Hyundai Motor hit by triple burden of tariffs, incentives and fire-related output loss

Hyundai Motor absorbed a triple burden in the second quarter — tariffs, rising incentive costs and production disruptions from a parts supplier fire — that weighed heavily on profitability. The combined impact of the three factors disclosed during the company's earnings conference call, including 900 billion won ($608 million) in tariff payments, totaled 1.5 trillion won.

Hyundai Motor said Thursday it paid approximately 900 billion won in tariffs in the second quarter. The company paid a similar amount in the first quarter, bringing the cumulative tariff burden for the first half to roughly 1.8 trillion won.

The company expects the year-on-year earnings impact of tariffs to ease in the second half, as the comparison base has already risen — tariff payments reached approximately 1.8 trillion won in the third quarter of last year and 1.5 trillion won in the fourth quarter.

Intensifying sales competition also squeezed profitability through higher incentives. Hyundai Motor said the net increase in incentives — after offsetting the effect of vehicle price increases — amounted to approximately 400 billion won.

Lee Seung-jo, executive vice president and head of Hyundai Motor's finance division, said the company expanded incentives to counter the repeal of the US Inflation Reduction Act and the aggressive push by Chinese electric vehicle makers into the European market. He added that incentives were also deployed to clear aging model inventory ahead of new vehicle launches in the second half.

A fire at a parts supplier disrupted not only output but also the sales mix toward higher-margin vehicles. A blaze at a supplier of engine valves to domestic factories cut off parts supply, causing production delays for high-value models including Genesis and Palisade.

Hyundai Motor shifted production to other models and developed alternative parts, normalizing supply by May, but the reduced output of high-margin vehicles worsened the model and powertrain mix. The company estimated the resulting decline in operating profit at approximately 200 billion won.

On the positive side, stronger hybrid sales contributed roughly 400 billion won in profitability improvement. Hyundai Motor sold 188,000 hybrid vehicles in the second quarter — a quarterly record — with hybrids accounting for 18.9 percent of total sales, also an all-time high.

Rising raw material costs driven by the Middle East war and inflation added further pressure. Higher prices for plastics and other key materials pushed second-quarter costs up by approximately 400 billion won.

Hyundai Motor acknowledged that parts supply disruptions and weak European sales could prevent it from meeting its annual sales target. The company has not formally revised its sales guidance, however, and plans to make up as much of the lost volume as possible by ramping up production in the second half.

Lee said the company is working to meet its annual guidance but that, given current projections, it may fall slightly short.

He added that this does not mean the company intends to change its annual sales target at this point, and that it expects to share more precise figures with the market at the CEO Investor Day scheduled for late August.

Even as the sales outlook has become uncertain, Hyundai Motor maintained its full-year operating profit margin guidance of 6.3 to 7.3 percent. The strategy is to secure profitability by increasing the share of high-value models such as hybrids and Genesis vehicles, even if overall sales volume falls short.

The company noted that its operating profit margin improved from 5.5 percent in the first quarter to 5.8 percent in the second, and said it expects the improvement to continue in the second half. Lee said the company believes it can achieve sufficient year-on-year growth in the third quarter and expects the same in the fourth.

Hyundai Motor acknowledged that hitting its original European sales target will be difficult. Wholesale sales in Europe fell 10.9 percent year on year to 144,000 units in the second quarter, hurt simultaneously by the aging of key models such as the Kona and Tucson and the aggressive expansion of Chinese electric vehicle makers.

Lee said that given current market conditions in Europe, achieving 100 percent of the company's target is quite difficult.

Hyundai Motor plans to launch the compact electric vehicle Ioniq 3 in Europe in the second half and aims to sell more than 20,000 units. The company said it will prioritize price competitiveness to counter Chinese EV rivals while balancing profitability and pricing through cost reductions.

However, the launches of the Ioniq 3 and the new Tucson are concentrated in the fourth quarter and year-end, limiting the sales recovery effect this year. Hyundai Motor expects European sales to improve in earnest from next year, when new models can be sold throughout the full year.

The low profitability of electric vehicles was also flagged as a challenge. Because battery and electrification components are more expensive, warranty provisions — set aside at the time of sale to cover future free repairs and parts replacements during the warranty period — are inevitably larger for EVs than for internal combustion engine vehicles, even when the same provisioning rate is applied.

Hyundai Motor plans to reduce EV quality costs through battery remanufacturing, partial repairs and expanded over-the-air software updates using its vehicle software platform Pleos.

Regarding the remaining stake in Boston Dynamics, the company said SoftBank has exercised its put option, and that each Hyundai Motor Group affiliate is reviewing options for acquiring the stake through internal procedures.

Koo Ja-yong, executive vice president in charge of investor relations at Hyundai Motor, confirmed that SoftBank exercised the put option earlier this month and said that, as each shareholder is currently deliberating carefully, there is nothing further to add at this time.

Hyundai Motor also said it will continue buying back preferred shares to narrow the price gap between preferred and common stock. The company said it purchased roughly 20 to 25 percent more preferred shares than common shares during its first-quarter buyback. Specific details on the scale of future buybacks and shareholder return policy are to be announced at the Investor Day in late August.

Meanwhile, Hyundai Motor posted total second-quarter sales of 49.22 trillion won, up 1.9 percent year on year and a record high for any quarter. Operating profit, however, fell 20.8 percent to 2.85 trillion won, and the operating profit margin declined 1.7 percentage points to 5.8 percent from 7.5 percent a year earlier.

Global wholesale sales dropped 6.9 percent to 992,000 units, weighed down by parts supply disruptions and lower sales in the Middle East. Net profit for the period fell 11.1 percent to 2.89 trillion won. Hyundai Motor will pay a second-quarter dividend of 2,500 won per share on both common and preferred stock.