BMW Said to Weigh Setting Up North American Engine Plant

Bayerische Motoren Werke AG, the world’s biggest maker of luxury cars, is considering building engines in North America for the first time and expanding vehicle production in the region to capitalize on growing demand, three people familiar with the matter said.

BMW may establish a motor factory in Mexico or the U.S., and the Munich-based company could potentially decide on the project in 2014, according to the people, who asked not to be identified because the talks are confidential.

The carmaker would join German premium-auto rival Mercedes-Benz in producing engines in the region as Asian and U.S. rivals already do. Mercedes will start using motors next year built at a Nissan Motor Co. plant in Tennessee. BMW has largely restricted its engine-making to Europe, only announcing a plan last year to build 4-cylinder units in Shenyang, China, to supply the company’s local car plants in Dadong and Tiexi.

“Engine technology is BMW’s core competence,” Juergen Pieper, a Frankfurt-based analyst at Bankhaus Metzler, said by phone. “Establishing local motor manufacturing abroad is more complex than assembling cars, but it’s a logical step for them to eventually start making engines in markets where they’re expanding vehicle production,” to reduce the cost of logistics and mitigate currency effects.

BMW fell 47 cents, or 0.6 percent, to 80.58 euros at the close of trading today in Frankfurt. The stock has gained 10 percent this year, valuing the carmaker at 51.8 billion euros ($71.5 billion).

SUV Production

The German company set up its only North American factory in Spartanburg, South Carolina, in 1994. The site, which produces all of BMW’s X3, X5 and X6 sport-utility vehicles, is one of the U.S.’s main auto exporters. BMW may expand vehicle-making in the region beyond a new model already announced for next year, the people said.

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

Daimler AG’s Mercedes-Benz division, which ranks third in global luxury-car sales after BMW and Volkswagen AG’s Audi unit, makes SUVs in Tuscaloosa, Alabama.

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.

U.S. Deliveries

U.S. 11-month sales at BMW, including the Mini brand, rose 9.2 percent, while Stuttgart-based Daimler’s Mercedes and Smart nameplates posted growth of 12 percent. U.S. demand at Ingolstadt, Germany-based Audi jumped 13 percent. That compares with European 11-month group sales declines of 0.3 percent at BMW and 1.4 percent at Audi, while Daimler’s deliveries in the region rose 5.3 percent.

Local manufacturing reduces the effects of the dollar’s moves on foreign-exchange markets on non-U.S. companies’ earnings. Japanese carmakers producing engines in the U.S. include Toyota Motor Corp. and Honda Motor Co.

BMW’s Spartanburg factory will start making the new X4 SUV in 2014. Daimler expanded Mercedes production at Tuscaloosa in mid-2013 as part of a global effort to meet growth in demand. It will add the next version of the mid-sized C-Class sedan there in 2014, with the motors supplied by the Nissan plant in Tennessee.

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 Chief Executive Officer Norbert Reithofer reiterated “absolute support” on Oct. 28 for a trade agreement. Growth prospects in the U.S. remain encouraging because of a robust economy and more favorable demographics than in Europe, he said.

Costs of adding production capacity outside Europe and developing advanced technology such as lightweight construction and 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 city 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 3.7 percent decline in third-quarter earnings before interest and taxes to 1.93 billion euros.

The company’s expansion is part of its effort to maintain an edge over Audi and Mercedes-Benz, 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.