In July 2014, BMW announced that it will build a new plant in Mexico near the city of San Luis Potosi in the San Luis Potosi state with an investment of US$1 billion. There are several reason why the company prefers production in Mexico over China and the U.S. According to a report from Automotive News Europe, the company’s growth rate in China is significantly dropping every year from the past few years and is expected to fall even further.
The growth in the Chinese market was 70% at one point, which kept falling as years passed and was just 17% in 2014, and is forecast to fall further to a single-digit percentage this year, suggests the report. There is a steady decline in the revenue as well. Moreover profits from locally built cars are split 50-50 with JV partner Brilliance Auto.
The company already has a mass manufacturing facility in the U.S., but has still decided to open a new one in Mexico instead of expanding the U.S. facility. Though some of the most common reasons behind such a move are cheaper labour costs and affordable land, there’s more to it. A report from Wall Street Journal states that this kind of move for global production is to reduce the trade-related cost. Not just BMW, many other well-known automakers producing cars in the U.S. and Canada are turning to Mexico not just for lower fixed and variable costs, but for cheaper exports too.
The report provides an instance supporting its statement that every Made in USA BMW sold in Europe (European Union countries) is hit with a 10% import duty. As per the report, Mexico has 10 free trade agreements with 45 countries-counting EU members separately, and other trade deals in Latin America and the Asia Pacific. The U.S. has free trade agreements with 20 countries but these countries are mostly the small ones such as Chile, Jordan and Panama, adds the report. BMW is just one of the many automakers turning to Mexico for their global production to save fixed costs, operational costs and trade costs in the long-run. The consumers should benefit from this move due to reduction in the cost of selling, and thus the selling price of the cars.