Hyundai Motor has agreed a deal with the South Korean city of Gwangju to build a low cost assembly plant where workers will be paid less than half what peers make at the automaker's other facilities in the country.

The factory, scheduled to start operating in 2021, will be Hyundai's first new domestic plant in 23 years, the Nikkei reported.

It represents an aligning of interests for Hyundai, which aims to become more cost competitive, and the southwestern city, which seeks to boost employment, although the project nearly collapsed amid disagreement over wages.

The plant is expected to produce 100,000 vehicles per year. Gwangju will shoulder 21% of the roughly KRW700bn won (US$629m) investment with Hyundai contributing 19% and the rest to be raised from investors and local companies.

Hyundai plans to outsource production of mini-SUVs to the joint venture, re-entering the minicar market for the first time in 17 years.

South Korean President Moon Jae-in attended Thursday's signing ceremony for the project, which he hailed as a "historic turning point" for the country. But the path forward for the plant appears unclear amid fierce backlash from the automaker's labor union, which believes it will drive down workers' wages.

The average starting pay at the Gwangju plant will be just 35 million won a year, or about $31,000, compared with typical annual pay of 92 million won at other Hyundai facilities, according to the city.

Although the latter figure includes overtime and seniority-related pay disparities, making a direct comparison impossible, the new plant will still generate significant savings for Hyundai, which has higher labor costs than Japanese rival Toyota Motor.

Hyundai's trade union, which uses annual strikes to put pressure on the automaker for big wage increases, will not have a presence at the Gwangju plant.

The city and national governments will provide support for housing and employee benefits.

Gwangju formulated the plan for the factory and pitched it to Hyundai. The city expects the plant will create at least 1,000 new jobs directly, with the tally rising to 12,000 when subcontracting factories are included, according to an auto industry liaison in the municipal government.

Talks on the plant fell apart in December after Hyundai and Gwangju failed to reach an agreement on how to handle pay hikes for workers at the plant. But the companies managed to iron out a deal after Moon expressed support for the project in a New Year's news conference, injecting fresh momentum into the talks.