Kia makes $1 billion bet on car factory in Mexico

Kia Motors is investing more than $1 billion to build a plant in Mexico as Korea’s second-largest automaker shrinks its dependency on local production.

The automaker said yesterday it signed a contract with the Mexican government at the Technological Museum of the Federal Electricity Commission in Mexico City.

Enrique Pena Nieto, Mexico’s president; Rodrigo Medina de la Cruz, governor of Nuevo Leon; and Lee Hyoung-keun, vice chairman of Kia, were at the signing ceremony.

The plant will be built on 500 hectares of land in Pesqueria, near Monterrey in the state of Nuevo Leon, and will have an annual capacity of 300,000 vehicles. Kia aims to produce compact cars from the facility starting in 2016.

This will be Kia’s sixth overseas plant. The affiliate of Hyundai Motor Group has three plants in China, one in Slovakia and one in the U.S. state of Georgia. Once the Mexico plant is completed, Kia’s total production capacity will go up to 3.37 million units, with overseas production accounting for 1.68 million units.

“Since November 2011, Kia has had no plans for new plant construction, so insufficient production capacity was expected from 2016, but the Mexico plant reinforces its long-term momentum,” said Seo Sung-moon, a researcher at Korea Investment & Securities. “If the Mexico plant goes into full production, Kia’s overseas production will exceed domestic production from 2017.”

Kia is following other global automakers that are building plants in Mexico.

Last month, German premium automaker BMW said it will invest $1 billion to build a new luxury car factory in the state of San Luis Potosi, which will start production in 2019. A week earlier, Daimler AG and Renault-Nissan Alliance announced that they would jointly invest $1.6 billion to build a new plant in Aguascalientes. It will produce compact models for Infiniti and Mercedes-Benz.

Kia said it decided to set up a production base in Mexico to explore new markets.

“Mexico’s annual demand is 1 million units and has high potential to grow, but because of a 20 percent tariff, we couldn’t sell our products,” said a company spokesman. “In addition, Mexico has relatively low wages and high productivity, free trade agreements with some 40 countries, and a good geographic location for access to global markets.”

Kia is also counting on a boost in exports from Korea as a result of the new plant. Under Mexican law, if a company runs a plant in Mexico, imported products equivalent to 10 percent of the locally manufactured volume are exempt from tariffs. Since Kia’s new plant will have an annual capacity of 300,000 units, up to 30,000 vehicles from Korea can be shipped to Mexico without tariffs.

Industry insiders believe Kia will produce compact models such as the Forte and Rio at the Mexico plant to target Latin America customers. However, the company said that it has long-term plans not limited to small cars.

“With the Mexico plant, we plan to reinforce our sales and after-sales networks in Latin America and improve our brand image,” Kia said in a statement. “We are also planning to export to Latin America midsize or large-size sedans.”

Kia claims the decision will affect the entire local automotive industry as more jobs will be created. Suppliers will benefit as well, it said.

“Some 70 percent of the facilities for the Mexico plant will be Korean-made facilities,” Kia said. “We will also expand investment in local facilities for the export of locally produced auto parts.”

Industry observers said the decision is also part of Kia’s effort to minimize the risks of a strong Korean won and labor disputes in Korea. While its competitors’ overseas production account for as much as 75 percent of their total production, Kia’s production only accounted for 43 percent as of last year.

Overseas production by Kia’s bigger affiliate, Hyundai Motor, accounts for 61 percent of its total production.

Kia already saw poor earnings in the second quarter due to the strong Korean won. In the April-June period, the automaker had an operating profit of 769.7 billion won ($758 million), down 31.7 percent from a year earlier.

“Due to our business structure, in which exports account for 75 percent of our locally produced cars, the exchange rate of the Korean won against the U.S. dollar is a significant factor and our profitability decreased,” the company said.

Analysts say Kia’s heavy dependency on local production makes it vulnerable to its union’s industrial action.

Along with workers at Hyundai, the Kia Motors union at the Gwangju plant yesterday conducted a 12-hour strike after wage negotiations broke down. The union has threatened it will also boycott work on weekends.

Kia’s union conducted a four-hour strike last Friday that resulted in 22 billion won in lost production, according to the company.

According to data from the Korea Automobile Manufacturers Association (KAMA), Kia was the No. 1 car exporter this year after shipping 772,559 vehicles through July, about 50,000 units more than Hyundai.

This is the first time Kia has topped automobile exports since KAMA started collecting data in 1994.

Yesterday, Kia also released its third-generation Sorento midsize sport utility vehicle. The company aims to sell 270,000 units of the Sorento next year.

BY JOO KYUNG-DON [kjoo@joongang.co.kr]