The road joining Puebla City, Mexico, and San José Chiapa gets so rough in spots it can barely be considered paved. Mules tug plows through dusty fields a few yards from the windows of Audi’s chartered luxury coach as we make our way through this poor, agro-industrial region to the groundbreaking ceremony for Audi’s first North American plant, which will also become Mexico’s first premium-brand automobile factory.
By mid-2016, up to 150,000 Audi Q5 crossovers will start rolling off a state-of-the-art assembly line here.
If Audi’s vision becomes a reality, much is about to change around here. Set on 400 hectares of land (roughly equivalent to 400 soccer fields), the Puebla complex represents a $1.2 billion investment on Audi’s part in 2013 alone. Once running, some 3,800 individuals will be tasked with handling nearly all aspects of the Q5’s production, from stamping to painting to final assembly. Suppliers and other supporting entities (about 150 of which also sent representatives to the groundbreaking ceremony) are being encouraged to populate a planned “supplier park” nearby.
In total, an estimated 20,000 jobs are expected to spring up from the endeavor as new schools, municipal services, roads, residential developments and private businesses are developed to support the influx of workers.
See Autoblog’s Audi Q5 photo gallery here
Audi: A Brand on the Rise
Good for Puebla, even if only a tiny fraction of the vehicles being built here will be actually be bought by Poblanos. Indeed, only a few thousand Q5s are expected to stay in Mexico each year. Audi expects to double its annual sales in Mexico to 15,000 by 2020, but the real game here is to supply the Q5 to the U.S. But the vehicles built here will also get shipped to Europe-including Audi’s home country of Germany.
Audi is on a seemingly unstoppable tear right now, setting sales records for each of the last 28 months. In 2012, Audi sold 1.45 million vehicles worldwide, up about 150,000 from 2011. Based on current projections, Audi appears poised to easily achieve its goal of selling two million automobiles annually around the world by 2018, possibly even earlier. In the process, the company, a division of the Volkswagen Group, hopes to overtake stalwart BMW as the world’s best-selling premium automaker.
That’s where the new and expanded factories come in. According to Audi, today’s Q5 production in Ingolstadt, Germany is maxed out at 125,000 units per year, with another 80,000 or so being built between its Changchun, China and Aurangabad, India, facilities. Later this spring, Audi will start crafting an all-new version of its compact A3-including the first-ever A3 sedan model geared to U.S. customers-at a plant in Hungary. And by year’s end, Audi’s second Chinese plant will come online to help satisfy its Chinese customers’ insatiable demand for the Q5, among other models.
Audi promises that the San José Chiapa plant will be the most high-tech of its 13 production facilities when it finally comes online-even more advanced than its Bavarian mother ship facility in Ingolstadt.
Why not build in the U.S.?
The largest market by far for Puebla-built Q5s is the United States, where one out of every four off the line will end up.
With such a large chunk of Q5 output earmarked for the U.S., why didn’t Audi locate the factory in the U.S., especially after parent company Volkswagen chose Chattanooga, Tennessee, for the North American production site of its Passat mid-sized sedan?
The answer essentially involves a combination of Mexico’s geography, attractive trade agreements and dramatically lower labor costs.
First, having a North American assembly plant will shave two weeks from Q5 delivery times to U.S. dealers, which can’t seem to get enough of the hot-selling crossovers. Second, Audi considers Mexico a “bridge” between the U.S. and Canadian markets and South America, the latter representing another great frontier for the brand.
And Puebla itself is familiar territory for Volkswagen, AG: San José Chiapa is just a few dozen miles from the Volkswagen assembly plant where most U.S.-bound Jetta, Golf and Beetle models are built. VW also operates an engine plant in Silao, Mexico, that will provide one of the Q5’s volume four-cylinder engines.
Advantageous trade agreements between Mexico and other countries also played a major role, according to Stadler. In addition to NAFTA, Mexico also boasts favorable trade arrangements with more than 40 other countries in Europe, South Asia and elsewhere that represent strong export markets for Mexican-built Audis (and the Q5 in particular). VW Passats built in Tennessee are mostly earmarked for the North American market, Stadler notes, so such trade agreements are less consequential to the VW plant than they are to Audi in this regard.
There’s also the matter of currency: in accordance with NAFTA, the Puebla operations deal in U.S. dollars, and thus serve as a currency hedge in the event of exchange rate fluctuations between the Euro and the dollar, which have proven particularly troublesome for European automakers selling cars in North America in recent years.
The last and perhaps least surprising reason Audi chose Mexico over the U.S. for its North American factory involves Mexican labor costs, which Stadler calls “competitive.” What skilled workers in Mexico could do for the equivalent of $10 per hour might cost $45 to $50 per hour in America, Stadler said. On a per-vehicle basis, that could translate into thousands of dollars in profits.
Cheaper labor not expected to compromise quality
While any company can appreciate a good human resource bargain, will Audi, which is known for its envy-of-the-industry fit and finish, get what it pays for when production Q5s roll off the line? Audi doesn’t think so. First, it believes there is plenty of skilled labor within Mexico-much of it college-educated-eager to work at the country’s first premium brand automobile factory. “The best will come to Audi,” Stadler stated.
Though hiring officially begins in 2014, Audi says that it has already received some 2,500 applications. Audi says it will ensure that the Puebla workers sync up with Audi’s obsession with interior and exterior execution with unprecedented training programs, including opening an expansive training center to be utilized not just by Audi but by its local suppliers, too. It also plans to ship 500 of its early hires to Germany for six-month apprenticeships starting in 2014, placing them alongside their German counterparts to help hone their eye for certain qualities-the acceptable level of sheen on metallic surfaces, for example, or panel gap consistency-of the components they will be handling. Many will return as trainers for other new employees.
With the kind of investment Audi and the VW Group is making in Mexico, perhaps it can look forward to actually selling more of its products there to employees who will be able to afford them.
