Hyundai and Kia Will Lose $2 Billion on Fixing Bad Engines

Hyundai’s offsetting much of its earnings with engine repairs, Honda dealers are shaking in their boots because somebody said “direct sales,” and we all just want Nissan and Renault to work this out. All that and more in Tuesday’s Morning Shift for October 18, 2022.

1st Gear: So Many Engines to Fix

That class action lawsuit over Hyundai and Kia’s oil-swilling Theta GDI engines cost the company $2 billion in the third quarter of 2022 alone, the company announced Tuesday. That represents a big chunk of both brands’ quarterly profits, and the funny thing is that Hyundai reckons it wouldn’t have had to spend so much fixing and replacing old engines if you all just bought new cars! Say, why don’t you all just do that?

This is what a “lifetime engine warranty” as a mea culpa looks like in action. Courtesy Reuters:

The costs, of which Hyundai accounted for 1.36 trillion won and Kia for 1.54 trillion won, amount to more than half of Hyundai’s estimated third-quarter net profit and 77% of Kia’s profit, Refinitiv data shows.

The provisions are due to an increase in the number of engine replacement claims as more U.S. customers have opted to drive their old cars over buying a new one amid tight vehicle production caused by a global chip shortage, the South Korean group said in a statement.

Hyundai and Kia, among the world’s top 10 automakers by vehicle sales, recalled nearly 1.7 million vehicles in 2015 and 2017 in one of their biggest recalls in the United States, citing a problem with their Theta GDI engine that raised the risk of crashes.

After the recall, the duo offered an unprecedented lifetime engine warranty as part of efforts to improve their tarnished reputations.

Korea Investment & Securities analyst Kim Jin-woo said the provisions – unlike a recall – were unlikely to have a major impact on the firms’ brand value and credibility, and described the cost as “reasonable” given it factored in the post-COVID trading environment.

The average age of cars on the road rose to 13.1 years in 2022, up by a little more than half a year in 2020, per S&P Global Mobility. The Korean won also happens to be pretty weak versus the dollar these days, which isn’t helping Hyundai out either. On one hand, in a different world, these owners might’ve moved into newer cars already. Then again, Hyundai’s engine woes cover so many models — many of them built as recently as 2020 — that rectifying this was probably always going to be extremely painful for the company. Maybe it should consider building better engines the first time, next time.

2nd Gear: Honda Dealers Don’t Know What to Do About the Sony-Honda Thing

Last week I wrote a story about how the Sony Honda Mobility joint venture looks like an extra puzzle piece in Honda’s larger EV strategy, and how it’s unclear where that piece will fit, if it will fit at all and who might suffer if Honda tries to make it fit.

To that last point: Dealers. Sony Honda wants to skip dealers, and of course Honda dealers in the U.S. don’t love hearing that. From Reuters:

The online aspect of the Sony Honda plan, as well as the lack of details around how the vehicle will be sold and serviced, has raised questions with the Honda and Acura brand dealers. Many nonetheless expect Honda to work through the existing retail network.

“These issues are certainly a concern,” said Brian Benstock, general manager and vice president of Paragon Honda and Paragon Acura in Queens, New York. “The best path forward is with the dealers.”

“We have a role (automakers) can’t replicate,” said Benstock, who also is on the Acura national dealer advisory board and has spoken with Honda officials about the new vehicle. “There’s no way that Honda wants to hurt their existing dealer body.”

Some dealers questioned why Honda would even consider trying to work outside the current U.S. sales network given its national reach. Honda has about 1,100 Honda dealers and 270 Acura dealers.

A Honda spokesperson referred questions about the joint venture to the new company. Sony Honda spokesperson Mai Nagadome said there are still a lot of details to finalize, but selling through the dealers has not been ruled out and customers would feel uneasy without some kind of after-sales service process.

“The cost of continuing to develop (internal combustion engine) products along with EVs and autonomous tech and software for the next generation vehicles is proving to be quite the challenge,” said Peter Hennessy, dealer principal of Atlanta-based Hennessy Automobile Companies, which includes a Honda store.

“I get teaming up with Sony, but it should be done in conjunction with the dealer network, not outside it,” he added.

…says the dealer. I’m not saying cutting dealers out of the equation is going to magically make car buying stress-free or cheaper. (Have you seen the way Tesla has increased prices over the last two years?) However, you can’t blame people for becoming disillusioned with the entire trade, in this era of abhorrent markups and predatory, obfuscatory practices. Honda wants to try this out, and it’s right to, because it’s seen the writing on the wall. For those Honda dealers that still want to sell EVs, I’m sure they’ll be able to pad the Prologue’s sticker to their heart’s content.

