BMW said to mull first engine plant in U.S. or Mexico

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FRANKFURT (Bloomberg) -- BMW Group is considering building engines in the United States or Mexico for the first time and expanding vehicle production in the region to capitalize on growing demand, three people familiar with the matter said.

BMW could potentially decide on the project in 2014, according to the people, who asked not to be identified because the talks are confidential.

The automaker has focused on developing fuel-efficient powertrains since CEO Norbert Reithofer took the helm in 2006. BMW has kept tight control of the technology, only starting production of engines outside Europe last year with 4-cylinder units made in Shenyang, China, to supply BMW's local car plants in Dadong and Tiexi.

"As part of our long-term growth strategy, we're frequently looking at different countries for possible locations of future production facilities," Matthias Schmidt, a BMW spokesman, said. "No decisions have been made yet, though, for an additional plant."

BMW set up its only North American factory in Spartanburg, South Carolina, in 1994. The site produces X3, X5 and X6 SUVs, and is one of the U.S.'s main auto exporters. BMW may expand vehicle production in the region beyond a new model already announced for next year, the people said. Rival Mercedes-Benz makes SUVs in Tuscaloosa, Alabama.

Currency effects

BMW, Mercedes and Audi are adding production in North America to take advantage of sales-growth potential that contrasts with stagnating demand in their home market of Europe. BMW Group's 11-month U.S. sales, including the Mini brand, rose 9 percent, while deliveries at Daimler's Mercedes and Smart vehicles climbed 12 percent and Audi deliveries increased 13 percent.

Local manufacturing also reduces the effects of the dollar's moves against the euro on earnings at the German carmakers. The Spartanburg factory will start making BMW's new X4 SUV in 2014. Daimler expanded Mercedes production at Tuscaloosa in mid-2013 as part of a global effort to meet sales growth, and it will add the next version of the midsized C-class sedan there in 2014. Audi laid the cornerstone in May for a $1.3 billion, 150,000-car plant in San Jose Chiapa, Mexico, that will begin making the Q5 SUV in 2016.

Trade talks

A free-trade treaty that U.S. and European Union authorities are working on would boost export opportunities. BMW CEO Reithofer reiterated "absolute support" for a trade agreement on Oct. 28. Growth prospects in the U.S. remain encouraging because of a robust economy and more favorable demographics than in Europe, he said.

The costs of adding production capacity outside Europe and developing advanced technology such as lightweight construction or electric vehicles are weighing on German carmakers' earnings. BMW forecast on Nov. 5 that automotive profitability in the fourth quarter will weaken because of spending to roll out new models like the i3 electric car. Spending as a proportion of revenue will exceed targets this year and continue at a high rate in 2014. The outlays led to a 4 percent decline in third-quarter earnings before interest and taxes to 1.93 billion euros ($2.6 billion). The company's expansion is part of its effort to maintain an edge over Audi and Mercedes, which have both vowed to surpass BMW in sales by the end of the decade.

"BMW remains the best positioned European auto manufacturer, due to its exposure to growth markets and the profitable premium segment," Stefan Burgstaller, an analyst at Goldman Sachs in London, said in a note to clients on Dec. 3.

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