What are the implications of the revised South Korean Motor Vehicle Management Act on recalls?
In South Korea, recalls in the automotive industry have been few and far between. This is unlike in the US where product liability issues, class action lawsuits and large fines against automakers have made recalls more frequent. Additionally, the US has a robust investigating agency in the National Highway Traffic Safety Administration, which determines why
and how cars are recalled, while in South Korea the equivalent agency, the Korean Automobile Testing & Research Institute (KATRI), lacks this kind of mandate.
In South Korea, lax measures concerning vehicle safety and the hesitance of manufacturers to recall cars spurred consumers to fight for stronger laws to protect the public since the early 2000s. The intention was for these laws to affect foreign automakers and chaebols, the large, conglomerate family-controlled firms of South Korea alike.
Given this backdrop, the South Korean government has made revisions to the Motor Vehicle Management Act which came into effect on 5 February 2021. This version of the act strengthens enforcement against automakers who do not actively order a recall despite major manufacturing defects in the form of tighter regulations, compensation and punitive damages.
Under the amended law, if carmakers attempt to conceal, minimise or fabricate manufacturing defects, carmakers are obliged to pay a fine of 3% of the company’s total revenue. And if carmakers knowingly delay a recall, they also must pay the same amount, up from 1% stipulated in the previous version of the Act.
Drawbacks to South Korean regulations and systems Act
The Ministry of Land, Infrastructure and Transport (“MOLIT”) is responsible for enforcing the Act which states that if a manufacturer has knowledge of any “defects as failing to meet the safety standards of motor vehicles or safety standards of parts, or as hampering safe operations, the motor vehicle manufacturer or part manufacturer shall, from the date of acknowledging the facts, disclose such defect without delay”. It also stipulates that if these recalls are found to be “reasonable” that “information regarding such recalls shall be disclosed and distributed to the news media”.
However the flaw in this mechanism is that South Korea relies on a self-certification system for ensuring the safety of vehicles. Under this system, carmakers can start to produce and sell vehicles first, while the safety and compliance tests by KATRI which is part of MOLIT are conducted later. If there is a defect that requires a recall, carmakers drag their feet because of the reputational damage it will cause. Another weak point of the Act’s previous version is that the burden is on the customers to prove the products are defective, creating difficulties unless carmakers are willing to disclose information. This situation is unique to South Korea since in the US and other markets, South Korean carmakers actively resolve situations and issue prompt recalls in line with local laws.
A precursor to the 2021 changes to the Act took place in January 2019, when MOLIT passed the “Lemon Law”. Under the law, if a new car is purchased and there are two major or three minor defects found, the consumer can receive a refund within two years of purchase. These changes were made after a series of incidents concerning BMWs in South Korea in 2018 during which vehicles caught fire presumably over a malfunctioning component. Critics pointed out the law is not obligatory for car manufacturers to follow and therefore ineffective. In reality, the law was not applied frequently. There was only a single case of a vehicle being replaced and zero cases of a consumer being refunded under the Lemon Law.
Carmakers’ potential response to toughened laws
While it remains unclear how Korean and foreign makers plan to cope with the strengthened regulations, our analysis suggests that the number of recalled cars will increase going forward.
In an example from June 2020 which might shed light on a potential reaction among Korean carmakers, Hyundai Motor Group asked the Constitutional Court of Korea to review the constitutionality of the Motor Vehicle Management Act. The review was accepted in March 2021. Hyundai specifically wanted the court to review any potential legal ambiguity regarding the requirements surrounding vehicle recalls. This action was in response to recalls related to a particular Hyundai engine.
Hyundai Motor Group flagged particular parts of the Act is as follows.
Motor Vehicle Management Act Article 31-1 (Correction, Etc. of Manufacturing Defects) “Where any motor vehicles or motor vehicle parts manufactured by a motor vehicle manufacturer, etc. or a motor vehicle parts manufacturer, etc. have such defects as failing to meet the safety standards of motor vehicles or safety standards of parts, or as hampering safe operations, the motor vehicle manufacturer, etc. or part manufacturer, etc. shall, from the date of acknowledging the facts, disclose such defect by mail, text message using a mobile phone, etc. without delay, as prescribed by Ordinance of the Ministry of Land, Infrastructure and Transport…”
Hyundai argued that certain terms within the text of the Act, such as the definition of the word “defect”, the idea of what constitutes “hampering safe operations” and the exact meaning of the phrase “from the date of acknowledging the facts” are legally ambiguous and require the court’s evaluation. Without this judicial clarity, Hyundai stated it cannot be claimed that Hyundai has intentionally delayed recalls on its cars.
We note that in its US operations, Hyundai has recalled cars and compensated customers in 2015 and 2016, while concurrently complaining of a lack of legal clarity surrounding these issues in Korea . Also, Hyundai received a fine of USD 81m from the National Highway Traffic Safety Administration for its delay in issuing recalls in the US.
Overall, Hyundai’s different responses to recall issues in the US and Korea stems from the less punitive legal consequences that it might face in Korea. For instance, in the US, Hyundai faced several 2017 and 2018 class action lawsuits, alleging that Hyundai refused to recall vehicles with the Theta II GDI engine, even though the automaker knew the engine was defective. In May 2021, a US federal judge granted final approval to a nationwide settlement valued at USD 1.3 bn.
Increase in auto recalls likely to continue
According to the Korea Transportation Safety Authority, the number of vehicles recalled has steadily increased after it peaked in 2018. While the number of vehicles recalled in 2016 totalled 674,983, it peaked at 2,820,533 in 2018 and stayed at a 2 million vehicles level per year from then.
Stricter punishment according to the 2021 changes could lead domestic and foreign carmakers to pre-emptively resolve recall issues given the harsher penalties they would face.
As of August 2021, the number of vehicles recalled year to date reached 2,244,696, up 38.8% from the same period in 2020. The most recalled domestic brand in August 2021 year to date is Hyundai Motors with 691,518 units, growing almost four times from the same period in 2018 and generally in line with 2020.
Among foreign carmakers, BMW ranked top with 756,972 vehicles recalled year to date in August 2021, up 336% more compared with 173,565 units in the same period in 2020 and already exceeding its full-year figure for 2020.
In the short to medium term, the increase of vehicle recalls in Korea is likely to continue. Over the past two to three years, the number of vehicle recalls has been on a steady rise, due primarily to strengthened recall regulations. Some of the issues for which cars were recalled have been the increase in software-related defects, as well as quality control issues, as shown in the case of Hyundai’s Kona electric vehicle and fuel-cell EV Nexo recall cases.
The rise in the number of recalls is also
attributable to automakers’ voluntary
actions to fix defective parts preemptively
to minimize damage to their reputation.
Based on the latest data released by the
Korea Fair Trade Commission in December
2020, the number of voluntary recall cases
increased by 33% in 2018 (294 cases)
from 2017 (261 cases) and 2019 was in
line with the previous year.