3rd Gear: Mobileye Is the Reverse Porsche

Remember how Porsche cemented a landmark IPO in a very tough market late last month? Intel’s autonomous driving unit Mobileye is basically experiencing the opposite of that! From the Wall Street Journal, via Reuters:

Intel Corp is eyeing a valuation that is significantly lower than previously expected for the initial public offering of its self-driving car unit Mobileye, the Wall Street Journal reported on Monday, citing people familiar with the matter.

Mobileye, which was originally expected to land a roughly $50 billion valuation, is now set to target one of under $20 billion and sell a smaller number of shares than originally planned, according to the report.

Intel declined to comment.

The lower valuation underscores the downturn in the market for new listings, with the tech IPO market facing its worst drought in nearly two decades.

Mobileye, which late last month unveiled its filing for a U.S. IPO with plans to list shares on Nasdaq under the ticker “MBLY”, is still aiming for the shares to begin trading on Oct. 26, WSJ reported.

It’s a shame — more money probably would have been the answer.

4th Gear: ‘Quicker,’ Says Fisker, of How it Needs a US Plant

If you don’t have a base of manufacturing in the U.S. and you build EVs, you’re set to have a tough time in the coming years. Fisker has endured a tough time for a long time, for plenty of other reasons that have nothing to do with that — so the Inflation Reduction Act isn’t really helping the situation. It’ll now seek a factory in the U.S. so its SUVs still qualify for the maximum $7,500 federal tax credit. From Bloomberg, via Automotive News:

Fisker Inc. is accelerating the search for a U.S. production site for its Ocean SUV after the White House announced plans to focus electric-car subsidies on those made in North America.

The company is considering a range of options, including buying a factory or extending its partnership with Magna International Inc., CEO Henrik Fisker said Monday at the Paris auto show. The EV startup is on track to start making the Ocean at Magna’s plant in Austria next month, he said.

“I am looking at bringing Ocean production over to the U.S., and we are looking at some opportunities to produce as early as 2024,” Fisker said in an interview. The U.S. policy shift “has definitely made us think to accelerate because we think this might give us an advantage.”

I know it sounds a little ridiculous for Henrik Fisker to suggest his company has an “advantage” of any sort, given the Ocean’s long, long, long road to production. But if he plays his cards properly, he’ll actually might prove right. Think about it — Fisker only has to get one model built here, and its partner Magna is already considering a U.S. location for the same reason Fisker wants one. Fisker also has a deal with Foxconn, Bloomberg reminds us, that took over Lordstown’s old stomping grounds.

So there are indeed ways Fisker can turn this pickle into prosperity. As ever, the question is whether Fisker will be the company to seize the moment. History suggests it’s not a lock.

5th Gear: They Still Need Counseling

Renault and Nissan are still trying to save their marriage without fugitive glue, and this week Renault’s CEO Luca de Meo told Japanese paper Nikkei that he wants to work this out, he really does. I’m inclined to believe Nissan may not be as hopeful. From Reuters:

The relationship between Japan’s Nissan Motor Co and top shareholder Renault SA should be “more equal”, the Nikkei newspaper quoted the French automaker’s chief executive as saying.

“This is not one side losing and the other side winning,” the newspaper quoted Luca de Meo as saying in an interview, which took place in France on Monday.

“Each company needs to do what is best,” he told the Nikkei, adding that that was the spirit of their alliance.

Renault is Nissan’s largest shareholder with 43% while the Japanese automaker owns 15% in its partner.

The two companies said last week they were in talks about a new phase in their partnership that could include Nissan investing in a new electric vehicle venture Renault plans to carve out from its business.

Such a shift could mean the biggest reset in their relationship since the 2018 arrest of longtime executive Carlos Ghosn. Talks so far have included consideration of Renault selling some of its Nissan stake, Reuters has previously reported.

The imbalance in shares the companies own of each other is thought to speak to the heart of Nissan’s discontent. So if de Meo wants Nissan’s vote of confidence and economic and technological support, I think I know a way he might be able to get it. There’s free marriage counseling for you! In return, I ask only that Nissan brings back the IDx and Renault, the Avantime, with no changes in either case.

Reverse: Let’s Go Yankees

This team is going to make me cry this afternoon. And if not then, the Astros will take care of it by the end of the week.