July 3, 2014 at 2:17 pm

BMW joins Audi in Mexico as German carmakers chase global growth

BMW AG joins rivals Audi and Mercedes-Benz with plans to build a car factory in Mexico as low wages and global expansion take precedence over “Made in Germany” exclusivity.

The $1 billion plant in San Luis Potosi will be BMW’s second in North America when production starts in 2019, the Munich-based company said Thursday. The plant’s capacity to build 150,000 vehicles a year will increase production in the region to as many as 600,000 cars, or about 30 percent of this year’s sales goal.

“The BMW group will be even better positioned to take advantage of the growth potential” in North and South America, Harald Krueger, the manufacturer’s production chief, said in the statement. “We are continuing our strategy of production follows the market.’”

The world’s biggest manufacturer of luxury cars will be the last among the German rivals in making vehicles in Mexico, where labor costs are about 20 percent of U.S. levels. Daimler AG’s Mercedes will start joint production in 2017 with Nissan Motor Co.’s upscale Infiniti unit in Aguascalientes. Volkswagen AG’s Audi will begin assembling autos in San Jose Chiapa in 2016. The Latin American country’s free-trade agreements with the U.S., South America and Europe were critical to the plans.

“Mexico’s location facilitates exports to North America as well as South America, which we think will be a future growth market,” Frank Biller, a Stuttgart, Germany-based analyst at LBBW, said before BMW’s announcement. “If a cluster of carmakers starts production in Mexico, this will create a local industry.”

BMW plans to scale back cost increases by “several hundred million euros annually” in light of tougher emissions regulations and spending on future technology, the carmaker said last month. Expenditures include the “i” electric-car subbrand, whose models feature a chassis made from carbon fiber. The company is targeting operating profit from carmaking at 8 percent to 10 percent of sales on an ongoing basis.

BMW, Audi and Mercedes are all expanding as they target record global deliveries and vie with one another for the sales lead in the segment. Both Ingolstadt-based Audi, which ranks second to BMW in the world’s luxury-car market, and No. 3 Mercedes have vowed to overtake BMW by the end of the decade.

“Some carmakers already have longer-term experience in Mexico, and I’m not aware of any significant problems in recent years affecting production or quality,” said Biller.

Sales of BMW-brand vehicles in the U.S. jumped 12 percent from a year earlier to almost 157,400 cars in the first half of 2014. Deliveries were lifted by demand for the 4-Series coupe and X3 sport-utility vehicles, which BMW makes in Spartanburg, South Carolina. U.S. sales by Stuttgart-based Mercedes rose 6.8 percent to 151,624 cars in the period, while Audi delivered 84,349 cars, a 14 percent gain.

The new Mexican plant follows BMW’s decision to invest $1 billion to raise annual production capacity 50 percent at Spartanburg by 2016 to 450,000 vehicles, including the new full- sized X7 SUV. When the expansion is complete, more BMWs will roll off the line in South Carolina than from any other facility in the world.

While the “Made in Germany” cachet remains critical to BMW, the focus is shifting more to engineering and design in its home market, with manufacturing carried out elsewhere to reduce import tariffs and currency risks, Milagros Caina-Andree, the carmaker’s head of human resources, said in April.

“We are now an international company with Bavarian roots and many sites abroad where we build vehicles at the same high quality level as in Germany,” she said.