Most of the geometries in KML are stored in lat/long coordinates. However, the Z values are stored in meters, which are much smaller than the degrees used by X and Y.
If you attempt to view the lat/long 3D data in Data Inspector, the Z values will be much larger than the X and Y, making it appear to be a long thin stick. Please use a CsmapReprojector to convert to a projected coordinate system for viewing in DI, or writing to OBJ.
Thank you for your answer @DaveAtSafe.
The Z values seems to be correct. For example one of the KML output features has minimum extends of 24.9894137996254, 60.293148440891, 20.374 and maximum extends of 24.9894889811011, 60.2931722656237, 23.704 but still shows up as a long thin stick when viewed in DI.
The KML writer also seems to automatically re-project the coordinate values to LL84 system (according to the log), if any other re-projector transformer is not used.
I tried the CsmapReprojector but it did not help at all.
When i converted the KML file to OBJ, re-projecting the data back to the original coordinate system with the CsmapReprojector helped though, and atleast the obj file looks fine now.