BMW Said to Plan $1 Billion Factory in Mexico Following Audi

Jul 02, 2014 3:23 am ET

(Updates with share price in fifth paragraph, BMW comment in ninth.)

July 2 (Bloomberg) -- Bayerische Motoren Werke AG plans to invest about $1 billion in a new factory in Mexico, catching up with its German competitors in manufacturing luxury cars in the Latin American country, a person familiar with the matter said.

BMW’s second plant in North America will produce about 150,000 cars a year when production starts by 2019, said the person, who asked not to be identified before an official announcement. The factory will be located in San Luis Potosi, 250 miles northwest of Mexico City, and will employ about 1,500 people, the person said.

BMW will release details of a decision on July 3, Mathias Schmidt, a spokesman for the Munich-based company, said by phone, declining to comment on the plans.

The maker of BMW, Mini and Rolls-Royce vehicles is the last of the world’s top three luxury-car makers to outline plans to build vehicles in Mexico, where labor costs are about 20 percent of U.S. levels. Daimler AG’s Mercedes-Benz last week announced plans to produce autos jointly with Nissan Motor Co.’s upscale Infiniti unit starting in 2017 in Aguascalientes. Volkswagen AG’s Audi plans to start assembling sport-utility vehicles in San Jose Chiapa in 2016.

BMW shares rose as much as 1.3 percent to 94.50 euros and were up 0.8 percent at 9:20 a.m. in Frankfurt trading. The stock has gained 10 percent this year, valuing the company at 60.5 billion euros ($82.8 billion).

‘Significant Risks’

“BMW can’t afford to compete with Mercedes and Audi at a labor-cost disadvantage,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. Still, the German manufacturers are “taking significant risks in a country that has little history of manufacturing luxury cars.”

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 Audi and Mercedes have vowed to overtake BMW by the end of the decade.

Sales of BMW brand vehicles jumped 12 percent to 157,382 cars in the U.S. in the first half of 2014. Deliveries were lifted by demand for the 4-Series coupe and X3 SUV, which is made in South Carolina. Mercedes sales rose 6.8 percent to 151,624 cars in the period, while Audi delivered 74,277 cars, 14 percent more than a year ago.

Strong Demand

U.S. customer demand during the first half of the year was “stronger than many have thought and we fully expect confidence and demand to stay strong through the end of the year,” Ludwig Willisch, chief executive officer of BMW’s North America unit said yesterday in a statement.

Production in North America helps European automakers reduce the impacts of dollar-euro fluctuations. Currency shifts may weigh on car-division revenue this year, BMW said in March. Factories in Mexico give manufacturers tariff-free access to the U.S., the world’s biggest economy, while enabling them to keep costs in check.

The new Mexican plant follows BMW’s decision to invest $1 billion to raise production capacity 50 percent at its facility in Spartanburg, South Carolina. The plant will have the ability to make as many as 450,000 vehicles, including the new full- sized X7 SUV, by 2016.