UPDATE 4-South Korea's Kia to build new vehicle assembly plant in Mexico

Wed Aug 27, 2014 9:01pm EDT

(Add comments from Kia, suppliers)

By Dave Graham and Luis Rojas

MEXICO CITY Aug 27 (Reuters) - South Korean automaker Kia Motors Corp has earmarked $1 billion to build a vehicle assembly plant in Mexico, and President Enrique Pena Nieto said on Wednesday he expects the plant will spur investments by suppliers of another $1.5 billion.

The plant, with a capacity to build 300,000 vehicles a year, will be located in the state of Nuevo Leon and should open in the first half of 2016, Kia said.

"This investment will trigger others, those of their suppliers. We estimate that suppliers will invest another $1.5 billion," Pena Nieto told an event in Mexico City.

A slew of Korean suppliers are expected to invest in a supply network for the plant. Hyundai Mobis plans a module factory in Mexico, while Mando Corp, which makes parts for steering, braking and suspension systems, is considering a plant there, spokesmen at those companies said.

Economy Minister Ildefonso Guajardo said the Kia facility would boost Mexico's auto output by 13 percent.

The Kia plant marks the latest in a series of major investments by global automakers as they seek to take advantage of Mexico's growing industrial base, low labor costs and tariff-free access to the U.S. market.

Last month, German luxury car maker BMW announced a $1 billion Mexican plant investment. So far this year, Mexico has attracted around $10 billion in auto sector investments.

Rolando Zubiran, secretary of economic development for Nuevo Leon, said he was confident the Kia plant's capacity could later be expanded beyond 300,000 units, depending on demand.

One person with knowledge of the negotiations prior to the announcement said the plant could pave the way for South Korea and Mexico to resume stalled bilateral free trade talks.

Kia plans initially to produce the Forte compact and Rio subcompact at the plant, people in South Korea close to the talks said. Kia is also considering adding the Sportage sport utility vehicle.

The plant will help Kia meet rising demand in both North and South America and reduce its reliance on exports from its home market, where high labor costs and a strong currency have eroded cost-competitiveness.

Vehicles built in South Korea made up 57 percent of Kia's global sales last year, compared with 38 percent for sister company Hyundai Motor Co.

"We decided to build a Mexico factory because it is inevitable for us to venture into new markets to secure future growth engines and survive global competition," Kia said in a statement.

Kia said that high import tariffs have curbed its vehicle sales in Mexico and other South American countries, while it is grappling with a vehicle shortage in the U.S. market.

Kia's U.S. assembly plant in Georgia, which produces the Optima sedan and Sorento SUV as well as Hyundai's Santa Fe SUV, is running at full capacity.

Kia's U.S. vehicle sales rose 7 percent this year through July to 349,722, benefiting from demand for crossovers like the Soul and Sportage, and outperforming Hyundai's 1 percent gain and the wider market's 5 percent rise. (Additional reporting by Hyunjoo Jin in Seoul; Editing by Simon Gardner, Tom Brown, Leslie Adler and Stephen Coates)