Maximum Cost at KRW600.0bn
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
HMC to pay for recall with possibility of exercising right to indemnity
The Hyundai Kona EV fires could cost HMC approx. KRW60.0bn (assuming a 10% battery replacement ratio). The company will initially pay for the cost and then may choose to exercise its right to indemnity against battery manufacturers/battery packaging companies depending on who is responsible.
Recall for total of 77,000 vehicles
According to the Ministry of Land, Infrastructure and Transport, damage in the car’s battery separators was the cause for the fires. The no. of vehicles to be recalled will total 77,000 at home and abroad. HMC will conduct a recall of 25,564 vehicles sold domestically (manufactured between Sep 29, 2017 and Mar 13, 2020). Also, Hyundai Motor America in the U.S. filed for a voluntary recall of around 11,000 EVs at the National Highway Traffic Safety Administration (Hankook Ilbo, Oct 10). About 37,000 vehicles will be recalled in Europe and another 3,000 vehicles in other countries. The recalls will be executed in the same manner across markets: the battery management system will be updated and dysfunctional batteries will be replaced. Monitoring will be regularly conducted, with warning signals to be automatically sent to drivers and HMC. Also, battery charging and vehicle ignition will be suspended if any glitches or abnormalities are detected. Car owners who have repaired damage associated with batteries can file for reimbursement.
Maximum cost at KRW600.0bn; cost could be distributed across responsible parties
The maximum cost to be initially booked by HMC could reach as much as KRW600.0bn, but not all batteries will be subject to replacement. Some expenses should be passed onto battery manufacturing and assembly companies. Assuming a battery price of KRW120,000 per kwh, battery replacement cost per EV would total KRW7.68mn (64kwh x 120,000). If all 77,000 vehicles were required battery replacement, as much as KRW600.0bn in costs will be incurred (KRW7.68mn x 77,000 units plus miscellaneous costs). If only 10% require replacement, the cost will be around KRW60.0bn. HMC will initially pay for the recall and then exercise the right to indemnity with related parties depending on where the fault lies. Kona EV battery cells are supplied by LG Chem, and the packaging is provided by HL Green Power (Hyundai Mobis/LG Chem stakes at 51%/49%). The battery management system is supplied by Hyundai KEFICO (HMC wholly owned subsidiary), and Hyundai Mobis is responsible for assembling the battery packs into the system.
Stock could price in deterioration of brand value
According to the National Automobile Dealers Association in the U.S., the degree of damage to brand value depends on (1) the frequency of media coverage (often associated with no. of fatal injuries), (2) the quality-related premium that the brand receives and (3) the version of the car model. Fortunately, the Kona EV issue has not resulted in any injury or death. However, the Kona EV was distinguished as North American Car of 2019 and was launched only two years ago. After confirming liability, HMC stock could price in the deterioration of brand value.