Car makers in India are setting up component manufacturing plants close to their car assembly plants to cut production costs. Hyundai Motors is the latest with group unit Hyundai Wai zeroing in on the southern state of Andhra Pradesh.

It has selected Nellore close to the Tamil Nadu border and Hyundai’s Chennai factory. The company will soon sign a memorandum of understanding with the state government for the project worth INR1,200 crore (about US$300m) initially.

The new parts unit will be established in two phases with first expected operational by the first half of 2011.

Top sources in the state government’s land allotment unit – Andhra Pradesh Infrastructural Development Corporation – confirmed the development for just-auto and said the deal would likely be agreed by the end of this month. The administration had approved the development and instructed the corporation to provide the land.

Sources said Hyundai Wai had wanted a 50 acre site and Nellore got the nod as it was close to Chennai where Hyundai assembles models like the i10 and i20 for domestic and export sales.

Hyundai has already completed a preliminary study of the site.

The parts plant is a further major Hyundai investment in India and comes after it opened its fourth overseas research & development centre costing $25m in the state capital Andhra Pradesh.

Hyundai Wai was founded in 1976.

Hyundai Motor sales here fell for the second straight month in May to about 27,000 vehicles for an 18.2% market share. April volume was 29,000 and market share 19.8% compared with around 20% in the first quarter.

Local assembly was halted for two days as striking workers occupied part of the plant and the dispute cost the automaker 3,500 cars.