Financial Woes, Overcapacity Could Delay Kia Motors Georgia Factory

BEIJING — When South Korean carmaker Kia Motors held a ceremonial groundbreaking in West Point, Ga., last October, Gov. Sonny Perdue called the planned $1.2 billion factory "the largest single economic development announcement in the history of our state."

But a perfect storm of problems could delay work on the plant, which is already behind schedule, analysts in Asia said.

A combination of weak sales, overcapacity in Asia and difficultly obtaining financing could lead Kia and its parent company Hyundai Motors to slow work on the factory, which is expected to make 300,000 vehicles annually at peak production, analysts in Seoul, Tokyo and Singapore said.

Kia has said the plant will be completed in fall 2009. On Tuesday, company spokesman Alex Fedorak said Kia contractors had started drilling holes in a strip of land near the Alabama border this month to lay the foundation for the buildings.

"Job No. 1 will be fall 2009," Fedorak said in an e-mail. He added that it would be an "unrealistic expectation" that the plant would operate at full capacity when it opens, however.

But within Hyundai, executives have acknowledged the factory may not be completed until the spring of 2010, said Hirofumi Yokoi, a Tokyo-based analyst with auto industry consulting firm CSM Worldwide.

"Kia is trying to stick to schedule, but the Hyundai guys told me second quarter 2010 will be more realistic," Yokoi said, citing a conversation he had with a former Hyundai manager who now works as a consultant to the company.

Yokoi and other analysts said a slew of negative events could cause Kia to the slow construction.

Shortly after Kia announced in March last year that it would build the factory in West Point, Hyundai Motors Chairman Chung Mong-koo was detained in a corruption investigation and his son Chung Eui-sun, the president of Kia, was barred from leaving South Korea, forcing the company to reschedule its groundbreaking from April until October.

Without that delay, the factory likely would have been completed next year, a Seoul-based analyst said. She asked to remain anonymous because negative comments about Kia could hurt her company's business with the Hyundai Group, one of Korea's largest conglomerates.

"A new factory of this size doesn't usually take more than two years (to build), so people were expecting it to be open in 2008," she said.

Financial troubles have also plagued Kia, although the company posted a profit in its most recent quarter.

Because of lower-than-expected sales, Kia has faced financial losses "for the past three years" and finding money for large new projects is difficult, said Kim Dong-ki, a Korea University economist on Hyundai's board of directors.

Hyundai Motors can act as a guarantor on bank loans for Kia, but because of the ongoing liquidity crunch in western markets, Korean companies including Kia have had trouble securing large loans in the United States, Kim said. Kia canceled a $500 million bond sale in July amid growing reluctance from investors to buy corporate debt.

Earlier this month, Kia issued a domestic bond for 200 billion Korean won, an amount equivalent to $211 million, but because the company would have to pay fees to hedge against currency fluctuations, executives would prefer to use the money for projects inside South Korea, the Seoul-based analyst said.

At the same time, an aggressive global expansion has added to Kia's long-term debt. Analysts estimate that new Kia factories in Europe and China, as well as the planned factory in West Point, will double Kia's long-term debt to $8.7 billion, industry weekly Automotive News reported in July.

The rapid expansion – including a $1.4 billion factory that opened in Slovakia in April – has also created overcapacity.

Kia's factories in South Korea are producing less than 80 percent of their full capability, a problem that is likely to grow when a new Kia factory opens in China next year, the Seoul-based analyst said.

"Kia has more room for producing in Korea so they don't really need the plant in the U.S. right now," she said.

While Kia is almost certain to build the factory, "probably they will have to delay construction," and a 2010 opening date is "more realistic," she said.

Weak U.S. sales have been another problem. Kia sold 323,871 vehicles in North America last year, up 6.5 percent from 2005 but below industry expectations.

While U.S. sales "haven't been a disaster, they certainly haven't been what the company wanted," a Singapore-based analyst who asked for anonymity said.

In the long term, Kia's situation is likely to improve and the West Point factory, which will employ 2,500 people and create 2,000 jobs at surrounding supply companies, will be completed, analysts agreed.

Roughly 79 percent of Kia's sales are outside of Korea and both Kia and Hyundai are increasing manufacturing capacity worldwide to minimize shipping costs and the impact of exchange rate fluctuations, Hyundai director Kim said.

Kia may also sell cars made at the West Point facility in Latin America, he said.

"As long as they have a strong demand not only in North America but also in Central and South America, they think the sooner (the factory) is built the better," he said.

CSM Worldwide analyst Yokoi said the Georgia factory "is a milestone for Kia and the Hyundai Group."

"They want to set it up as scheduled, but especially because of the financial situation, that will be challenging," he said.