FRANKFURT (Reuters) -- Volkswagen's luxury car unit Audi said today it has picked San Jose Chiapa in Mexico as the site for its new SUV plant.
Audi announced earlier this year plans to build a factory in Mexico, a step designed to take advantage of low labor costs in Mexico and an exemption from import duties in some regions to help it reach its target of selling 1 million cars in the United States by 2018.
Audi said the new factory would have an annual production capacity of about 150,000 vehicles, as expected, and that the Q5 sport utility vehicles would be built there, starting in 2016.
The plant site is located about 40 miles from Volkswagen's existing manufacturing operations in Puebla, which produce the Beetle and Jetta.
Audi's statement didn't specifically refer to using VW's existing supply chain, but mentioned "site conditions, logistics links, infrastructure, well-qualified employees and living quality -- these were the decisive criteria for the choice of location."
Audi CEO Rupert Stadler, in a statement, said: "The production site in San José Chiapa meets various key requirements of our global growth strategy and we can step up our activities in American markets."
In the statement, Audi said the location "is an ideal base from which to supply international markets."
The move will also bring VW closer to rivaling Nissan in volume in Mexico and help Audi catch up with BMW and Mercedes in the United States. The two German competitors have had production footprints in the world's No. 2 auto market since the 1990s and each sell about twice as many cars there as Audi.
Ramping up regional production and purchasing may also help VW to reduce its exposure to unfavorable currency fluctuations which have long weighed on the carmaker's results in the United States, where it aims to return to profit next year.
VW also started building a second Mexican factory in Silao in 2011 to produce 330,000 engines per year to furnish regional vehicle production. A VW factory in Chattanooga, Tenn., to make U.S.-style versions of the Passat mid-sized sedan was opened last year.
Favorable business conditions
A member of the North American Free Trade Agreement, Mexico has favorable wage costs and is exempt from import duties. It also has a free trade deal with the European Union.
Mexican auto production and exports rose in July from the same month a year earlier, the Mexican Auto Industry Association said in its latest report, in a positive sign for the country's economy.
Almost 68 percent of the vehicles exported went to the United States, Mexico's main trading partner, compared to 64 percent in July last year.
VW has said it expects production at its Mexican facilities to rise 20 percent this year to 615,000 vehicles from 2011, compared with expected Mexican economic growth of at least 3.5 percent.
VW, which has pledged to become the world's biggest auto manufacturer no later than 2018, has a goal of boosting group vehicle sales in the United States, the world's second largest car market, to 1 million by 2018, with 200,000 units from Audi.
Construction work on Audi's new factory should start in mid-2013, and the factory will produce as many as 150,000 Q5 sport utility vehicles from 2016, Audi said.
Philip Nussel contributed to this report.