Volkswagen Group has settled on Mexico to build a new North American factory for its premium Audi brand.
The factory will begin operating in 2016 and will initially have capacity for 150,000 Q5 SUVs a year, Audi CEO Rupert Stadler said at a briefing on Thursday in Hamburg.
It will cost considerably less than 2 billion euros ($2.6 billion) to build, Stadler said.
Audi said it will choose a location for the Mexican plant later this year. The VW Group and Audi supervisory boards approved building the plant, the luxury-car division's first in North America, at meetings on Wednesday.
The Q5 is "a product that would sell very well in the U.S.," Arndt Ellinghorst, a London-based analyst at Credit Suisse analyst, said. "Volkswagen has all the components for that platform already in Mexico in their Puebla plant, so I would be surprised if it's not somewhere around the Puebla region."
About 26 to 27 percent of the Q5s built in Mexico will be sold in the United States; the rest will be shipped overseas, according to a company source familiar with the matter.
Trade duties, such as those imposed on vehicles exported from the United States to markets in Europe and South America, were a major factor in Audi's decision to locate production in Mexico.
Per-vehicle manufacturing costs also were significant lower than in the United States and the quality of vehicles being built in Mexico has vastly improved, making Audi officials confident quality won't be a problem, the source said.
The Mexico plant will provide a boost to the VW Group's sales prospects and manufacturing operations in North America, where its light vehicle output rose 25 percent in 2011 to a record 542,363 units.
It will also relieve supply constraints that executives say have limited Audi's U.S. growth. The brand posted a 16 percent U.S. sales gain last year to a record 117,561.