According to media reports, BMW is expected to announce sometime today that the German luxury automotive producer will invest upwards of $1 billion to build its first auto assembly plant in Mexico. Informed sources are being cited as indicating that the proposed new facility, BMW’s second in North America, will be designed to produce upwards of 150,000 vehicles per year. Speculation is that the plant will be located in San Luis Potosi, about 250 miles northwest of Mexico City. An announcement is expected from a ceremony being planned today with the President of Mexico. The Mexican plant investment follows an earlier announcement to invest $1 billion to increase production capacity by 50 percent at the automaker’s existing production facility in the U.S., raising capacity to upwards of 450,000 vehicles annually.
With this announcement, the automaker will join other global based OEM’s that have announced major investments within Mexico. Last week, Daimler and Nissan jointly announced a $1.4 billion investment in a proposed shared auto assembly plant to produce smaller luxury vehicles. The plant, planned for upwards of 300,000 vehicles per year, will be built nearby an existing Nissan factory. Plans currently call for an initial Nissan Infiniti model to be rolled off the new assembly line by 2017, followed by a yet to be named Mercedes-Benz model in 2018.
The news follows last-year’s announcement by Volkswagen’s Audi division in building a $1.3 billion plant in Mexico. Volkswagen is also working on a design for a new smaller SUV model for the U.S. market, and with that model, will have to make an additional decision regarding augmenting North America based production. The Wall Street Journal further indicates that Hyundai is also expected to unveil plans for its first auto assembly plant in Mexico.
Why the attraction to Mexico as a North America automotive production hub?
The first and foremost answer is direct labor costs. Media is quoting a recent study conducted by KPMG indicating that labor costs are currently 60 percent lower than those in the United States. This week, the Wall Street Journal made reference to a study conducted by automotive industry consultancy AlixPartners indicating that 57 percent of the top 100 Europe based automotive assembly plants are operating at less than 75 percent capacity. This is the obvious overhang from the recent severe recession that impacted Europe, where auto sales declined rapidly. Yet, in the midst of this excess capacity, European OEM’s are augmenting capacity in other lower cost regions.
The second factor involves other costs. Under NAFTA, factories in Mexico have tariff-free access to U.S. and Canadian consumer markets, while having the ability to leverage lower costs in other areas such as domestic transportation. Mexico also provides a considerable currency and labor cost advantage over European based auto plants. That leads to the third factor, global logistics. Mexico has invested in both its Gulf and Pacific west coast ports which provide added opportunities to export auto production to other global markets including Europe, Latin America or even Asia.
From our Supply Chain Matters lens, European automotive OEM’s are exercising the same strategies that major Japanese OEM’s Honda and Toyota had previously embarked on, investing in North America production as a platform to support evolving export markets. Honda exported 108,705 U.S. made vehicles to 50 countries in 2013.
With the new attraction of Mexico, global OEM’s gain even more flexibility in determining the most profitable supply chain sourcing and production paths to support global demand or offset currency fluctuations.
In the end, U.S. manufacturing resurgence is not a lock-in as OEM’s continue to discover other lower-cost options.
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