Kia Mexico Moves Forward Despite Hardball Stance by Trump-Like ‛El Bronco’

Kia refuses to discuss the details, but government officials in Nuevo Leon say Kia agreed to increase purchases from local Mexican suppliers, accept a reduction in the previous 20-year tax exemption to a 95% exemption for five years and let the state off the hook for paying for electricity and water.

Vince Courtenay, Correspondent

June 13, 2016

6 Min Read
Kiarsquos Mexican plant to employ 3000 workers at full capacity in 2017
Kia’s Mexican plant to employ 3,000 workers at full capacity in 2017.

Some call him the Donald Trump of Mexico, and the locals in the northern state of Nuevo Leon have labelled him El Bronco, literally meaning a rough, tough, harsh individual.

But Jaime Rodríguez Calderón, Nuevo Leon’s governor, has managed to chop incentives provided for Kia’s new assembly plant and its affiliated suppliers from about 28% of the total $3 billion investment package to 10.5%, according to reports in Mexico.

Kia refuses to discuss the details, but government officials in Nuevo Leon say the automaker agreed to increase purchases from local Mexican suppliers, accept a reduction in the previous 20-year tax exemption to a 95% exemption for five years and let the state off the hook for paying for electricity and water.

The officials note Nuevo Leon’s training costs are substantial and cover 1,600 workers at the assembly plant and 5,500 at the 15 Korean supplier companies that set up operations to service Kia. Of the total workforce of 7,100, all but 200 of them reportedly are Mexican nationals.

A Kia spokesman does not disclose how many employees now are working in the newly opened plant, but says the number will rise to 3,000 when the facility reaches full capacity in 2017. Including supplier operations, the project will provide employment for 14,000 workers, he notes.

The Kia plant in Pesqueria, Nuevo Leon, came on stream with an initial annual production capacity of 100,000 vehicles, with line speed set at 59 units per hour. The plan is to rapidly expand capacity to 300,000 vehicles annually. About 80% of production is earmarked for export markets, including the U.S.

The first vehicle in production is the C-segment Kia Forte, called the Cerato in some export markets and the K3 in Korea. It will be followed by the Kia Rio in January and the Hyundai Accent in June 2017, according to WardsAuto data.

El Bronco risked putting up a virtual wall in his state that might keep future investors out, some critics say. As soon as he took office in October last year, he tore up the incentives contract with Kia and halted all work on the promised infrastructure the plant badly needed – sewer lines, water delivery conduits, rail spurs to connect the plant with the nearby rail line and paving of the substandard dirt road that runs past the plant.

He demanded renegotiation of the deal and has twisted Kia’s arm mercilessly ever since.

At present, it is necessary to move completed vehicles entirely by truck over Mexico’s rugged road system, because there are no spurs connecting the plant with the rail network.

The whole investment package totals more than $3 billion, including investments by Hyundai Motor Group affiliates and other suppliers in Nuevo Leon to support the Kia operation.

“Fifteen Tier 1 Korean suppliers entered into Mexico with Kia,” a Kia spokesman says.

The area has such a concentration of Korean investment money the locals have colloquially renamed the small city where the plant and most suppliers are located “Peskorea.”

Among Hyundai Group affiliates, Hyundai Mobis has constructed a $418 billion plant in Nuevo Leon that will supply unspecified modules and headlamps. Hyundai Wia invested $371 million to build an engine plant adjacent to the Kia assembly plant, and Hyundai Steel put $44 million into a facility in Monterey, Nuevo Leon, to supply cold rolled steel plates.

Among non-affiliates is Kodaco-Mexico, which constructed a $100 million plant in the neighboring state of Coahuila to supply air conditioners and brake components. Korea's Posco Steel also made investments for new facilities to serve the plant.

Political Intervention

It took intervention by Korea President Park Geun-hye to get Rodríguez Calderón to take a more conciliatory stance with Kia. She put the matter before Mexican President Enrique Pena Nieto during her state visit in April to discuss a possible free-trade agreement between the two nations.

Although Kia and its affiliates have given up hundreds of millions in incentives, the automaker can look forward to a brighter future with the planned infrastructure improvements now back in place.

But the situation had been very serious. Before Mexico’s president leaned on Rodríguez Calderón, Kia reportedly had been threatening to take the matter to the International Center for Settlement of Investment Disputes at the World Bank in Washington for mediation. Some reports suggested the automaker could pull out of Mexico and set up a second plant in the U.S. instead.

When the operation began serial production May 16, Kia Mexico President Seong Bae-Kim told news media that getting to that point was not easy. He said Kia built the plant and put it into production in a record 13 months, despite lack of industrial infrastructure in the area and the worst torrential rains to inundate the region in 30 years.

Kia and Rodríguez Calderón reached their new incentives accord on June 8.

The automaker is refusing comment on the pact, instead putting full focus on the work and the opportunities that are ahead.

“We’re really excited,” a Kia source tells WardsAuto. “The incentives matter is now behind us. It’s a done deal and we’re moving forward.

“It’s a great world-class facility. Our entry into Mexico is pretty spectacular with huge potential. Locally we have already garnered a 3% market share, and we’ll have a 5% share by 2020. We’re opening 22 more dealerships (this year).”

The company spokesman notes Kia is now the ninth best-selling brand in Mexico. The marque delivered 18,280 units in the year’s first five months, on target with the automaker’s 3% market-share goal. For 2016, the automaker is aiming for 45,000-unit sales through the 70 dealers it will have in place by the end of the year. It has set a 5% market-share goal by 2020.

But there still may be headwinds to face.

The local Mexican branch of the steel maker Ternium now is balking and trying to spike plans by Hyundai Steel and Posco Steel to seek an increase in their present cold-rolled-steel import certificates. They have filed for the permit increase in order to meet the longer-term production plans for the assembly plant.

Ternium wants to supply the bulk of the metal, but Hyundai Steel contends it lacks the quality the Kia plant requires.

On another front, although Kia is an outside party to it, the previous governor of Nuevo Leon now is under investigation for buying up the ranch land where the Kia plant is located at dirt cheap prices, then selling it to the state at a huge profit. Nuevo Leon ceded the land free of charge to Kia as the site for its new plant.

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