Audi Considers Output Expansion To Achieve US Growth

German premium auto manufacturer Audi is to consider doubling capacity at its plant in San Jose Chiapa, Mexico, to 300,000 units annually. In line with BMI 's core view, the company is investing heavily in the region to gain market share.

Mexico Manufacturing For Export

Audi's San Jose Chiapa plant, which has just begun construction and will be ready in 2016, is currently set to have an annual output capacity of 150,000 units. It is to produce the Q5 sport-utility vehicle, and the capacity expansion would allow for the introduction of a second model.

Audi has previously stated that it expects to domestically source at least 65% of the content for the San Jose Chiapa site. BMI has long maintained a bullish view on the supply chain in Mexico on the back of ongoing investment and the increasing maturity of the sector. This view continues to play out.

BMI maintains a bullish outlook on auto production in Mexico, predicated on low labour costs; relative weakness in the peso, which will serve to make exports more competitive; a high number of free trade agreements (FTAs), including the North American Free Trade Agreement (NAFTA); and comparative weakness in the productive capacity of Mexico's regional competitors ( see our online service, March 5, 'Regional Production Hub To Continue To Attract Investment' ). We believe that these factors should continue to attract autos investment in the country, particularly for export-orientated production.

The San Jose Chiapa region is geographically very close to the central Mexican states, where a number of auto companies have recently invested. Indeed, we believe that the area is fast becoming a key site for industrial productivity ( see 'Central Mexican States Set For An Economic Boom', April 3). BMI believes that as the area develops, companies will be increasingly keen to invest, as a consolidated manufacturing base would offer a number of cost-reducing opportunities, such as economies of scale, availability of skilled labour, and good infrastructure and transport links.

Much of the site's output is to be exported to the high-growth US market, in line with BMI 's view that Mexico is emerging as a regional production hub. Indeed, a number of autos companies have invested across the supply chain in Mexico to export across the region.

In line with BMI 's view, Audi maintains a bullish outlook on the North American market, and expects the region to be a strong source of growth in the future. Europe and Asia are currently key markets for the company, but it expects North America to be increasingly important. Indeed, the company expect s one in every seven cars it s e ll s globally in 2020 to be in North America. BMI believes that this has informed Audi's ongoing interest in manufacturing in Mexico.

American Market Growth And Global Ambitions

BMI believes that the recovering housing market and accessible credit will contribute to 6.5% growth in the US light vehicle segment in 2013 (s ee 'Housing Recovery Gives Big Three Home Advantage', May 3 ). In the first four months of 2013, Audi's sales in the US increased 15% year-on-year (y-o-y), to 47,343 units. German premium rival BMW 's sales in the US increased 4.2% y-o-y, to 79,117 units. We expect the premium segment in this market to continue registering strong growth over the year.

Globally, Audi reported sales increased 6.7% y-o-y in the first four months of 2013, to 503,000 units, maintaining its lead over Mercedes-Benz , but still lagging behind BMW. Much of these global sales increases have been due to strong growth in European and Asian markets, but the US market is increasingly important for the brands.

This article is tagged to:
Sector: Autos
Geography: Mexico, China, Germany, United States

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