A huge recall announcement on Thursday has come at a difficult time for Korean carmaker Hyundai Motor and its affiliate Kia Motors.

Together the two companies are recalling almost 1.9m vehicles in the US for electronics problems related to brake-light switches and air bags. Coming hot on the heels of a dose of bad publicity over over mis-stated fuel efficiency claims, the latest affair will do the Korean duo no good in the crucial north American market.

The switch recall covers most of the carmakers’ models produced between 2007 and 2011 while Kia’s air bag recall applies to Elantra compacts made over the past two years. The stop-lamp switch malfunction may cause brake lights to not illuminate, the cruise
control to not turn off and other faults that could raise the risk of a crash, the US National Highway Traffic Safety Administration said.

Hyundai and Kia said they were voluntarily initiating the recall to ensure the safety and quality of their vehicles although there have been no reported injuries or accidents related to the malfunctions. They added that the problems did not affect a vehicle’s brake
performance.

However, investors dumped the shares on Thursday. Hyundai tumbled 5 per cent to Won207,000 and Kia’s slid 3.27 per cent to Won53,300, compared to a 1.2 per cent fall in the benchmark Kospi index.

“Although the recall is not for critical malfunctions and the cost for fixing the problems would not be big, they are still burdensome for the companies’ brand image, as they come only six months after the mileage error,” said Suh Sung-moon, analyst at Korea Investment & Securities.

Hyundai and Kia said last November that they had overstated the fuel efficiency of more than 1m vehicles sold in north America. But the issue has not had a big impact on their sales as they quickly offered customers a generous compensation package.

Chung Sung-yup at Daiwa Securities says the latest recall would have a smaller impact on the carmakers’ bottom line than the mileage trouble. He estimates the recall costs at only Won50bn or less than 0.5 per cent of Hyundai’s estimated net profit for this year. “Investors are overreacting to the issues, which are not comparable to Toyota’s past
recall woes,” said Chung.

But most industry watchers agree that the recall comes at a bad time for the automakers when they struggle to cope with a weaker yen and to make improving brand value their top priority. The Japanese yen, which has fallen about 27 per cent against the Korean won since late May last year, is complicating the Korean carmakers’ plan to sell their
vehicles at transaction prices as they try to move away from the low end of the market.

Hyundai and Kia were among the fastest-growing automakers during the global financial crisis but their US sales declined this year due to low inventories and a lack of new cars. Hyundai’s and Kia’s combined sales fell 3 per cent in the US in the first three months of this year, while their combined US market share fell to 8.11 per cent in
March from 9.1 per cent a year ago.

Hyundai and Kia are expecting sales growth of just 4 per cent this year, which would be the slowest growth for a decade, as they shift their focus on quality and brand value rather than volume growth.

Chung at Daiwa believes the slowing US sales growth is mainly because of constrained capacity, rather than the negative effects of the weaker yen. Hyundai has faced growing calls for capacity expansion in the US, although its Alabama factory and the Kia plant in Georgia run three daily assembly shifts to maximise production. Hyundai says
it has no immediate plans for capacity expansion in the US.

“The company will eventually have to increase capacity to drive growth in the US,” he says. “I’m afraid that this recall issue may make them more hesitant about expanding capacity, due to worries about possible quality lapses.”

Related reading:
Hyundai: missing out on the rally, beyondbrics
South Korea: In search of a new model, FT
Hyundai and Kia face suits on fuel error
, FT

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