SEOUL/WASHINGTON — On November 22, 2018, Reuters reported that Hyundai Motor and affiliate Kia Motors were under investigation by U.S. prosecutors over whether their vehicle recalls were carried out properly. The news sent shares in both South Korean automakers lower.
The criminal probe is being handled by the U.S. Attorney’s Office for the Southern District of New York, part of the U.S. Department of Justice, according to a person with knowledge of the matter. That person said it was still unclear whether the inquiry would result in charges, but warned that any criminal case could expose the companies to heavy fines.
Hyundai and Kia, which together rank as the world’s No. 5 automaker, have already faced major recall costs linked to engine failures that raise crash risks. The companies recalled nearly 1.7 million vehicles in the United States in 2015 and 2017, making it one of their largest recall actions in the market.
Shares reacted sharply after the report. Hyundai fell 3.2 percent to its lowest level in nearly nine years, while Kia dropped 4.8 percent. Hyundai Mobis, the parts affiliate, also lost 6.5 percent as the broader.KS11 market slipped 0.3 percent.
The Department of Justice is working with the National Highway Traffic Safety Administration on the matter, the source said. DoJ spokeswoman Nicole Navas Oxman declined to discuss the case. In an emailed statement, she said: “The Justice Department generally does not confirm, deny or otherwise comment on the existence or non-existence of an investigation.”
The companies are also facing a separate NHTSA review into whether the recalls covered enough vehicles and were issued quickly enough. The regulator said it had “active” investigations into engine problems involving certain Hyundai and Kia models and added: “These investigations are ongoing - no final conclusions have been reached.”
Hyundai declined to comment on the SDNY probe. The article also noted that the United States has previously pursued other automakers, including Toyota Motor and Volkswagen AG, with strict penalties in major enforcement cases.
Recall costs and internal criticism ¶
Hyundai and Kia had already set aside about 1 trillion won, or $885 million, in 2017 and 2018 to cover costs mainly tied to engine-related recalls. In the United States, Hyundai recalled 470,000 Sonata sedans in 2015 because of failures in “Theta II” engines, then expanded the action in 2017 to 572,000 Sonata and Santa Fe sport utility vehicles over the same defect, according to NHTSA.
Kia separately recalled 618,160 Optima, Sorento and Sportage vehicles using the same engine in the U.S. market. The source also said Kim Gwang-ho, a Hyundai engineer and company veteran of 26 years, told NHTSA that the automakers should have recalled more vehicles in 2015, citing an internal report.
Nomura analyst Angela Hong said the uncertainty around the U.S. investigations could hurt more than just the companies’ finances. “There are a lot of uncertainties surrounding the U.S. investigations. If charges are filed, this would not only lead to fines, but also hurt their brand image and sales,” she said.
The Reuters report also noted that a U.S. judge dismissed a criminal charge against Toyota in 2017 after the company completed three years of monitoring under a $1.2 billion settlement, and that Volkswagen later paid $4.3 billion in fines in 2017 after admitting to diesel emissions fraud.
At the time, the exchange rate used in the report was $1 = 1,129.4500 won.
