Week of January 17, 2000
  Blockbuster Deal of the Week
   from Site Selection's exclusive New Plant database

Beetlemania Writ Large:
Volkswagen Investing $1 Billion at Mexican Site

Call it billion-dollar Beetlemania.

Taking dead aim at Toyota's North American success, Volkswagen (VW at www.vw.com) is betting big bucks on its plant in Mexico. In fact, the automaker plans to invest US$1 billion in its manufacturing facility in the city of Puebla, which has become a key North American center for producing VW's "New Beetle."

Introduced in the North American market in 1998, the neo-Beetle has won a raft of awards, including designation as "North American Car of the Year" by the continent's major auto-industry writers.

More importantly for VW, the New Beetle has been a major hit in the North American marketplace. That popularity was the catalyst for bulking up the company's already considerable presence in Puebla, located 60 miles (96 km.) southeast of Mexico City. Although the Puebla plant has continued to manufacture the older VW Beetles since it opened in 1967, VW's new billion-dollar investment has much more to do with the Puebla plant's being the North American production linchpin for the New Beetle.

The Puebla plant, in fact, was the first VW facility to build the new Beetle. VW officials attributed that designation to the plant's high productivity and its proximity to the United States. (You can bet your firstborn, however, that even it wasn't mentioned by VW officials, the fact that the typical worker in Puebla makes only some $14 a day was also major factor in the decision.)

Investment Will Add Productivity, Diversify Product Line

VW's newest investment in the Puebla facility will be aimed in part at further upping the plant's productivity. Half of the$1 billion investment, VW officials say, will be spent on modernizing the operation.

The other half of the will be used to diversity and improve the quality of the products made at the facility, including adding motor assembly operations at the Puebla site.

As of this writing, VW hadn't made any announcement vis--vis how the major investment will affect the Puebla plant's employment. The job fallout will likely become clearer as the investment unfolds over a four-year period ending in 2004.

A new VW plant in a different Mexican location has long been rumored to be in the works. But VW's recent announcement of its expansion in Puebla makes no mention of plans for a second Mexican plant. (Given the cloak-and-dagger intrigue several years ago in the VW-GM battle over the designs for the innovative "Plant X," however, VW's failing to mention a new Mexican plant certainly doesn't necessarily mean that it has abandoned the idea of setting up such a facility.)

Location Already Home to 16,000 VW
Workers, 4,000 Supplier Workers

Even in its pre-expansion stage, though, the Puebla facility has the scale of a small city. Some 16,000 employees work at the VW plant, which is located on a sprawling 740-acre (296-ha.) site. Each day, the facility turns out more than 1,000 new cars, working around the clock. Some 270 vehicles in that daily production volume are New Beetles.

And, as with all large contemporary auto plants, the VW operation has had a huge location impact on suppliers. A mammoth industrial park located next to the Puebla plant currently contains some 23 auto supply operations. Together, those 23 suppliers in Puebla employ 4,000 workers, who produce parts for Volkswagen, as well as for other auto firms that have located facilities in Mexico.

All told, the Mexican plant has produced more than 4 million vehicles since it opened. Economists estimate that the VW plant and its suppliers account for between 40 percent to 75 percent of the commercial output of Puebla, which was once a sleepy, colonial-era village.

Location Decision Reflects NAFTA's Impact

VW's giant expansion at the Puebla plant also reflects the ongoing site selection impact of the North American Free Trade Agreement (NAFTA).

Six years ago, 80 percent of the plant's production was comprised of vehicles that were sold in Mexico. Since then, though, things have changed dramatically. First came NAFTA's implementation in 1994, followed by the peso's sharp devaluation in 1995. Those events triggered a sharp change in course in the market focus for Puebla-produced products, with U.S. destinations dominating. That emphasis on U.S. exports further accelerated with the Puebla facility's designation as the first VW facility to would build the New Beetle.

By 1998, in fact, the Puebla plant was exporting 87 percent of the 340,000 vehicles the facility annually produces; 80 percent of those vehicles were sent north to the United States. That exporting trend will surely continue and likely even accelerate with the major expansion in Puebla, plus the New Beetle's continuing, nostalgia-fueled popularity within the U.S. market.

Volkswagen, in fact, has become the No. 1 exporter of vehicles from Mexico. Industry statistics near the end of 1999 showed that Volkswagen of Mexico had sold 280,435 vehicles outside the Mexican market. Chrysler ranked as Mexico's No. 2 vehicle exporter, with 254,891 vehicles exported near the end of 1999, followed by General Motors, with 172,630.

'Old Beetle' Still a Mexican Market Titan

Ironically, the Puebla facility's increasing focus on non-Mexican markets has left Mexican consumers as a secondary focus for a plant originally set up largely to serve Latin American markets. Most Mexicans simply can't afford the New Beetle -- generally priced around $20,000 - that now dominates Puebla production. Nonetheless, it's hugely important for the Mexican market that the Puebla plant continues to daily turn out some 100 units of the old-style Beetles. In fact, that facility is the only one in the world that still manufactures the classic Beetle.

And no wonder. The classic Beetle never came even remotely close to going out of style in Mexico. Even today, many Mexicans regard the retro-Beetle with a reverence that rivals that showered on the Beatles after 1964's release of "Meet the Beatles."

Mexicans continue to revere the classic Beetles for their reasonable price (currently around $6,700) and their durability on Mexico's sometimes-rough roads. Auto analysts, in fact, estimate that more than 1.1 million old-style Beetles are on the road in Mexico. That makes up more than one of every eight passenger cars in the entire country.

In fact, the old-style Beetles -- known in Mexico by the Spanish word "Vocho" -- remain so popular in Mexico that they're the subject of a monthly magazine: "Vochomania," a slick publication that even has a "Beetle of the Month" centerfold. Undoubtedly, "Vocho" sales will continue to be strong in the Mexican market in the near future.

Report: Latin Auto Market Will Rebound

VW's major Mexican expansion decision coincides with a recent report from the Economist Intelligence Unit (EIU) that predicts a major rebound in the Latin American auto sector.

The near-term Latin auto market will bottom out in 1999, EIU predicts with total sales marking a drop of 27 percent from 1998. After that, though, the report projects that Latin auto sales will begin to pick up steam, reaching 4.28 million units in 2004, a 37 percent increase from 1998 levels.

In like fashion, the EIU predicts that vehicle production in Latin America will increase by more than 42 percent from 1998 to 2004, reaching 5.29 million units in 2004.

GM, says the EIU, will remain the market leader in Latin America through 2004, with VW ranked No. 2.

©2000 Conway Data, Inc. All rights reserved. Data is from many sources and is not warranted to be accurate or current.