Kia: All systems go in Mexico

Kia Motors Corporation will build a new assembly plant in Mexico and will invest US$1 billion in facilities in Monterrey, Nuevo Leon, scheduled for completion in the first half of 2016.

Mexican government officials expect the plant would drive suppliers to invest another US$1.5 billion in the country. Economy Minister Ildefonso Guajardo said the facility would boost Mexico's output by 13%.

Construction of the plant starts next month, 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, but specific vehicles to be produced at the plant have not been confirmed.

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.

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 lately, 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 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 US allows 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 US.

Although most production exported from Mexico flows north rather than 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.

Forecasts suggest 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 has 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.

Some forecasts suggest 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.

Forecasts point to the majority of the new Mexican plant's production being exported to the US, although other destinations are expected to include Argentina and Brazil.

While the capacity of the facility is expected to be 300,000 units a year, it is unlikely that production will break 200,000 units within the next five years.