What lessons can electric vehicle manufacturers learn from Hyundai’s costly recall?

On 24th February, Hyundai announced the recall of over 82,000 electric vehicles, at a cost of 900 million USD, in what has been deemed the most expensive recall of electric vehicles to date. The recall was made after a fault related to the battery pack caused vehicle fires, which raised concerns over customer safety. Despite this, it seems plausible that Hyundai may suffer less financial and reputational damage than first thought. However, other manufacturers should ensure rigorous procedures are followed as they may not prove as fortunate.

Hyundai have recalled 3 different models, at an average cost of 11,000 USD per vehicle, for battery pack replacement. The Kona, Ioniq and Elec City buses all feature electric vehicle (EV) battery packs made by LG Chem’s factory in Nanjing, China. Hyundai have stated that the battery cells, built between 2017 and 2020, were prone to short-circuiting, a claim that has since been disputed by LG Chem. Whilst the party at fault is yet to be determined, it became clear that upgrading the battery management software was an insufficient solution, as noted by the South Korean Transport Ministry.

The high cost of this recall can be seen as a function of the current battery prices for manufacturers. A BloombergNEF survey estimates average EV battery cost to be 137 USD/kilowatt hour which, at this price, is estimated to account for 30% of the total car cost. Whilst battery components remain expensive relative to total car cost replacing them in a comprehensive recall, will prove expensive.

Given the joint investigation into the fault is still pending, the financial implications for Hyundai are unknown. If LG Chem were correct in their assessment that Hyundai misapplied its fast-charging logic, Hyundai would bear the majority of the recall expense. This expense, which amounts to almost half of Hyundai’s net income for 2020, will be reflected in Hyundai’s Q4 results. However, evidence gathered by the South Korean Transport Ministry suggest this worst-case scenario for Hyundai is unlikely. They have found cell defects in LG Chem’s factory, which suggests that LG Chem may have to contribute significantly to recall costs. If this is the case this would limit the extent of the financial burden on Hyundai. Analysts, including Kim Dong-ha at Hanwha Investment and Securities, see this outcome as likely and believe impact on the stock price will be limited. This suggests that the impact on Hyundai financially may be less than first thought.

Additionally, it seems possible that negative impact on Hyundai’s brand reputation may also be limited. Their actions have been interpreted as proactive by analysts, who lauded their comprehensive and swift response. Kim Dong-ha said, “this recall, which pre-emptively responded to customer safety even with a low possibility of fire and financial burden, is positive for strengthening the EV brand.” Moreover, resisting calls from LG Chem to limit the scope of the recall, to only South Korean cars, may pay dividends in terms of maintaining the confidence of consumers. Ultimately, if consumers accept that in the early stages of EV manufacturing there will be faults, then it appears Hyundai’s reputation may emerge relatively unscathed, and perhaps even enhanced.

However, in spite of the possibility for Hyundai to emerge with limited damage, manufacturers should be alerted to the potential financial risks of rollouts. Other car brands have recently recalled cars due to battery-related issues. BMW AG and Ford Motor Company recalled electric, or plug-in hybrid, vehicles in late 2020. Additionally, General Motors Company have recalled 69,000 Chevrolet Bolts due to vehicle fires caused by battery issues. Whilst these recalls did not necessitate hardware replacement, this may not always be the case. EV manufacturers would be wise to continue to work closely with battery companies to ensure safety and durability to avoid the potential for significant financial detriment. Mike Held, director of Alix Partners, echoed this with his warning that automobile companies must be prudent if they want to avoid the costly battery recalls of the consumer electronics industry.

Moreover, despite Hyundai’s reputation potentially being unscathed, automobile firms must ensure that they avoid the need for recalls, as there is no guarantee that brand damage will not be incurred. EVs are, in relative terms, in their infancy and manufacturers are vying for the confidence of consumers. It is possible that a future recall due to battery pack issues, which remains eminently feasible, may impose long-term damage on brands. Tesla, in particular, who themselves had two vehicles catch fire due to battery issues in 2020 ought to be especially rigorous, in light of their growing relationship with LG Chem.

Ultimately, Hyundai’s recall, on the assumption that the fault of the battery pack problems lies, at least in part, with LG Chem, seems unlikely to cause them significant brand or financial damage. However, other EV firms should be warned by the potential risks to finances and brand reputation. Whilst under constant pressure for a fast rollout of EVs by investors and governments alike, they ought to ensure that battery technology and safety is prioritised. This will ensure that existential threats to their business, caused by battery recall and replacement, remain unlikely.

By Angus Lovatt

Sector Head: Daniel Aliwell