Volkswagen Group picked Mexico to build a new North American factory for its premium Audi brand -- a move designed to drive exports and relieve supply constraints that executives say have limited the automaker's U.S. sales growth.
The Audi supervisory board decided today in favor of Mexico over a site next to the VW group's existing U.S. factory in Chattanooga, Tenn., which opened a year ago to build the VW Passat.
The Mexico plant will provide a boost to the VW Group's sales prospects and manufacturing operations in North America, where its light vehicle output rose 25 percent in 2011 to a record 542,363 units. Audi posted a 16 percent sales gain last year to a record 117,561.
Audi said it will build an SUV at the factory starting in 2016 and a site for the plant will be selected later this year.
A source familiar with the matter said Audi plans to build the second-generation Q5 SUV at the factory, along with potential variants of the model, for export to markets worldwide.
Only about 26 to 27 percent of the Q5s built in Mexico will be sold in the United States; the rest will be shipped overseas. The factory is expected to build 120,000 to 170,000 vehicles annually, the source said.
Trade duties, such as those imposed on vehicles exported from the United States to markets in Europe and South America, were a major factor in Audi's decision to locate production in Mexico.
Per-vehicle manufacturing costs also were significant lower than in the United States and the quality of vehicles being built in Mexico has vastly improved, making Audi officials confident quality won't be a problem, the source said.
Audi is considering sites in central Mexico and plans to start construction on the new plant in 2013, the source said. The amount of Audi's investment in the project hasn't been determined because the location has yet to be determined.
"Good infrastructure, competitive cost structure and existing free trade agreements played a significant role in the choice of Mexico," Audi CEO Rupert Stadler said in a statement. "This trailblazing move will help us safeguard our position on the world market."
By picking Mexico, VW Group will be the first and only German automaker to locate major assembly operations south of the U.S. border to build luxury vehicles.
Mercedes-Benz and BMW -- two of Audi's chief competitors -- have major factories in the United States, where they build mostly crossovers and SUVs.
Other foreign premium brands, such as Honda Motor Co.'s Acura division and Nissan Motor Co.'s Infiniti unit, also build luxury models stateside.
Toyota Motor Corp.'s Lexus brand builds the RX crossover at a factory in Ontario, Canada.
The decision appears to be a win for Audi's Stadler, who according to Automobilwoche, a sister publication to Automotive News, had been pushing for Mexico over the United States.
Executives at the parent company had preferred the U.S. site because of its proximity to existing suppliers and the marketing benefits of the "Made in the U.S.A." label.
But Mexico has its advantages too.
With the Mexico plant, VW will be able to export to countries in Europe and the Americas duty free. Also, the brand will be better positioned to ship vehicles to South America, where it sees Brazil as a promising market.
By building Audi models in North America, the VW group will also better guard against currency fluctuations and help free up capital to invest in new models and technologies for the U.S. market.
The VW group already builds the VW Jetta and Beetle at its Puebla, Mexico, factory about 80 miles southeast of Mexico City. It plans to open an engine factory next year in Silao, Mexico, a centrally located city in the north, to build 300,000 engines a year for North America.
Audi's North American factory is crucial to VW Group's aggressive push to surpass General Motors as the world's leading automaker. By 2018, it wants sell 10 million vehicles globally a year -- up from the 8.3 million it sold worldwide last year.
In the United States, it has equally ambitious goals: it aims to sell 1 million vehicles a year here by 2018, including 200,000 Audis annually.
VW Group of America sold 443,840 vehicles in the United States last year, up 23 percent over 2010. Sales during the first three months of 2012 have climbed 34 percent to 124,293 vehicles.