Luxury car factories rev up in Mexico

Mexico has been able to lure high-end brands like BMW and Audi because of its geographic location, low wages, and free-trade agreements with 45 nations.

Most Mexican-built autos that US consumers see in showrooms are compact cars like the Ford Fiesta, Nissan Sentra, and Honda Fit.

But soon premium automakers like BMW, Audi, and Mercedes-Benz plan on rolling luxury vehicles off assembly lines in Mexico.

President Enrique Peña Nieto presided Thursday over an announcement by BMW that it will build a $1 billion plant in San Luis Potosi. It will begin production in 2019 and ship luxury vehicles to North and South America.

It was the latest in a quick succession of announcements by German and Japanese automakers of plans to build premium vehicles in the world’s 14th largest economy.

“The manufacture of autos in this segment that demands the highest-quality standards and state-of-the-art technology shows that the production profile of Mexico is evolving,” President Peña Nieto said.

The BMW plant in San Luis Potosi, in north-central Mexico, with abundant rail connections to US markets, will employ 1,500 people and produce 150,000 units a year, said Harald Krueger, a member of BMW’s board of management in charge of global production.

“The decision to build a plant here in Mexico was quite easy,” Krueger said, noting a strong industrial base, an established supplier and a skilled workforce.

The BMW announcement was a further sign of a realignment of the global auto industry, one in which Mexico has become a winner because of its geographic position, low wages, and free-trade agreements with 45 nations around the globe.

With the 1994 North American Free Trade Agreement binding Canada, Mexico, and the United States into one of the world’s largest trading blocs, the auto industry in Mexico has grown at three times the pace of other manufacturing sectors.

Initially, auto parts manufacturers were the beneficiary as Mexico was pulled into the supply chain of the US and Canadian auto industries.

That means that today, every vehicle built in the United States contains more than $4,000 of Mexican-made parts, four times the level of two decades ago, according to a March report by Scotiabank, a Toronto-headquartered bank.

But over the past decade, Detroit’s Big Three and automakers in Japan and Germany have rushed to build vehicle assembly plants in Mexico, where labor costs are a fifth of what they are in Canada and the United States. Mexico will eclipse Japan this year as the No. 1 source of auto imports into the United States.

By the end of the decade, one of every four autos sold in North America will be built in Mexico.

In 2006, Mexico was the world’s ninth largest exporter of cars. Today, the country is the fourth largest exporter – behind Germany, Japan, and South Korea – and Mexico’s economy secretary expects it will become No. 2 in a few years.

Japanese and German automakers in particular see Mexico as an export hub for both North and South America.

Nissan opened a $2 billion assembly plant in Aguascalientes last November, which it erected in a record 19 months, while Mazda and Honda are building, or have operational, new plants near Celaya in central Mexico.

The Honda plant will produce the 2015 subcompact Fit hatchback, largely for sale in US markets.

Assembly is notably shifting toward premium autos, as global automakers demonstrate that they are confident US buyers will not balk at purchasing Mexican-made luxury models and that quality standards will remain high.

“The BMWs that will be built in Mexico will be true BMWs,” Krueger said.

German automaker Audi is finishing a $1.3 billion assembly facility near Puebla that by mid-2016 will be the sole global source for the luxury Q5 sport utility vehicle.

Last week, Nissan and Daimler AG (parent of Mercedes-Benz) announced a $1.3 billion joint investment to build a plant to assemble compact luxury models in Aguascalientes, to the west of San Luis Potosi. The plant will roll out Nissan’s Infiniti models beginning in 2017, and a year later it will produce Mercedes-Benz models aimed at trying to unseat BMW’s lead in the US market.

Since Mexico remains a modest domestic market, the surge is largely because of vehicle exports. Mexico sent abroad 83 percent of the 2.93 million vehicles produced in 2013, a fourth consecutive year of record production.

Once the BMW plant is operating at full steam, its production will be about one-tenth of BMW’s global production at its 28 facilities in 13 countries.

Krueger, speaking in a brief interview, said the announcement of the Mexico plant dovetails with plans announced in late March that BMW would boost production at its Spartanburg, S.C., facility from 300,000 units to 450,000 units per year.

“It’s a two-pillar strategy for the NAFTA region,” Krueger said, referring to the North American market.

BMW has more than 100 suppliers in Mexico, double the number of four years ago, and the suppliers will provide components for both US and Mexican production, he said.

Krueger said the German automaker is determined to build plants closest to where the fastest growth is occurring.

“What is the main driver for us? We produce in the markets where we have growth opportunities,” he said.