Kia finally announced yesterday (27 August) at a press conference staged in Mexico City that the company will build a new assembly plant in Mexico, confirming reports of the plan. Kia plans to invest USD1 billion in the plant in Monterrey, Nuevo Leon, which is scheduled to complete in the first half of 2016. At the press conference, Mexican government officials said that they anticipated the plant would drive suppliers to invest another USD1.5 billion in the country, reports Reuters. Economy Minister Ildefonso Guajardo said the facility would boost Mexico's output by 13%.
Construction of the plant is due to start in September 2014, according to Kia. The company says that the plant will boost corporate production capacity to 3.37 million vehicles per annum, with a capacity of 1.69 million units at South Korean plants and 1.68 million units at overseas plants. The Mexican plant is being built on a 53.8 million-square-feet site that will also "be home to numerous supplier companies' facilities", Kia said in a statement. The company's statement also noted, "Kia expects the Mexico plant to play a major role in alleviating current global supply issues thanks to its strategic geographic location. Namely, its proximity to the United States will enable the company to better address the ongoing supply shortage situation that has arisen due to the dramatic growth of the Kia brand in the US market. Furthermore, Kia plans to use the plant as a foundation for strengthening the brand's sales presence throughout the Central and South American region, while freeing up Kia's domestic plants to address supply shortage issues in other regions of the world."
Kia’s vice-chairman Lee Hyoung-Keun confirmed the output capacity at the event in Mexico City, alongside Mexican president Enrique Peña Nieto, but the specific vehicles to be produced at the plant have not been confirmed, reports Bloomberg. Automotive press reports have suggested the Forte is likely to be the first product, with some indicating the Sportage sport utility vehicle (SUV) might be under consideration as well.
Significance: Kia's sales are somewhat limited by production capacity, although parent Hyundai is reluctant to add capacity. The added production will enable Kia to supply North American demand with regional production of more vehicles, as well as enable access to Canadian, Latin American and US markets. Kia's move is similar to those of several other automakers in the recent past, particularly in adding production capacity of vehicles that will compete at the lower end of the pricing scale, where margins can be thin and competition fierce. Keeping labour costs down in lower-margin vehicles, while maintaining quality, containing shipping costs, and having free-trade access to as many markets as possible are all project concerns that can be improved with the selection of a Mexican production base.
The additional capacity will eventually enable Kia to incrementally increase global sales and ease some capacity strain, as well as temper the company's dependence on home-market production, where labour is relatively expensive and relations are often contentious. Overall, the new plant is forecast to provide a capacity increase and is not expected to be offset by decreased production elsewhere in the Kia production system. Although the capacity increase could be as high as 300,000 units, it will take some time before the facility reaches that level of output. Kia is forecast to produce 3.3 million units in 2014, reaching 3.6 million units in 2020 and 3.9 million in 2025. The Forte is the name used in the North American, Chinese and Middle Eastern markets, but other names are used for the vehicle in other markets, including the Ceed, Cerato and K3.
The selection of Mexico over Canada or the United States enables access to more markets than would the other two member countries of the North American Free Trade Agreement (NAFTA), while remaining close to the largest of the Western Hemisphere markets, the United States. Although most production exported from Mexico does flow north instead of south, and that is expected to be the case for Kia as well, the option of exports to Europe and Latin America provides some flexibility as demand in various markets tends to shift over time, owing to the cyclical nature of the automotive industry as well as economics and industry trends.
IHS Automotive forecasts that Kia will add production of the C-segment Forte to its Mexican facility first, with the Rio expected to be the second product. The Forte will be added to the new plant during the latter half of its current life cycle, which enables the company to spend the first year or so of production getting the plant ramped up with a known product. This can reduce margins for error and variability as the new plant equipment and staff are ramped up, compared with introducing a brand-new platform to a new facility and workforce. While Mexico does have a skilled automotive base, Kia has selected a state in which there are no other automotive facilities yet. The company may have to spend additional time on training because of this, but it will not be facing as much competition for labour as it would have if it built nearer some of the existing automotive hubs. The next-generation Forte is due to change from the HD platform to the AD platform and arrive in 2018.
We forecast production of the Rio, as the second product at the plant, will begin at the new facility in 2018, as it has a lower profit margin than the Sportage, which some have suggested will be the second product at the plant. The Rio also is likely to have more potential in South American markets because of its smaller size. However, the Sportage is also a platform-mate of the Forte and it remains possible that the SUV be the second vehicle produced at the plant.
IHS Automotive forecasts that the majority of the new Mexican plant's production will be exported to the United States, although other destinations are expected to include Argentina and Brazil. While the capacity of the facility is expected to be 300,000 units per annum, IHS does not forecast production breaking 200,000 units during the forecast period.
