MEXICO CITY (Bloomberg) -- Mexico's relationship with German car production began nearly 50 years ago with output of Volkswagen's mass-market Beetle. Now it's becoming a place where high-end BMW, Audi and Mercedes-Benz cars roll out of billion-dollar factories.
By decade's end, Mexico will claim fourth place worldwide for German luxury output after the carmakers' home country, China and the U.S., according to estimates compiled for Bloomberg by IHS Automotive consultant Guido Vildozo, surpassing Belgium, Spain and Brazil.
In choosing Mexico for a plant site this year, BMW Group validated the nation's emergence as an auto-assembly powerhouse from its roots making the iconic Beetle. BMW, Audi and Mercedes have all decided since 2012 to build cars in the country.
"Mexico has become the crossroads of automotive trade for the western hemisphere," IHS Automotive Managing Director Michael Robinet said. "Mexico has proved it can build a vehicle of any stripe."
The luxury automakers jumped ahead of some competitors that are still refining strategies for Mexico, which is poised to become Latin America's largest vehicle producer. South Korea's Kia Motors Corp. announced a more than $1 billion project in August, while Toyota Motor Corp., the last major automaker without a high-volume Mexico assembly plant, is still studying expansion plans.
The country has received negative attention recently as the source of some of Takata Corp.'s defective air bags, blamed for at least five deaths. While it was once seen as a dangerous place, where executives feared for their safety, it's now winning the trust and investment of the highly regarded manufacturers.
Mexican factory quality, a surge in engineers and an expanding domestic parts industry all helped pave the way for BMW, Mercedes and Audi, said Armando Soto, president of Kaso & Asociados, a Mexico City-based auto industry consultant.
"This was quite an easy decision," Bernhard Eich, the BMW director for the new San Luis Potosi plant, said. "We are very confident we will find the skilled workforce. We have a huge supply network in Mexico."
Beetles to BMWs
BMW is set to start production in 2019, and will be the last of the three luxury automakers to begin output. Audi, the first of the group to announce a Mexico plant, will begin assembly in 2016. Daimler, along with Nissan Motor Corp., will make Mercedes and Infiniti compact cars at its factory opening in 2017.
Volkswagen ushered in the German auto-production era in Mexico by building Beetles from 1967 to 2003 in Puebla state. The cars were once the vehicle of choice for Mexico City taxi companies, with thousands in green-and-white livery plying the capital's crowded streets. The Beetle production legacy was a draw for Audi, according to Javier Valadez, a spokesman for the carmaker, a Volkswagen unit.
"Mexico is the ideal country for Audi," Valadez said. That's because of "the level of development of Mexican providers as well as its distinct knowledge of German engineering thanks to the relationship between Mexican companies and Volkswagen for more than 50 years."
The Volkswagen brand also may join the high-end auto push. Excelsior newspaper reported without attribution Sept. 8 that VW was considering making Touareg and Tiguan SUVs by building a third plant in Puebla state. Israel Victoria Diaz, a spokesman at the company's Mexico unit, told Bloomberg that the automaker doesn't have any concrete plans concerning new projects in Puebla.
"It's a snowball effect," Bill Rinna, senior manager of North American forecasts at LMC Automotive, said. "As more automotive suppliers move there and more of these OEMs add capacity in the country, it attracts other manufacturers to the region. Cost definitely has to do with it, but there's also a highly skilled workforce there."
Graduates from technical schools and engineering programs increased to about 25 percent of degree-holders in Mexico in 2011 from about 15 percent in 2007, compared with a stagnant rate of close to 10 percent in the U.S., according to ProMexico, the nation's export promotion agency.
Soto of Kaso & Asociados said parts priced about 10 percent cheaper than in the U.S. let German luxury brands hit by Europe's recession cut costs without sacrificing the quality their clients demand. Improvements in automation at Mexican plants have helped the country lure the industry's leaders, said Michelle Hill, a consultant at Oliver Wyman. The nation's labor productivity is improving faster than in the U.S., Hill said, citing editions from previous years of her firm's Harbour Report.
In addition to the German brands that dominate global premium sales, Ford Motor Co. makes the Lincoln MKZ in Hermosillo, and General Motors Co. builds the Cadillac SRX in Ramos Arizpe, though that work will move to Tennessee, in the U.S., at the end of next year.
The output bump from premium automakers flocking to Mexico will allow the nation to push aside South Korea to become the third-largest car exporter after Japan and Germany by 2016, according to IHS's Robinet.
Both Audi's Valadez and BMW's Eich said they may expand beyond the 150,000 units they're each scheduled to produce per year. The Nissan-Mercedes venture may produce 300,000 vehicles annually.
"There will be a huge increase of capacity in the luxury market," Eich said. "We approached Mexico because we knew about the advantages."