Bloomberg News

Audi to Consider Doubling Mexican Production to 300,000 Vehicles

May 05, 2013

Audi AG (NSU), the world’s second-largest maker of luxury cars, will consider doubling capacity at a plant in Mexico to 300,000 vehicles in the longer term and adding production in Brazil to take on global leader Bayerische Motoren Werke AG (BMW) in the Americas.

The new Mexico factory, which will build 150,000 of the Q5 sport-utility vehicle annually starting in 2016, has enough space to eventually build a second model such as a Q6 SUV, Chief Executive Officer Rupert Stadler told reporters at the groundbreaking for the plant. The automaker will decide this year on whether to start building cars in Brazil.

Audi’s rise to surpass Daimler AG (DAI)’s Mercedes-Benz as the second-biggest premium brand was chiefly fueled by its presence in Europe and an early entry into China. The Ingolstadt, Germany-based automaker is banking on an expanded production presence in the Americas to help gain ground in the region.

“In 2020 every seventh Audi from our worldwide production will go” to North America, Stadler said in a speech at the groundbreaking ceremony in Mexico over the weekend. “Then we have reached our goal and strengthened America as a third pillar of our sales in addition to Asia and Europe.”

Audi, which accounted for more than half of parent company Volkswagen AG (VOW)’s profit last quarter, plans to locally source at least 65 percent of the content for the factory in San Jose Chiapa, a town between Mexico City and the port of Veracruz. The $1.2 billion investment will create 3,800 jobs in the town, the CEO said.

Brazil Production

A decision on possibly producing cars in Brazil should be made this year amid efforts by the Brazilian government to wall off the market, said Bernd Martens, Audi’s purchasing chief.

“From a strategic point of view it would be good to be there because the economy is developing and we believe the number of people who can afford an entry-level premium car is set to grow,” Martens said.

Audi is looking into producing cars using VW’s modular toolkit system in Brazil and may do so on a smaller scale within one of VW’s existing plants in the country, he said.

Audi has been making progress in recent years winning over more American customers with a broader product line up. In the first four months, its U.S. sales rose 15 percent to 47,343 cars. Still, that’s about half what its two main rivals sell. Mercedes, which Audi passed globally in 2011, sold 92,822 vehicles to lead the U.S. luxury segment, while BMW delivered 88,127.

U.S. Race

BMW and Mercedes “are more established in the market, have more dealers and entered the SUV market in the U.S. at a much earlier stage than Audi, all of which are key advantages,” said Tim Urquhart, a London-based analyst at IHS Automotive. “Over the long run we are expecting Audi to take share from Mercedes- Benz in particular and this will be helped to a degree by Q5 production beginning in Mexico.”

Audi’s U.S. sales will rise 48 percent to 206,301 vehicles in 2018 from 139,347 last year, IHS forecasts. That compares with a 15 percent increase during the same period to 316,479 at Mercedes and a 20 percent gain to 338,491 at BMW.

Globally, Audi is boosted by its lead in China and Europe. Deliveries in the first quarter rose 6.8 percent to 369,500 vehicles, trailing the BMW brand by 11,900 vehicles and widening the gap over Mercedes to 44,600.

Profit from Audi is critical to funding Volkswagen’s expansion strategy, which is aimed at surpassing General Motors Co. (GM:US) and Toyota Motor Corp. (7203) as the world’s biggest automaker. Audi accounted for 56 percent of the Wolfsburg, Germany-based manufacturer’s first-quarter operating profit.

Labor Costs

Volkswagen is betting on Mexico’s lower labor costs to further pad Audi’s profit margins, which already beat BMW and Mercedes. The VW unit reported operating profit as a percentage of revenue of 11.1 percent in the first quarter, beating BMW’s 9.9 percent and Mercedes’s 3.3 percent.

Auto workers in Mexico are about 20 percent cheaper than in the U.S. and Canada, according to Luis Lozano, the lead automotive partner at PriceWaterhouseCoopers LLP in Mexico City. Mercedes operates a factory in Alabama, while BMW makes SUVs in South Carolina. Labor costs in Mexico are about $7 per hour, Stadler said.

The expansion is part of Audi’s efforts to go global, breaking out of its German-dominated production network. Until four years ago, Audi produced 75 percent of its vehicles in the German cities of Ingolstadt and Neckarsulm. By 2017, the share of the German plants is forecast to fall to 45 percent as annual production rises to 1.9 million vehicles from 1.5 million last year, according to data from IHS Automotive.

Audi will next year for the first time produce more cars outside Germany than within the country, Martens said.

To contact the reporter on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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