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

May 19, 2016
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.
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