South Korean Automotive
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 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
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
Stricter punishment according to the 2021
changes could lead domestic and foreign
carmakers to pre-emptively resolve recall
issues given the harsher penalties they
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.