Kia's Possible U.S. Plant Offers Currency Risk Benefit

Seoul August 16, 2005; Kim So-hyun writing for the Korea Hearald reported that the feasibility of Kia Motors Corp.'s possible U.S. production plant drew attention after a candidate state was officially mentioned by the nation's No. 2 carmaker last week.

Kia, lagging far behind its affiliate Hyundai Motor Co. in U.S. sales, is expected to consider building a production plant near Hyundai's Alabama factory in an effort to cut currency risks, according to industry officials.

Mississippi Governor Haley Barbour visited Hyundai Automotive Group Chairman Chung Mong-koo at his Seoul headquarters a week ago to attract the company's investment in the southern state.

According to the group, Barbour proposed a deal as beneficial as the one Hyundai Motor had signed with the state of Alabama.

Hyundai Motor, Korea's largest carmaker which opened its U.S. plant in May, was provided with 2.1 million pyeong of land free of charge, and an exemption from corporate and regional taxation. The state of Alabama had also mended the plant site, built gas, electricity and sewage systems and enlarged the pathway for the $1 billion facility named Hyundai Motor Manufacturing Alabama.

Although there is enough room for another factory next to Hyundai's plant in Montgomery, Alabama, industry watchers say the possibility of building Kia's factory there is very low.

This is simply because having two or more factories in a single state could expose the carmaker to various risks in terms of taxation as U.S. states have different legal systems. Japanese Toyota Motor Corp. runs separate production facilities in Kentucky, Indiana and West Virginia.

"In order to make use of HMMA's auto parts supply channel and logistics network, it would be better for Kia to operate a factory in a nearby state," said Mirae Asset Securities Co. analyst Park Young-ho.

Mississippi, which is just two to three hours' drive from HMMA, would be a competitive candidate, but Kia is in no hurry as there are more contenders.

The new U.S. plant is likely to break ground before 2009, industry watchers say. It takes about two years to build an auto assembly plant but the planning process requires at least another three years prior to construction.

The investment would amount to 1 trillion won if it plans to churn out 300,000 autos every year like HMMA.

"For carmakers competing to grab a bigger slice in the limited market, production volume translates into corporate value. It would be a great opportunity for Kia, which produces less than half of Hyundai, to beef up productivity in the long run by building its third overseas plant in the United States after China and Slovakia," said analyst Park.

"However, it should happen after Kia reaches a certain level of profitability and quality as its U.S. market share is just around 1.6 percent."

Kia, which sold 270,000 cars in the world's biggest auto market last year, aims at sales of 290,000 units this year.

"If Kia continues annual growth of about 10 percent, it would be safe to begin U.S. production before 2009," Park said.

Hyundai Motor, which sold 420,000 cars in the U.S. last year commanded 2.6 percent of the market. Its Alabama plant currently has an annual production capacity of 150,000 units, which will be expanded to 300,000 cars next year.

Another major gap between Hyundai and Kia can be seen in the sales volume of their individual models. Hyundai's Sonata midsize sells more than 100,000 units in the United States whereas Kia's bestsellers don't go beyond 60,000 units.

As Kia's Slovakian plant is due for completion in November next year, it could also be more profitable to export the cars produced in Europe to the United States, considering employment costs, according to analyst Lee Sang-hyun of Hana Securities Co.

Also, Kia is more vulnerable to currency risks compared to its affiliate Hyundai, which was able to offset the loss caused by the strong domestic currency against the dollar. This is due in part to dominating almost half of the domestic market as well as increased production overseas.

Kia's operating profits in the first and second quarters this year were an unexpectedly low 0.4 percent and 0.6 percent, respectively. A new U.S. plant would lessen the currency risk.

The company's share price barely rose after new reports on the possible U.S. plant.