AN LUIS POTOSI, Mexico — To reach productivity benchmarks at its Mexico factory, BMW AG will embrace a new and innovative supply chain and logistics plan.
The German luxury maker won’t simply transfer its supply base from its other North American factory, which opened 22 years ago in Spartanburg, S.C. And it won’t demand that suppliers serving the South Carolina plant set up shop in Mexico, says Oliver Zipse, BMW board member for production.
Instead, it will create a new North American supply base.
“We will see all the latest state of the art here,” Zipse promised.
Those innovations will include:
- Assembly of parts modules for sequential delivery by BMW employees, operating apart from the vehicle production line.
- A GPS-based logistics web “geo-fence” that will track components coming into the plant and alert BMW about delays or problems.
- A nearby supplier park that can ship products in sequence as they are needed.
The factory will begin production in 2019, making BMW’s best-selling car in the United States, the 3-series sedan. It will be capable of building any of the automaker’s rear-wheel-drive vehicles that use BMW’s new flexible Cluster Architecture on one line. At capacity, the plant will be able to produce 150,000 vehicles annually and has been designed for easy expansion, Zipse says. It will include body and paint shops and an assembly line, but not metal stamping. The press shop will be outsourced.
The Mexico factory also has been designed so components come in at one end of the plant — a logistics advantage over the Spartanburg layout. The South Carolina plant layout has evolved over the last 22 years as the plant expanded. It now has what the company calls “fingers” of activity protruding along three corridors for 80 percent just-in-time deliveries to the assembly line.
In Mexico, BMW has the luxury of making parts delivery more streamlined from the beginning.
“You will have a substantial amount of direct assembly, where trucks end up at the delivery line,” Zipse said.
The venture also will make BMW a bit chummier with General Motors. The 300-acre San Luis Potosi site is adjacent to an established industrial park where many suppliers make components to serve a nearby GM plant, in operation since 2009.
Spartanburg does not have an adjoining supplier park, or even one in the near vicinity. And when that plant started from scratch in 1994 making the 3-series sedan, it also did not have the luxury of taking advantage of a neighbor’s established local supply chain. Compared with Mexico in 2016, Spartanburg of 1994 was a remote spot on the North American automotive supply chain map.
BMW began the search for a second production site in 2011, when the German automaker foresaw the global car market expanding quickly. BMW has ridden the wave of that market growth since launching North American manufacturing. Spartanburg started with the capacity to build about 70,000 cars a year. It is now the company’s largest auto plant, with expectations to produce 450,000 crossovers this year.
By comparison, with an initial capacity of 150,000 vehicles a year, San Luis Potosi is beginning at more than twice the scale that Spartanburg had.
Investment: $1 billion
Product: BMW 3 series
Annual capacity: 150,000 cars
Production start: 2019
Supplier plans: Tap into existing Mexico parts industry, bring some parts from BMW's South Carolina supply base, assemble some parts internally, embrace suppliers that are new to BMW, import some content from Europe
Mexico is a rapidly evolving location for automaking. Today, no premium brands manufacture in Mexico. But by the time BMW opens there, Audi will be making Q5 crossovers in San Jose Chiapa, and Mercedes-Benz will be building crossovers at a joint factory with Infiniti in Aguascalientes, starting next year.
These evolutions make it less of a concern to BMW that the Mexican supply base hasn’t mass-produced parts for premium brands yet, Zipse says.
BMW will use suppliers and parts mainly from North America, including some that already are supplying Spartanburg. But about 120 BMW suppliers already have locations in Mexico, and last year alone, about $2.5 billion worth of Mexican-made parts were exported to BMW plants worldwide, including the United States, BMW estimates.
“It is already a substantial supplier base for our business,” Zipse said.
Hermann Bohrer, former director of BMW’s Munich factory, has been put in charge of the Mexico manufacturing operation. He said some suppliers “will come to supply only us” but declined to give specifics.
When choosing suppliers, BMW will not source parts based on whether the company already is serving BMW in the United States, but it will look at whether “they are competent with good technology and cost-efficient,” Zipse said. For example, the automaker has decided to source painted bumpers from the Chinese supplier Minghua de Mexico, which is constructing a nearby plant.
