Tag: Kia

OM in the News: Can Mexico Renege on Location Incentives?

Workers at the Kia plant near Monterrey, Mexico conducted tests on the assembly line, which just opened. last month.
Workers at the Kia plant near Monterrey, Mexico conducted tests on the assembly line, which just opened.

The new governor of the northern Mexican state of Nuevo León is balking at the tax breaks, land grants and other public perks that have underwritten the country’s automotive boom of recent years, reports The Wall Street Journal (May 17, 2016). He is refusing to honor a large portion of the incentives promised by the previous state government to woo a $2.5 billion new assembly plant by South Korea’s Kia Motors. Officials say the incentive package amounts to nearly 28% of the investment by Kia and its suppliers, and they are challenging provisions worth up to $100 million, including a 20-year holiday on payroll taxes.

Kia executives say they want it to be honored. The newly opened Kia plant will eventually produce some 300,000 compact Forte cars a year, most of them destined for the U.S., and Mexico has become one of the hottest countries in the globe for car companies. The country churned out 3.4 million vehicles in 2015, making it the world’s 7th-largest producer and 4th-largest exporter. Kia is one of 5 foreign auto makers that have assembly plants coming on line over the next 5 years. Those plants would increase Mexico’s annual production to 5 million vehicles by 2020.

Offering public incentives to auto makers has been standard practice since the 1980s and were key to U.S. southern states winning automotive assembly plants from the Rust Belt, with packages giving back 25%- 35% of the total investment. With its promise of eventually generating 14,000 jobs, Kia’s move here was seen as a vote of confidence for Nuevo León, emerging from years of gangland violence that had turned it into one of Mexico’s more dangerous corners.

Classroom discussion questions:

  1. What other location factors, besides incentives, drew Kia to Mexico? (See Chapter 8).
  2. Compare the Kia location decision to that made by Mercedes, which chose Vance, Alabama, for its first U.S. plant in 1993.

OM in the News: Alabama’s Incentives to Lure Hyundai–9 Years Later

It was April, 2002 when the State of Alabama announced that Hyundai would be opening a new billion dollar plant in 2005 in economically distressed Montgomery. I recall the headlines at the time about whether the $253 million in industrial incentives were sound business or public policy decisions. Indeed, in Chapter 8 we debate the merits of such incentive programs.

OK, so let’s look back with the benefit of 9 years of hindsight. The New York Times (Feb.18,2011) reports that Hyundai and its sister company, Kia (which just opened a plant nearby) have brought 1,000s of high-paying jobs to the region—and have even nurtured a little Korean culture in Montgomery. Hyundai is running its plant flat-out, with 2,650 workers staffing 3 shifts  24 hours a day. The jobs pay about $20/hour and there is so much overtime that workers make more than their unionized colleagues in plants up North.

 Kia has hired 600 workers to ramp up a second shift at its Sante Fe brand SUV plant and plans to add 1,000 more for a 3rd shift. The presence of Hyundai and Kia have kept Alabama’s unemployment rates among the lowest in the SE—this despite the closure of 12 textile mills that had formed the area’s economic base for decades. Most of those textile jobs went to mills in China and India.

More good news: rarely do a few weeks go by without another parts supplier hiring up. Alabama now lists 138 suppliers that support the Hyundai plant, directly or indirectly.(Some also do business with Honda and Mercedes near Birmingham and Toyota in Huntsville). More than 50 companies have followed Hyundai from Korea to Montgomery, bringing 3,000 Koreans to the area. Finally, near the car plant, a Hyundai subsidiary that makes electrical transformers is building a factory that will create another 1,100 jobs.

Discussion questions:

1. Evaluate the incentive program today, nine years later.

2. What are the hidden benefits of attracting a major manufacturer like Hyundai?

3. Why is the company doing so well in this economy?