| |
BMW to Spend US$750 mil. on Expanding Production at Spartanburg
11 Mar 08
BMW hopes that its U.S. production expansion will combat the U.S. dollar's weakness and generate significant cost savings.
Global Insight Perspective | | Significance | BMW is to spend US$750 million on increasing production capacity at its plant in Spartanburg, South Carolina. The plant will subsequently become the sole production site of BMW "X" cars, the X3 and X5 SUVs and the new X6 sports-activity vehicle. | Implications | BMW is protecting itself against the weakness of the dollar and hedging against fluctuations in the global currency markets. The move may signify a wider strategic shift for BMW as it looks to decentralise its production strategy from its German operations. | Outlook | As a result of the United States being the largest single market for its "X car" range, it makes perfect sense for BMW to pursue this strategy. The company will protect itself against the weakness of the U.S. currency by building the models in the dollar zone and reap similar currency benefits from any exports made to Western Europe, while at the same time benefiting from Spartanburg's cheaper labour costs. |
BMW Announces Major U.S. Production Expansion BMW has announced that it will invest US$750 million in making its plant in Spartanburg, South Carolina, the sole production location of the company's range of X3 and X5 sports-utility vehicles (SUVs) and the new X6 crossover, which BMW is terming a sports-activity vehicle (SAV). The plans were announced yesterday by BMW's head of global production Frank-Peter Arndt, who stated that the investment would almost double the production capacity of the Spartanburg plant to around 240,000 units per annum (upa) up from the current figure of 150,000 upa. BMW's new commitment to South Carolina would also create 500 new jobs, while also adding 1.2 million square feet of factory space at the site. The investment plans have already been implemented as a new paint shop facility at the site is already under construction. In a BMW corporate release Arndt said, "Centralizing our know-how for BMW X models in Spartanburg will enable us to work more efficiently, thus supporting our long-range corporate strategy. In addition, it was a logical step for the BMW Group as a global player to increase production capacity in its largest market." The move is also in direct relation to the rising sales that BMW has enjoyed with its SUV model range in the United States, with combined sales of the X3 and the X5 increasing by 8.9% y/y to 58,089 units in 2007 in the country. While there is no doubt that there are practical benefits to centralising production of the X cars in the United States, there is little doubt that the principal driver for the strategic move is the weakness of the U.S. dollar against the euro. BMW and other premium European automakers have seen profits shrink from their U.S. operations as a result of the continuing devaluation of the U.S. currency. Therefore it makes perfect sense for BMW to hedge against the devaluation of the dollar while building the X3, X5 and X6 in their biggest volume market. In addition, by building its SUVs and the new X6 at Spartanburg, BMW will also derive standalone costs benefits as a result of the cheaper labour costs in comparison to its German production facilities. BMW recently announced that it would cut 7,500 jobs from its German production operations, partly through voluntary redundancy and the redundancy of temporary workers, as well as 600 posts elsewhere in its global production bases (see World: 28 February 2008: BMW Executive Details Planned Job Cuts). In terms of the production mix at Spartanburg, the Z4 sports car, which has been built at the plant since its launch in 2003, will have its line moved to Europe. However, production numbers of this model are expected to tail off significantly ahead of its replacement in 2010. The plant currently builds the X5, while the X6 will be added later this year, with the first cars going on sale in the second half of 2008. The current X3 will continue to be built under contract at Magna Steyr's production facilities in Graz, Austria. However, the Austrian contract assembler has already been informed by BMW that the next generation X3, which is due for launch in 2010 will be built in Spartanburg. It is a major blow for the Austrian company as the model comprised 45% of magna Steyr's total vehicle production in 2006. However, Magna has stated that it is in talks with other carmakers to replace the X3 line. Outlook and Implications Although it may be unpalatable for the heavily unionised workers at BMW's German production plants to hear, BMW's current production strategy is far too centralised for a company with such a global outlook. The company is enjoying rising volumes outside its traditional sales stronghold in Western Europe, with Asia, the Middle East and the United States helping the company grow its sales by 9.2% y/y in 2007 to 1,500,678 (figure is for BMW Group and includes Mini and Rolls Royce sales). When the continuing weakness of the U.S. dollar against the euro is taken into account and the fact that the United States is the biggest single market for BMW's SUVs, the logic behind BMW's production expansion at Spartanburg becomes very clear. Making the United States the sole production base for the company's SUVs and the new X6 sports-activity vehicle will also increase supplier synergies and economies of scale at the plant, especially as the Z4 line is being moved back to Europe. It also means that BMW will derive currency exchange benefits from the models it builds in the United States and goes on to sell in Western Europe. Spartanburg's expansion will also help BMW protect itself against the continuing weakness of the dollar and future fluctuations in the global currency markets. BMW's production expansion in the United States will also help underpin the manufacturer's efforts to overtake Lexus as the number one premium carmaker in the country (see United States: 16 January 2008: BMW Aims to Overtake Lexus as U.S. Number One Premium Brand).
|
|
|