Wiring harnesses will be provided by Draexlmaier Group, headquartered in the German state of Bavaria, where BMW is based. Zipse also mentions Magna International of Canada as a likely source.
“The overall assessment is we will have enough local suppliers around here to build premium vehicles,” he said of the new location in Mexico.
The Tier 2 challenge
Guido Vildozo, senior manager, Americas, for IHS Automotive in Lexington, Mass., notes that Detroit 3 vehicles that retail for more than $40,000 have been built in Mexico in the past for Cadillac, Lincoln and Saab.
“It’s not the first time Mexico has moved in that direction,” he said. “But this is the first time we will see a German premium build.
“Tier 1 suppliers are well-established,” he confirmed. “But we find a challenge in Tier 2s and Tier 3s. That is where we have holes.”
Armando Cortes Galicia, automotive industry coordinator for the Mexican trade agency ProMexico, says that since the BMW plant announcement in 2014, more than 40 new parts suppliers have arrived in the state of San Luis Potosi. Another 11 major suppliers have expanded there.
But one of their competitors may be BMW itself.
The new auto plant will rely on what Zipse calls “modular insourcing, not from the outside — for flexibility reasons.”
BMW will take over some components itself partly to guarantee a facet that is important to the BMW brand: the ability to have last-minute assembly flexibility. That is primarily so that a customer or dealer order can be changed up to 10 days before the vehicle is manufactured. BMW is striving to allow last-minute changes up to six days before the manufacture date.
Because the parts modules coming to the line will be large and have to arrive in production sequence, BMW chose to have them built by its employees.
That is a new element of vehicle assembly for BMW, Zipse says. And it is the sort of design consideration that impacts an automaker’s supply-chain decisions.
BMW wants its plant to be flexible enough to allow the brand to satisfy customers. But San Luis Potosi also must be a cost-efficient investment. Insourcing modules provides more production flexibility, but it triggers other plant costs.
By assembling modules on a lane that is off the vehicle production line, the plant will be a little less expensive to construct, he says. But insourcing modules will create storage needs for large components.
“You have to be careful your sequence costs do not become outrageous,” Zipse commented. “Your plant might look simpler but not be flexible. That is very expensive.”
Traffic and clogged ports
There are advantages to building in Mexico, such as lower labor costs. “But we will have disadvantages,” Zipse acknowledged. “The most obvious is the engine is produced in England, Germany or Austria, and you have to transport it.”
There are major transportation bottlenecks at certain times of the day, Hermann says. Ford also is building a factory in the area, and when added to BMW’s parts logistics and production-related traffic, the problems will multiply. In Veracruz, where shipments will arrive for the plant, “the harbor is full,” he said. “We are working with the government on the infrastructure.”
Guido Vildozo believes Mexico’s industry already is feeling the strain of the country’s railroads and ports running close to capacity. But that is while operating at the industry’s current output, and Mexico is in the midst of a growth boom.
According to Fuasto Curvas Mesa, director general of the country’s automobile industry trade group, the Asociacion Mexicana de la Industria Automotriz, Mexican auto production will increase from 3.4 million vehicles last year to more than 5 million by 2020. Mexico is the seventh largest automotive producer in the world, Mexican industry and government officials said.
The pinch of growth is pushing BMW to deploy new logistics ideas for its parts in Mexico.
Manfred Erlacher, president of BMW Manufacturing Co., says logistics there will be aided by the introduction of an Internet-based technology referred to as a geo-fence. The geofence monitors parts deliveries within a specified distance of the assembly line using location-aware devices. It shows BMW production planners the status of each delivery truck and what it is carrying. In the event of a delay, BMW can use the database to find alternate sources or adjust the production schedule if necessary.
The geofence is being piloted in Spartanburg by three suppliers. If successful, it will be transferred to Mexico for the supply chain. It would allow BMW to keep only a two- to four-hour supply of components at the plant, Erlacher explains.
Aid not disclosed
Creating all this in Mexico from scratch is a costly project. BMW says it will spend $1 billion on the plant.
The Mexican government provided aid for the project, but government officials would not disclose how much. BMW will not pay local or state taxes for 10 years. Mexican reports have said BMW’s aid will total about $236 million.
The price tag demonstrates the enormity of the decision for the automaker. A new plant requires real estate and investment dollars — but it also requires new solutions and technology to bring in the parts to make it possible.