Published On: Thu, May 26th, 2016

‘El Bronco’ balks at tax breaks for new Kia Motors plant near Monterrey

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As reported Wednesday May 25 in The Yucatan Times, production began this week at Kia Motors massive new plant near Monterrey, Mexico. But The Wall Street Journal reports the new governor of Nuevo León state is balking at the tax breaks, land grants and other public perks that have underwritten Mexico’s automotive boom of recent years. Here is the WSJ report:

PESQUERÍA, Nuevo León — Nuevo León Gov. Jaime Rodríguez, whose nickname El Bronco plays on his headstrong style, and his aides are refusing to honor a large portion of the incentives promised by the previous state government to woo the $2.5 billion new assembly plant by South Korea’s Kia Motors.

“We aren’t against foreign investment,” Mr. Rodríguez said. “We are against a previous government that exceeded the limits.”

Officials in Nuevo León, whose capital Monterrey is often seen as Mexico’s business center, 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.

Workers at the Kia plant in Pesquería, near Monterrey, conducted tests on the assembly line last month. Production began on Monday.

Workers at the Kia plant in Pesquería, near Monterrey, conducted tests on the assembly line last month. Production began on Monday. PHOTO: ZUMA PRESS


Kia executives declined to discuss the deal but said they want it to be honored.
“It is not a common practice in the global business world to have this kind of situation,” Seong Bae Kim, president of Kia Motors Mexico, said in an interview at the nearly completed plant. “We feel that Kia should not be placed in a position to incur losses as a result of the local government’s political issues.”

The new Kia plant began limited production on Monday and will eventually produce some 300,000 compact Forte cars a year, most of them destined for U.S. customers.

Mexican manufacturing executives and federal officials worry the showdown could affect an industry that has been a bright spot in an otherwise lackluster economy.

Mexico has become one of the hottest countries in the globe for car companies. The country churned out 3.4 million cars and light trucks in 2015, making it the world’s seventh-largest producer and fourth-largest exporter. Kia is one of five foreign auto makers that have assembly plants coming on line over the next five years. Those plants would increase Mexico’s annual production to five million vehicles by decade’s end, experts say.

“Global companies and many countries have their eyes on this conflict,” said Ricardo Cantú, head of Nuevo León’s chapter of Index, a national association of export industries.

Mexican Economy Minister Ildefonso Guajardo, who hails from Nuevo León, has urged compromise, saying Kia could relinquish up to $23 million in incentives. “It’s an issue that hurts everyone if you don’t arrive at an agreement,” Mr. Guajardo said. “We have to arrive at an understanding and it requires flexibility on all parties involved.”

Offering public incentives to auto makers has been standard practice since at least the early 1980s and were key to U.S. southern states winning automotive assembly plants from the Rust Belt, with packages giving back 25% to 35% of the total investment in deals the size of Kia’s, said Guido Vildozo, a Latin America specialist with IHS Automotive.

Georgia gave Kia more than $400 million in tax breaks, land and other incentives to win its first North American plant, which began production in 2009, according to Georgia state development officials.

“For those megadeals, incentives are always a factor,” said Kathy Mussio, a partner at New Jersey-based Atlas Insight, which advises companies on plant locations.

Mr. Rodríguez won his June election by a landslide in part with promises to look into the Kia deal as well as numerous corruption allegations lodged against former Gov. Rodrigo Medina. Mr. Medina has denied any wrongdoing and hasn’t been charged with any crime.

“They didn’t need to make such a favorable offer.” said Fernando Turner, a 70-year-old auto-parts mogul now serving as Nuevo León’s minister for economic development.

Messrs. Rodríguez and Turner say a prime sticking point is the 20-year payroll tax exemption, which they say far exceeds the maximum concession permitted by state law. Both men also say the promised rail lines, power grid and other incentives to be paid for by the state are unaffordable.

“In parts of the U.S. and Mexico they have opened their wallets for these companies,” said Mr. Turner, whose Monterrey-based company makes catalytic converters and operates in more than 10 countries. “It’s a race to the bottom.”

The new mayor of Pesquería, the industrial suburb where the plant is located, said the incentives—mainly property-tax exemptions—his predecessor granted to Kia equal four times the annual budget of his fast-growing city of 90,000.

Former officials in the Medina administration say the incentive package was necessary to win the deal.

With its promise of eventually generating 14,000 direct jobs, Kia’s move here was seen by many 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. Several car makers in the preceding years had spurned state officials’ pitches in favor of other Mexican locations.

The sprawling compound housing the Kia factory and its suppliers was built in just 14 months near Monterrey’s international airport, northeast of the city. Connected by rail and toll highway to the U.S. border 120 miles away, the location is perfect for Kia, which intends to export 80% of the cars.

But Nuevo León hasn’t yet delivered the additional electricity supply it promised to begin full production, Kia officials say. Construction also hasn’t begun on the 14 rail spurs promised to connect the Kia lot with the rail line. Improvements to the two-lane country road that runs past the plant remain ongoing, as do the installation of drainage lines and water treatment facilities.

“We had very high expectations in coming here,” Mr. Kim said of Nuevo León. “But we’ve had a little bit of hardship.”

Source: wsj.com

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