cadenza (K7) and Sorento models.

Hyundai Motors explained that "the issue arose from not fully reflecting American consumer characteristics during product development." They explained that Americans prefer using trailer hitches, and they hadn't sufficiently considered the strain this puts on the engine. Their measure only applies to SUVs (Grand Santa Fe) and excludes Genesis sedans.


The reason Kia's costs are nearly double Hyundai's is that they included sedans (K7) in the affected vehicles. Kia only explained that "while sharing the Lambda name, the engine production facilities are different, and the issues are somewhat different."

Both companies emphasized that "there is no possibility of recurrence" regarding this warranty extension measure.
This statement appears aimed at preventing market concerns from spreading, likely due to the nightmare of past 'Theta 2 engine' defects.

From 2015 to 2022, Hyundai and Kia incurred over KRW 8 trillion in costs related to the 'Theta 2' engine. The companies seemed to resolve the situation by implementing a lifetime warranty program for Theta 2 engines in 2020. However, two years later in 2022, additional costs of nearly KRW 3 trillion emerged.

They cited 'difference in experience' as the key distinction between the Lambda 2 and Theta 2 quality costs. With Theta 2, they initially recalled only 2014-2017 models, but costs increased significantly when issues spread to 2018-2019 models. This time, they claim to have set aside sufficient provisions, being extremely conservative internally. A Hyundai official stated, "We've proactively set aside sufficient costs to prevent any recurrence of past issues."

Gwak Horyung (horr@fntimes.com)