Mexico: A Premium Marque Hotbed

Mexico: A Premium Marque Hotbed
 

Mexico’s German auto history began with small, cheap cars. Now it’s becoming a place where top-of- the-line German brands roll out of billion-dollar factories.

By decade’s end, Mexico will claim fourth place worldwide for German luxury output after the carmakers’ home country, China and the US, according to estimates compiled for Bloomberg by IHS Automotive consultant Guido Vildozo, surpassing Belgium, Spain and Brazil.

In choosing Mexico for a plant site this year, BMW validated the nation’s emergence as an auto- assembly powerhouse from its roots making Volkswagen’s iconic Beetle. BMW, the biggest premium-vehicle producer, completes the trio of German marques, after Audi and Mercedes- Benz, in deciding since 2012 to build cars in Mexico.

“Mexico has become the crossroads of automotive trade for the western hemisphere,” IHS Automotive Managing Director Michael Robinet said in a telephone interview. “Mexico has proven it can build a vehicle of any stripe.”

The luxury automakers jumped ahead of some competitors that are still refining strategies for Mexico, which is poised to become Latin America’s largest vehicle producer. South Korea’s Kia Motors Corp. announced a more than $1 billion project in August, while Toyota, the last major automaker without a high-volume Mexico assembly plant, is still studying expansion plans.

Factory Quality

The country has gotten negative attention recently as the source of some of Takata Corp.’s defective air bags, blamed for at least five deaths. While it was once seen as a dangerous place, where executives feared for their safety, it’s now winning the trust and investment of the highly regarded manufacturers.

Mexican factory quality, a surge in engineers and an expanding domestic parts industry all helped pave the way for BMW, Mercedes-Benz and Audi, said Armando Soto, president of Kaso & Asociados, a Mexico City-based auto industry consultant.

“This was quite an easy decision,” Bernhard Eich, the BMW director for the new San Luis Potosi plant, said in a telephone interview. “We are very confident we will find the skilled workforce. We have a huge supply network in Mexico.”

While the choices of plant locations were long in the making, in recent weeks Mexico has faced mounting domestic unrest over the disappearance of 43 college students. Nationwide protests, including one of throngs of tens of thousands last week, may impact the outside perception of the country as a place to do business if they continue.

Beetles to Bimmers

BMW is set to start production in 2019, and will be the last of the three luxury automakers, sometimes called original equipment manufacturers, to go online. Ingolstadt, Germany-based Audi, the first of the group to announce a Mexico plant, will begin assembly in 2016. Stuttgart, Germany-based Daimler, along with Nissan, will make Mercedes-Benz and Infiniti compact cars at its factory opening in 2017.

Volkswagen ushered in the German auto-production era in Mexico by building Beetles from 1967 to 2003 in Puebla state. The cars were once the vehicle of choice for Mexico City taxi companies, with thousands in green-and-white livery plying the capital’s crowded streets.

The Beetle production legacy was a draw for Audi, according to Javier Valadez, a spokesman for the carmaker, a Volkswagen unit.

“Mexico is the ideal country for Audi,” Valadez said. That’s because of “the level of development of Mexican providers as well as its distinct knowledge of German engineering thanks to the relationship between Mexican companies and Volkswagen for more than 50 years.”

More Engineers

The Volkswagen brand also may join the high-end auto push. Excelsior newspaper reported without attribution on September 8 that Volkswagen was considering making Touareg and Tiguan sport- utility vehicles by building a third plant in Puebla state. Israel Victoria Diaz, a spokesman at the company’s Mexico unit, told Bloomberg News via e-mail that the automaker doesn’t have any concrete plans concerning new projects in Puebla.

“It’s a snowball effect,” Bill Rinna, senior manager of North American forecasts at LMC Automotive, said in a telephone interview from Troy, Michigan. “As more automotive suppliers move there and more of these OEMs add capacity in the country, it attracts other manufacturers to the region. Cost definitely has to do with it, but there’s also a highly skilled workforce there.”

Graduates from technical schools and engineering programs increased to about 25% of degree-holders in Mexico in 2011 from about 15% in 2007, compared with a stagnant rate of close to 10% in the US, according to ProMexico, the nation’s export promotion agency.

Industry’s Leaders

Soto of Kaso & Asociados said parts priced about 10% cheaper than in the US let German luxury brands hit by Europe’s recession cut costs without sacrificing the quality their clients demand.

Improvements in automation at Mexican plants have helped the country lure the industry’s leaders, said Michelle Hill, a consultant in Troy, Michigan, at Oliver Wyman. The nation’s labour productivity is improving faster than in the US, Hill said, citing editions from previous years of her firm’s Harbour Report.

In addition to the German brands that dominate global premium sales, Ford makes the Lincoln MKZ in Hermosillo, and General Motors builds the Cadillac SRX in Ramos Arizpe, though that work will move to Tennessee at the end of next year.

The output bump from premium automakers flocking to Mexico will allow the nation to push aside South Korea to become the third-largest car exporter after Japan and Germany by 2016, according to IHS’s Robinet.

Both Audi’s Valadez and BMW’s Eich said they may expand beyond the 150,000 units they’re each scheduled to produce per year. The Nissan-Mercedes venture may produce 300,000 vehicles annually.

“There will be a huge increase of capacity in the luxury market,” Eich said. “We approached Mexico because we knew about the advantages.”

Bloomberg