South Korea’s second-largest car maker, KIA Motors, reported on Tuesday that second-quarter net profit rose 3.4%, as hefty provisions for warranties offset rising exports of pricier cars, the Reuters news agency said.

Kia’s net profit gain was paltry by comparison with a gain of 86% in quarterly profits at parent Hyundai Motor, Reuters added.

“Kia set aside 290.2 billion won ($US246.3 million) to cover warranty-related provisions and expenses during the first half of this year, up 71% from a year earlier, while Hyundai’s provisioning amount remained relatively the same,” Chae Kyoung-sup, a motor industry analyst at Shinyoung Securities, told the news agency.

Kia reported net profit of 186.4 billion won ($158.2 million) for the quarter to June 30, up from 180.3 billion a year ago, Reuters calculations show. Sales for the quarter were 3.6 trillion won, versus 3.11 trillion.

According to Reuters, Kia said it derived more than half its sales from exports in the first half, up from around 44% last year.

Reuters noted that a major selling point for Kia and Hyundai cars has been the generous 60,000-mile (97,000-km) bumper-to-bumper warranty and 100,000-mile coverage for engine and transmission for cars sold in the key US market while European customers get a three-year, bumper-to-bumper warranty.

With the three big US car firms driving a fierce price war on their home turf, Kia’s spending on incentives such as cash rebates stood at about $1,842 per car in the first half, similar to a year ago, Reuters said, citing Goodmorning Shinhan Securities.

Reuters noted that Kia has spent heavily to improve the quality of its cars in a move to catch up with rivals such as Toyota and said nalysts were positive on Kia’s efforts to switch its product line-up from cheap compacts to more expensive vehicles, such as the Sorento sport utility vehicle and Opirus luxury sedan.

Sales could gain more momentum in the fourth quarter on cuts in tax, but ongoing labour woes weighed on performance, Song Young-sun, an analyst at Korea Investment and Securities, told Reuters.

“Sales of larger vehicles went up and Kia is hoping to make up for weak local sales by boosting exports,” Song reportedly said.

Reuters noted that management is in talks with Kia’s union following partial strikes to press for a rise of 11.1% in wages and a shorter work week. Unionised workers at Hyundai recently won a wage hike of 8.6% or 98,000 won a month, besides bonus and incentive payments, the report added.

According to Reuters, Kia said it was close to taking a 1% share of Europe’s annual market of 16 million cars on brisk sales of sport utility vehicles and minivans – it currently has a 0.8% share of the European market now.

“Although our market share is still marginal, we view Europe as an entry market,” Kia spokesman Lee Sang-keum told Reuters.

Kia also said this month it plans a new factory in China with an annual capacity of 400,000 units by 2005, ramping up production to tap a booming market, the report added.

Kia said earlier it planned total investments of 1.25 trillion won this year, up 56% from last year, with more than 800 billion going into research and development, Reuters added.