New Delhi: Kia Motors Corp., a unit of South Korea’s Hyundai Motor Co., said on Thursday that it will invest $1.1 billion on building a manufacturing facility in Andhra Pradesh, marking its entry into a market that is touted to become the world’s third largest for passenger vehicles by 2020.

Kia signed a memorandum of understanding with the Andhra Pradesh government on Thursday for setting up the plant.

In a statement, the company said that it will bring a compact sedan and a compact sports utility vehicle (SUV) to the market in 2019.

To be sure, the compact sedan segment has witnessed a decline in sales—automakers such as Maruti Suzuki India Ltd and Hyundai Motor India Ltd are looking to introduce new models to reinvigorate sales.

According to Abdul Majeed, partner and national auto practice leader at PricewaterhouseCoopers, significant demand from the taxi market will see the segment grow.

“It depends if Kia will look to differentiate its product (sedan) from the taxi segment. The compact SUV segment, however, will continue to grow in the years to come as more first-time buyers will look to buy them," added Majeed.

Apart from its sister firm Hyundai Motor India Ltd, Kia’s entry is expected to pose a significant challenge for market leader Maruti Suzuki.

R.C. Bhargava, chairman, Maruti Suzuki, isn’t worried.

“In a market which is three million units and has the potential to reach 10 million, everybody will look to take a piece of the pie. For us, the objective is to remain competitive... Our market share has been growing and that indicates that we know what customers want from us," he said.

The new manufacturing facility will be built in Anantapur district of Andhra Pradesh. “Construction of the new manufacturing facility, Kia Motors’ first in India and representing an approximately $1.1 billion investment, will commence in the final quarter of 2017. The manufacturing facility is expected to begin production in the second half of 2019 and produce approximately 300,000 units each year," the company said in its statement.

Kia plans to produce the compact sedan and compact SUV for the Indian market at the new plant, which will include facilities for stamping, welding, painting and assembly. The site will also be home to numerous supplier companies’ facilities, the company said.

“It (the plant) will enable us to sell cars in the world’s fifth largest market, while providing greater flexibility for our global business. Worldwide demand for Kia cars is growing and this is our latest step towards becoming a leading global car manufacturer," Han-Woo Park, president of Kia Motors, said in the statement.

Sales of passenger vehicles in India during the fiscal year ended 31 March crossed three million for the first time, growing at the fastest rate in six years, largely on the back of demand for SUVs, according to data released by industry lobby group Society of Indian Automobile Manufacturers. Sales of utility vehicles grew 30% to 761,000 units.

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