Expansive Mexican Site Signals Audi’s North American Ambitions

SAN JOSE CHIAPA, Mexico – A telltale sign of Audi’s ambitious North American expansion plans is the automaker’s sprawling assembly plant now in the early stages of construction here.

Set on 1,137 acres (460 ha) on the outskirts of San Jose Chiapa, some 1,200 trucks go in and out of the grounds daily as earth is moved, new foundations laid and steel planted for the German luxury-car maker’s first vehicle factory in the region.

Scheduled to launch series production in mid-2016, the new facility – with twice the physical footprint of parent Volkswagen’s 600,000-plus capacity plant in nearby Puebla – will build some 150,000 Q5 CUVs for sale in North America and export around the world.

But the plant is about more than just building vehicles. For Audi, it is the first big stake in the ground for what is foreseen as a significant presence in the region by the end of the decade.

Symbolic is the latest groundbreaking ceremony held last week for a 148-acre (60-ha) supplier park on the plant grounds that will see an initial wave of seven parts makers set up operations to provide components just-in-time and in sequence to the adjacent Q5 plant.

The park is just a first step. But it also represents a culmination of sorts for Audi in its intensive, 18-month effort to recruit and cultivate North American suppliers as it builds a local auto-making infrastructure from scratch in Mexico. Additional phases are likely as more parts makers decide to co-locate here.

Maximizing local content is critical for the operation, not only because it will lower costs and simplify logistics, but also because it is needed for San Jose Chiapa to serve as a launch pad for Q5s sold around the world.

Once completed, the plant will be the sole source for all next-generation Q5s sold globally, with the exception of China, which also will tool up for the vehicle at a new plant.

Of San Jose Chiapa’s 150,000-unit 3-shift capacity, officials expect about 40,000 of the CUVs to be shipped to the U.S. and Canada and a small portion to serve the local market, where Audi currently sells about 12,000 vehicles annually. The remaining 100,000-plus units will be exported to Brazil, Argentina and elsewhere in Latin America, as well as to Europe, Japan and other markets in the Asia-Pacific region.

Minimum local content of 65% will be needed to ship vehicles to the U.S. and Canada under the North American Free Trade Agreement, but Audi says it expects to achieve an even higher 75% at launch and ultimately reach 90% as it moves to localize powertrain production.

So far, the automaker has 130 suppliers lined up to service San Jose Chiapa, more than 75% North American-based and 20% from Europe.

“If 90% of the cars would stay in the U.S., then maybe the U.S. is a better place (for locating the new plant),” purchasing chief Bernd Martens concedes. “But if you have a big volume which also goes abroad, then you have to have (a location) with trade agreements that favors exports.

“This was the key element,” he emphasizes. “Mexico has better conditions in terms of exporting cars to the world than the U.S.”

Cultivating Suppliers Critical Task

But that also means Audi has its work cut out for it in recruiting suppliers that will meet its quality objectives and ensure a Q5 built in Mexico is every bit as good as current models shipped from Germany.

“As the first premium-car maker here in Mexico, all eyes naturally will be on us,” Klaus Peter Korner, head of production for Audi Mexico, says at the supplier-park groundbreaking ceremony.

One advantage of locating 37 miles (60 km) from Puebla, where parent Volkswagen’s 47-year-old factory will pump out more than 400,000 Golf, Jetta and Beetle models this year, is the proximity of a ready-made local supply base.

But officials say even many of these longtime VW suppliers may have to step up their games to meet Audi’s more stringent quality and delivery requirements. Audi began researching the local parts infrastructure in 2012, pulling raw materials from the region into its labs to verify their suitability.

“Sometimes we had to improve (the quality),” Martens says. “And today I can confirm we have 90% of the raw material necessary approved through our laboratory.”

But that’s just the beginning. Parts makers also will have to follow Audi production methods, and prove they have a much firmer hand on their own Tier 2 and 3 suppliers than in the past.

“They have to show the plans and show where the parts are coming from that go into their subassemblies,” Martens says. “Most of the time, (when there have been vehicle-launch problems), it was with the second- and third-tier (suppliers).

“The suppliers we are going after have dedicated lines…(that) will produce parts for us,” he adds. “The same supplier that is delivering parts to General Motors can also deliver parts to Audi, but he has to show the plans to us.”

The first seven companies set to co-locate at the plant site are Faurecia (exhaust systems), HBPO (front end modules), Ficosa (side mirrors), Kautex (fuel system/tank), Draxelmeier (wiring harness), Truck and Wheel (complete wheel mounting) and HP Pelzer (carpeting).

Audi says 1,000 workers will be employed by the seven suppliers.

Construction remains in the early stages at the site, but foundations have been poured and steel girders are in place framing the outlines of the complex that includes a 1.1 million-sq.-ft. (99,000-sq.-m) assembly plant, 248,000-sq.-ft. (23,000-sq.-m) body shop and 463,000-sq.-ft. (43,000-sq.-m) paint operation.

Flanked by those facilities is the 14,000-sq.-ft. (1,300-sq.-m) “spine,” a nerve center of sorts that will house plant management and technicians.

Although this area seems more dry and dusty than wet, to prepare the grounds 161 million sq.-ft. (15 million sq.-m) of soil is being removed, replaced with a 20-ft.-deep (6-m) mix of materials designed to improve drainage.

