UPDATE 2-Hyundai Motor eyes major expansion with new plant in China

Wed Mar 26, 2014 1:52am EDT

* Hyundai says to sign deal on Chongqing plant on Thursday

* Hyundai JV may invest 1 trillion won in new factory - source

* Hyundai hopes to start production at plant in early 2016 - source

* Analysts expect Hyundai, Kia to build more plants in China, U.S.

* Hyundai shares jump over 4 pct (Add comments from analysts, company and background)

By Hyunjoo Jin

SEOUL, March 26 (Reuters) - Hyundai Motor Co plans to build its fourth plant in China for about 1 trillion won ($926.48 million) and start production in early 2016, a source said, in its first major overseas expansion in more than two years.

Hyundai and its affiliate Kia Motors Corp are betting the facility in Chongqing will protect their share of the world's biggest car market, which accounted for more than a fifth of their global vehicle sales last year.

"Considering China's future demand growth outlook, we need to build a new plant to maintain our stable market share of 10 percent in China," Hyundai said in a statement on Wednesday.

The move signals the end of a period of consolidation for the world's fifth-biggest automaker, which has been focusing on improving quality rather than expanding capacity in a bid to avoid the sort of recalls that have dogged Toyota Motor Corp .

Analysts expect Hyundai or Kia to consider additional production facilities in the United States, China and other countries to address a capacity shortage and defend market share from rivals such as Volkswagen, General Motors and Nissan Motor, which are aggressively boosting capacity in China.

"They are expected to build more plants in China to keep up with market growth," said Ko Tae-bong, an auto analyst at Hi Investment & Securities.

"I also carefully expect Hyundai to build a new plant in the United States as it is physically impossible to further expand production due to capacity constraints."

Group chairman Chung Mong-koo will sign a preliminary deal on Thursday with the government of Chongqing city, in southwestern China, Hyundai said. Hyundai already has three plants in Beijing with its joint venture with Beijing Automotive Industry Holding Co Ltd.

The plant will bring Hyundai and Kia's total China capacity to 2.3 million vehicles a year from a projected two million at the end of 2014, Hyundai said.

Funds for the facility will come from the joint venture and it will aim to start production in early 2016, according to the source who has direct knowledge of the matter.

"The plan is subject to approval from China's central government ... Hyundai looks to break ground on the factory this year, and expedite it as the project has been delayed," said the source, who was not authorised to speak publicly about the matter.

Hyundai shares jumped 4.5 percent to 243,000 Korean won, their highest level in more than two weeks, beating the wider market's 1.2 percent rise as of 0521 GMT.

CHINA BRIGHT SPOT

The last time Hyundai or Kia announced a new factory project was in late 2011, when Kia unveiled a plan to build a third China facility. That plant will be completed early this year.

China is a bright spot for Hyundai, which has been grappling with lacklustre sales in the United States and Europe.

The Asian giant was the biggest market for Hyundai and Kia last year, which saw their combined sales jump 18 percent to 1.58 million vehicles.

Those sales should rise 8 percent to 1.7 million vehicles this year as the new Kia plant comes online. Hyundai also plans to start production at a new commercial car plant in Sichuan province this year.

Global carmakers including Ford Motor Co and Volkswagen are stepping up investment in China's hinterland, where rising personal income is fuelling car sales.

In 2012, Ford announced it would invest $600 million to make more cars at its plant in Chongqing, and GM unveiled plans to build a $1 billion auto assembly plant in the city.

The focus on Chongqing comes as car markets in China's coastal cities grow increasingly crowded and vulnerable to restrictive government policies.

On Wednesday, China's eastern city of Hangzhou started restricting car sales, joining major cities including Shanghai and Beijing in the fight against pollution and traffic jams. ($1 = 1079.3500 Korean won) (Additional reporting by Samuel Shen; Editing by Stephen Coates)

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