Hyundai, Kia face profitability dilemma as high EV sales squeeze margins

Hyundai Motor and Kia are selling more electric vehicles (EVs) in Korea and Europe, but the shift is weighing on profitability as the low-margin vehicles make up a larger share of sales.

The profitability dilemma isn't new — it also made global automakers including Honda and General Motors scale back their EV ambitions.

Hyundai Motor and Kia posted record quarterly revenue in the second quarter, with Hyundai Motor reporting revenue of 49.2 trillion won ($33.5 billion) and Kia posting revenue of 33 trillion won. Despite record sales, Hyundai Motor's operating margin in the second quarter was 5.8 percent, down from 7.4 percent a year earlier. Kia's fell from 9.4 percent to 8 percent.

The margin decline is largely attributed to a worsening product mix, with lower-profit vehicles accounting for a growing share of total sales and eroding overall profitability.

EVs accounted for 24.5 percent of Kia's domestic sales in the second quarter, up from 11.9 percent a year earlier. In Western Europe, EVs made up 34.7 percent of Kia's sales, up from 19.5 percent during the same period. Globally, EVs made up 13.2 percent of Kia's sales, up from 7.4 percent a year earlier.

In general, profit margins are highest for hybrid vehicles, followed by internal combustion engine vehicles and then EVs.

In the U.S. market, internal combustion engine vehicles generate profit margins of around 10 percent, while EVs only have a 2.5 percent margin, according to Boston Consulting Group. Hybrid vehicles also reportedly generate margins roughly 1.5 times higher than those of internal combustion engine vehicles.

One reason for the low profit margins is that EV makers have yet to fully pass on the cost of expensive high-capacity batteries to consumers through higher vehicle prices. Discounts, subsidies and other incentives aimed at boosting EV sales are also hurting profitability.

"Incurring substantial costs to compete with Chinese automakers would be inevitable as the share of EV sales in Europe rose sharply," said Kim Gui-yeon, an analyst at Daishin Securities.

Although Hyundai Motor currently has a smaller share of EV sales than Kia, analysts say profitability pressure could intensify as it expands its EV lineup.

Hyundai Motor plans to launch the compact Ioniq 3 in Europe in the second half of this year as part of its push into the market. Profitability could come under further pressure if the already thin margins on compact vehicles are squeezed by price competition with Chinese automakers.

Rising warranty provisions are another factor weighing on profitability. Automakers set aside reserves in advance to cover warranty repairs, and the higher repair costs associated with EVs increase that financial burden as their share of sales grows.

Other global automakers are facing similar challenges.

Honda previously announced it would scale back its EV business, saying it loses money on every electric vehicle it sells. Volkswagen, Europe's largest EV maker, has also said EVs have been weighing on operating profit since last year. Volkswagen's operating profit fell 12 percent in the first half of this year from a year earlier, leaving it with an operating margin of just 3.8 percent.

Hyundai Motor Group plans to offset the pressure in the short term by increasing sales of higher-margin hybrid vehicles in markets including the United States, while improving EV profitability over the longer term.

"EV incentives and price adjustments are short-term defensive measures to counter Chinese competitors," a Kia official said. "We will narrow the margin gap with hybrid vehicles by improving cost competitiveness and production efficiency."

BY NAM YOON-SEO [lee.taehee2@joongang.co.kr]