Suppliers are also investing in new production bases in Mexico to meet an expected surge in demand from automakers’ upcoming facilities

Last week, Audi became the latest automaker to open new production base in Mexico. The premium car unit of the Volkswagen Group inaugurated the facility in San Jose Chiapa in Puebla, the company’s first manufacturing plant in North America. The company invested over EUR1 billion (USD1.1 billion) in the new plant, which has an annual production capacity of 150,000 units. The Mexican plant will become a global production source for the next-generation of Audi Q5 sport utility vehicle (SUV), which the automaker is showcasing at the Paris Motor Show. 

Given that the San Jose Chiapa plant will cater to the Global markets including the United States and Europe, Audi has taken several initiatives to aid production. The German automaker has invested in a “supplier park” near the vehicle production plant that already houses seven companies; four suppliers (Faurecia, HBPO, thyssenkrupp, and TI Automotive) and three logistics providers (Truck and Wheel, Kuhne+Nagel, and Syncreon). The supplier park allows the German carmaker to source key components for the Q5 on a just-in-sequence (JIS) basis. Audi is also focusing on higher localisation and is already sourcing 70% of the parts from the North American Free Trade Agreement (NAFTA) region. The company intends to further increase this localisation in coming years. In Mexico alone, more than 100 companies are supplying parts for the Audi Q5. 

Audi’s archrivals BMW and Mercedes-Benz are not far behind. BMW began construction of the plant in San Luis Potesi in June this year with plans to start operations in 2019. The company is investing USD1 billion in the plant which will have annual production capacity of 150,000 units and produce the BMW 3 Series. Mercedes-Benz’s parent company Daimler is leveraging a strategic partnership with Renault-Nissan to produce Mercedes-Benz vehicles in Mexico. The two partners established a 50:50 JV in 2014 and are jointly investing USD1.4 billion in setting up a manufacturing facility in Aguascalientes, where Nissan already operates two production plants. The new JV manufacturing facility will begin producing Nissan’s Infiniti brand vehicles from 2017 and Mercedes-Benz vehicles from 2018.   

Automakers are scrambling to set up production base in Mexico to serve key automotive markets. The companies are attracted by Mexico’s 12 free-trade agreements (FTAs) covering more than 50 countries. Last month, Kia opened its first production facility in Mexico in Pesqueria, Nuevo Leon. The Korean automaker is looking to produce 400,000 units per annum (upa) in near term at the USD3-billion plant.

Among Japanese automakers, Toyota is investing USD1 billion in new manufacturing facility in the state of Guanajuato, scheduled to begin operations in 2019. The new plant, Toyota’s second in the country, will produce the Corolla compact sedan. Toyota also operates a production facility in Tijuana that assembles Tacoma pickups. Last month, Toyota announced an investment of USD150 million at the Tijuana plant to expand production capacity to 160,000 units per annum by early 2018.

The US automakers such as Ford and GM have used their low-cost production base in Mexico to meet demand in their domestic market. However, these automakers are facing protests whenever they announced plans to invest in Mexico, including from worker unions. In April this year when Ford announced plans to invest USD1.6 billion in a new production plant in San Luis Potosi to produce small cars, the automaker’s move was criticised by the Republican presidential candidate, Donald Trump. During the same month, the automaker also announced USD1.6 billion investment at its US facilities. Ford has already revealed plans to stop small car production in the United States citing relatively higher costs and relocate production to Mexico over the next two three years. The company is already taking necessary steps including talks with United Automotive Workers (UAW) union, to shift Focus and C-Max production to the new plant when it begins production in 2018.

With several automakers investing in new production facilities or expanding existing ones, vehicle production is all set to see rapid growth in coming years. IHS Automotive forecasts light vehicle production will grow from 3.39 million units in 2015 to 4.9 million units by 2020. The strong growth in investment by automakers is driving automotive suppliers to invest in Mexico. Hardly a week goes by when there is no announcement of an investment by suppliers. This year alone, major suppliers including Bosch, Brose, Edscha, Magna, NSK, SKF and thyssenkrupp have either announced investments or have begun operations at their newly established plants to cater growing demand. Tire manufacturers are also not far behind with Michelin and Goodyear investing in new production facilities that are scheduled to become operation in the next few years. 

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