UPDATE 1-South Korea's Kia Motors plans first plant in Mexico-sources

Mon Jun 2, 2014 2:37am EDT

* Carmaker picks Monterrey, Mexico for new plant - source

* Needs 21 months to start production after groundbreaking - source

* New factory will build small vehicles - source

* Capacity set at 300,000 vehicles a year - source

* Carmaker mulling means to solve U.S. supply shortage - spokesman (Add comments from sources, background)

By Hyunjoo Jin

SEOUL, June 2 (Reuters) - Kia Motors Corp plans to break ground soon on a new plant in Mexico, two sources familiar with the matter said, a further sign that the company and its affiliate, Hyundai Motor Co, are easing an unofficial moratorium on capacity growth.

The plant, to be built in Monterrey, will have a capacity of 300,000 vehicles and initially produce two small cars, one of the sources told Reuters. The facility would help meet demand in the United States, where Kia's lone plant runs at full speed.

The sources declined to be identified because the plans are not yet public. Asked about a new factory in Mexico, a company spokesman told Reuters Kia is considering various options to resolve capacity constraints in the United States, but no decision had been made.

About two years ago, Chung Mong-koo, chairman of Hyundai Motor and its Kia affiliate, unofficially halted new capacity, worried that the South Korean group risked running into the kind of quality issues that dogged Japanese rival Toyota Motor Corp when it grew too aggressively in the 2000s.

The Kia spokesman declined to comment on whether Chung had eased his ban on building new factories.

Five people familiar with the group's plans told Reuters early this year that Hyundai and Kia were again looking to invest in new manufacturing capacity, running feasibility studies in promising markets such as Mexico. In March, Hyundai said it planned to build a new plant in Chongqing, in southwestern China.

"Hyundai and Kia are now more flexible with building new plants as their global manufacturing capacity has reached limits," said Suh Sung-moon, an auto analyst at Korea Investment & Securities. "Without new factories, the duo is expected to lose market share in 2016 for the first time in over a decade."

Hyundai and Kia, which together rank fifth in global car sales, are under pressure from a firming local currency which erodes its earnings, and suffer from recurring industrial disputes and high labour costs at home.

Kia has a factory in the U.S. state of Georgia, which produces the Optima mid-sized sedan and the Sorento sport utility vehicle (SUV) as well as Hyundai's Santa Fe SUV. Hyundai has one factory in Alabama.

Both plants are running at full capacity and are unable to keep up with demand in a recovering U.S. market, company executives have said.

The plant in Monterrey would be Kia's first in Mexico and production would begin about 21 months after groundbreaking, one of the sources said. (Editing by Tony Munroe and Matt Driskill)