(Recasts with Mexican local government saying the deal is not legal; adds comments and detail from Nuevo Leon government; dateline previously SEOUL)
SEOUL/MEXICO CITY, March 30 (Reuters) - Kia Motors expects to start production at its first Mexico factory in the first half of the year as planned, although the local government says the investment deal with the South Korean company is not legal and requires serious changes.
The disagreement may come up in a meeting between South Korean President Park Geun-hye during talks with her Mexican counterpart early next month, a person familiar with the matter told Reuters.
The new government in the Mexican state of Nuevo Leon, led by outspoken independent Jaime Rodriguez, is demanding that Kia renegotiate some of the incentives promised in the 2014 deal, citing the state’s difficult financial situation, Kia said.
Nuevo Leon said the deal violates state law by offering “excessive” incentives, such as freeing Kia from paying state income taxes for 20 years and agreeing to pay for a party to inaugurate the new plant.
These incentives are expected to cost the state more than 11 billion Mexican pesos ($637 million), almost twice its current public deficit, and would pose a bad precedent for future investment, the government said.
“For the lawyers of the current government, the agreements signed by the prior executive are illegal, unexecutable and damaging for the state and must be renegotiated,” the state ministry for economic development said in a statement issued to Reuters on Wednesday.
The government said it would be willing to offer Kia incentives totaling about 10 percent of the planned investment by the company and its providers, in contrast to the 28 percent in the prior agreement.
“The investment contract between the company and the Nuevo Leon state government was done through a legitimate procedure, and we expect the state government to respect the contract and faithfully abide by it,” Kia said in a statement on Wednesday.
The South Korean automaker aims to start the output of its Forte compact at the factory on May 15 as scheduled, the person said, declining to be identified due to the sensitivity of the matter.
The carmaker in 2014 announced the $1 billion project to build the Mexico plant, with a capacity of 300,000 vehicles a year. It will cater to demand from North America and South America.
Affiliate Hyundai Motors also plans to build its Accent small car at the Kia factory next year, two people familiar with the matter previously told Reuters. ($1 = 17.2580 Mexican pesos) (Reporting by Hyunjoo Jin and Mexico City newsroom; Additional reporting by Jeeheun Kahng; Editing by Joseph Radford and Leslie Adler)