Kia Outperforms Hyundai in Operating Profit Margin Despite Lack of Luxury Brand

As Hyundai and Kia continue to achieve impressive results, it’s noteworthy that Kia, seen as the younger sibling, is outperforming its older brother, Hyundai, in terms of profitability. This is surprising given that Hyundai includes the luxury brand Genesis in its high-end lineup, while Kia competes solely as a mass-market brand.

According to Hyundai and Kia on the 27th, Hyundai recorded an operating profit margin of 9.3% in the third quarter of this year, with sales of 41.27 trillion won ($35.3 billion), and an operating profit of 3.8218 trillion won ($3.27 billion). During the same period, Kia showed an operating profit margin of 11.2% with sales of 25.5454 trillion won ($21.9 billion) and an operating profit of 2.8651 trillion won ($2.45 billion).

Both companies can be considered to have a considerable level just by achieving an operating profit margin of around 10% as manufacturers. Still, it is surprising to see a gap of nearly 2% between the two finished car affiliates.

This is not a phenomenon limited to the third quarter. The operating profit margin in the first quarter was 9.5% for Hyundai and 12.1% for Kia, and in the second quarter, the gap was even more significant at 10.0% and 13.0%, respectively.

Even when looking at the annual performance last year, Hyundai’s operating profit margin of 6.9% fell short of Kia’s 8.4%. Last year, both companies had lower profit margins than this year, as operating profits were cut due to the setting up of sales guarantee reserves in the third quarter.

Comparison of Hyundai and Kia’s operating profit margin. ⓒDailian (Data, each company)

While Kia solely operates in the automobile sector, Hyundai has financial and other business sectors, which could account for some differences. However, even considering this, the situation doesn’t change significantly. If you look at Hyundai’s third-quarter performance by sector, excluding the financial and other sectors, the sales of the automobile sector were 32.312 trillion won ($27.7 billion), and the operating profit was 3.95 trillion won ($3.38 billion), resulting in an operating profit margin of 9.6%. Although slightly higher than the overall performance, it still falls significantly short of Kia.

The two companies share many parts if they are of the same class, using the same platform and powertrain. Therefore, there’s a perspective that Kia benefits from utilizing Hyundai’s research and development (R&D) capabilities.

However, Hyundai and Kia’s R&D organizations are integrated around CTO Kim Yong-hwa, and R&D facilities, including the Namyang Research Institute, are jointly operated. R&D costs are also shared.

In the first half of this year, Hyundai spent 1.6633 trillion won ($1.42 billion) on R&D expenses. Kia used 1.1624 trillion won ($995 million) for R&D expenses. The amount is higher for Hyundai, but the proportion to sales is higher for Kia at 2.3%, compared to Hyundai’s 2.1%. Financial factors do not significantly affect the difference in operating profit margins between the two companies.

Hyundai’s third-quarter sales ratio by class. ⓒHyundai

Kia’s third-quarter sales ratio by class. ⓒKia

The industry sees the key to Kia’s operating profit margin advantage as having a more favorable structure in terms of vehicle mix.

Hyundai and Kia have cited an ‘improved product mix’ centered on luxury cars and SUVs (Sports Utility Vehicles) as the background to their impressive performance in the third quarter and previous earnings announcements. This is because profitability has improved as the proportion of high-priced, high-value-added vehicles has increased.

At first glance, Hyundai, which owns the luxury car brand Genesis, seems to have the advantage in terms of product mix, but this is not necessarily the case when looking at the proportion of each type of car.

Seo Kang-hyun, Hyundai’s Planning and Finance Director (Vice President), said in a third-quarter earnings announcement conference call on the 26th, “The sales ratio of SUVs and Genesis has increased significantly, achieving 54.7% and 5.1%, respectively, which is close to 60% of the total sales ratio.” In last year’s third quarter, Hyundai’s SUV ratio was 50.6%, and the Genesis ratio was 4.9%, so the proportion of expensive cars has increased.

However, Kia’s product mix is better. Kia’s SUV sales ratio reached 68.7% in the third quarter. This is much higher than the combined ratio of Hyundai’s SUVs and Genesis brands.

Kia expects the SUV ratio to increase even more in the future. Jung Sung-kook, Kia’s IR manager, said in a conference call for earnings announcement on the 27th, “The SUV mix has continuously improved, rising from 66.5% in the third quarter of last year to 68.7% in the third quarter of this year, and it is expected to reach close to 70% in the fourth quarter.”

Hyundai has a relatively high ratio of sedans, and even its sedans, including the high-priced Genesis, have not yet fully established their position in overseas markets. However, the recognition of the Genesis brand is increasing in overseas markets such as the United States, and the expansion of the lineup is also continuously taking place along with the exploration of overseas markets. Through such efforts, it is seen that if the Genesis ratio within Hyundai rises to double digits, it can significantly contribute to the increase in operating profit margin.