SAN FRANCISCO – Audi AG is setting it sights on building up its North American business, although a weak U.S. dollar and a strong euro are wreaking havoc on those plans.

The German auto maker’s laser-like focus on the region is requiring some outside the box thinking, executives say, including the possibility of production in the U.S. for the first time.

Audi’s North American chief, Axel Mees.

Axel Mees, vice president in charge of Audi’s North American unit, says he personally believes the luxury-car maker should consider building vehicles here.

U.S. production is “regularly discussed” at Audi headquarters in Ingolstadt, Germany, Mees tells Ward’s in an interview here at the U.S. media launch for the ’05 A6.

“I believe that from a certain volume on, you certainly have to be very strong where the market is and you shouldn’t look at it purely from an exchange-rate perspective but from a market perspective,” he says. “You have to be present where you think your growth is.”

Rumors have been growing in recent years that Audi would build vehicles at parent Volkswagen AG’s plant in Puebla, Mexico. The facility appeared to top the list of possible North American sites because of Mexico’s lower labor rates.

But Mees pours cold water on that conjecture, saying Mexico may not be the right location for Audi to serve North America.

He points to Mexico’s supply base as one of the leading obstacles to building luxury vehicles in the country.

“If you go to Mexico, the supplier industry there is not as developed as Audi requires,” he says. “It is catering to low-cost vehicles and not complicated (expensive) vehicles.”

Locating production in Mexico would require Audi to import engines, plastics and other major components from Germany, making it impossible to meet the 65% local content requirements of the North American Free Trade Agreement and eliminating potential for the vehicles to be shipped tariff-free into the U.S. and Canada.

“You might sell the cars in Mexico, but you cannot export them to the U.S.,” Mees says. “If Audi decides to build vehicles in the North American market, it would make more sense to come straight to the U.S.”

While there are no immediate plans for that, Mees says the auto maker could build a business case for a project at an annual volume as low as 50,000 vehicles.

However, being part of the VW Group poses certain limitations. It would cost at least $600 million to $800 million to set up a plant in the U.S. to produce 50,000 vehicles annually, he says. That’s a significant investment for an auto maker with a comprehensive global footprint, and VW likely would pressure Audi to use one of its existing facilities if possible.

Mees declines to speculate on when Audi and VW may decide whether to build a factory in the U.S., although he plans to become more intimately involved in the debate in the coming months.

Inside sources say Mees’ case may be growing stronger by the day. Audi’s product plans include doubling its model lineup from the current 20 to 40 within the next 10 to 12 years. The auto maker is likely to shift its product-development focus from building a single vehicle range to meet all global market specifications to developing models designed specifically for select markets.

“If we want to be successful in the U.S. we have to do cars for the U.S. market,” says an Audi source. “European cars have become so expensive and unreliable because they have to be built for all markets in the world. There are discussions on this happening in Ingolstadt right now.”

That change in strategy would help Mees realize his personal dream of having an Audi factory in the U.S. With the U.S. taking a front-and-center role in Audi’s growth, he says the auto maker “can’t avoid” eventually building vehicles in this country.