The beginnings of a new highway also are taking shape and there are signs of inbound and outbound rail spurs that will make shipping parts into and finished vehicles from the factory a much easier task. Once completed, the highways and rail access will knock 40 minutes off the journey from Puebla, now an hour or more bone-jarring drive.

Audi Production System 'Magic Formula'

The factory will employ 3,800 workers, including some 700 white-collar staff, once full production is reached sometime in 2017. Among blue-collar workers, about 650 are expected to man the final-assembly line.

Audi plans to launch pilot production in mid-2015, with about 450 Q5s assembled to work out the kinks in the build process, check the quality of incoming parts and make sure the first batch of workers is up to speed.

Job One won’t come until a year later in mid-2016, and Korner says output will be increased steadily after that as new employees come onboard and Audi divides the workforce first into two, then three shifts.

“We will have a smooth ramp-up day by day and week by week,” the plant manager says. “(Once) we have a 2- to 3-week run of stable production and we have the people trained, then we ramp up the next group to double production.

“(When) one shift is on full capacity, then we (will) split the team and go with a second shift. And the same process we’ll do with the third shift, the night shift.”

Production will be dedicated to the second-generation Q5, which Korner says currently is in the design stage in Germany and “will be an absolute highlight.”

No other vehicles are planned for now, but officials don’t rule out the possibility of building e-tron hybrid versions of the Q5, though no timing is indicated. WardsAuto forecasts call for a second model, the Q6, to go into production at San Jose Chiapa in 2017 and compete with the BMW X6 and Land Rover Evoque.

The Audi Production System, Korner says, is the “magic formula” that will allow the automaker to launch a new vehicle with a new plant and workforce in a new country and with a bevy of first-time suppliers. “APS manages every aspect of the project inside and outside the plant,” he says, noting the process dictates everything from how vehicles and parts are made to how workers are hired and suppliers selected.

Investment here will total $1.3 billion, with $800 million already allocated to construction of the plant and its equipment. Another $350 million will be spent on supplier tooling, including $230 million in the Puebla region alone.

Audi says the plant will spawn an additional 20,000 spin-off jobs in the area, equal to five jobs created for every worker employed directly by the automaker.

Just-In-Sequence Puts Pressure on Suppliers

Critical to keeping costs down are Mexican wages, which reportedly are about 11% of those in the U.S. and 8% that in Germany.

But also key is running the plant with minimal inventory, which is where Audi’s Just-In-Sequence supply strategy takes hold. Those in the supplier park and some other manufacturers of strategic parts will be required to ship parts in sequence with only a 30-minute lead time from when they will be needed on the assembly line.

Thyssen Krupp, which makes front axles and midline and corner modules for Puebla-built VW Golfs, Jettas and Beetles, currently works under similar constraints. While not among the initial occupants of the San Jose Chiapa supplier park, TK will assemble rear-axle modules for the locally made Q5s and is expected to join a second wave of parts makers locating onsite.

For the VW operations, TK gets a broad production forecast from the automaker nine months in advance. Four weeks ahead of production, the first official orders are received, but those can change up to seven days ahead of production.

The build sequence can change as late as two shifts ahead of production. Once locked, TK’s Puebla operation has 144 minutes to begin production and deliver the component in sequence to VW’s nearby assembly plant, says TK Mexico Chief Operating Officer Jorge R. Sanchez Fornaguera.

“There’s no inventory at the VW plant and only 144 minutes of inventory here,” he notes of the cost-saving tactic.

Despite the constant pressure of supplying 2,000 vehicles per day with a long list of potential parts combinations, TK hasn’t had a sequencing issue since last year, Fornaguera says.

But that level of success will be tested severely with the new rear-axle operations for Audi that will be housed in a planned €5 million-€6 million ($6.9 million-$8.2 million) facility employing 252 people.

“The rear axle is more complex” than what TK builds for VW today, Fornaguera says.

Puebla Governor Rafael Moreno Valle, considered a can-do politician instrumental to making the San Jose Chiapa plant a reality, points to Audi’s commitment to the region, which dwarfs the size of investment parent VW made in 1967 with its plant in the state initially designed to build just 17,000 Beetles a year.

“Audi will be making 150,000 cars in 2017,” he says. “This is an unprecedented project. What we’re doing here is the best way to fight poverty.”

Only about half of the site is needed for the assembly plant and other facilities in the works. The remaining 568 acres (230 ha) already is being prepped for a potential expansion that would see a second identical assembly operation constructed as more capacity is needed, a prospect considered highly likely by those involved.

“We will test the market…look for some time and then we will make a decision,” Martens says of the potential to expand. “But certainly we are prepared from (an) infrastructure (standpoint). The paint shop is prepared for higher capacity, the construction of the building is prepared for that, so that we can decide – after this investment.”

After launching a new plant with a new vehicle and a virgin supply network, adding another 150,000 units of capacity will be the easy part, Martens says.

“Once we have this done, the next car…uses all the structure,” he says. “So the plant is here – doubling its size is no big deal.

“But we make it in steps, because we want to have a sustainable growth,” he adds. “We don’t want to make an investment (and end up with) half the plant empty.”

The new capacity is integral to Audi’s goal to grow sales in the U.S. from 158,000 last year to 200,000 in 2018, while hiking worldwide volume to 2 million units by then. The automaker appears well on its way to meeting these targets, with global sales last year topping 1.5 million in 2013, up from less than 770,000 a decade ago.

[email protected]