Hyundai plans to shift some small car output to Mexico next year

Hyundai Motor Co is planning to build the new version of its Accent small car at a Mexican plant owned by sister company Kia Motors next year, two people familiar with the matter said, shifting some output of the low-margin vehicle out of high-cost South Korea.

The Accent would be the first Hyundai car to be made in Mexico, giving the automaker access to the country’s cheap labor that along with its proximity to the North American and South American markets has attracted so many of its rivals.

“As labor costs in Mexico are just one fifth of that in Korea, Hyundai will be able to save a lot in small car production and better compete with rivals which have manufacturing presence in Mexico,” said Ko Tae-bong, auto analyst at Hi Investment & Securities.

Accent production in South Korea, where small car demand has been sluggish, would fall by roughly half, a person with direct knowledge of the matter said. But he added that the move is likely to be offset by plans to build a new higher-margin subcompact SUV at home – a sign that the automaker is unwilling to antagonize its strike-prone workforce.

Hyundai plans to start production of the new Accent in Mexico in July 2017 and build 20,000 of them that year, said the person, adding that it aims to make 76,000 in 2018 and 100,000 the year after.

He also said Kia plans to build its Rio subcompact at the Mexican factory, which is set to begin operating in May with production of the Forte compact.

The sources declined to be identified because they were not authorized to speak on the matter publicly.

In an emailed response to Reuters’ inquiries, Hyundai said it is considering building Hyundai vehicles at Kia’s Mexican factory but nothing has been decided.

The automaker also said it is considering introducing subcompact SUV models in South Korea, the United States and Europe. It currently only has subcompact SUV models in markets such as China and India but the segment has become increasingly popular with consumers in more developed economies too.

High labor costs and the small size of the domestic market have discouraged Hyundai and Kia from adding capacity in South Korea for over a decade.

Demand for subcompact cars has been weak, with Hyundai exporting 94 percent of the Accents made at home and Kia shipping 97 percent of its Rio production overseas. Last year, Hyundai sold 61,486 Accents in the United States, and 18,280 in South Korea.

Hyundai and Kia made 44 percent of their vehicles at home in 2014, according to IHS analyst Ian Park. The research firm predicts that South Korea, which ranks fifth in global car production, will cede its position to India in 2017 and then fall behind Mexico the following year.

(Reporting by Hyunjoo Jin; Editing by Tony Munroe and Edwina Gibbs)