VW Group Approves New Plant Investments in China and Mexico; Audi Completes Acquisition of Ducati

The Volkswagen (VW) Group has announced a raft of new investment decisions, including new plant investments in Mexico and China, as well as the acquisition by Audi of the Ducati motorcycle company. According to a company press release, VW finally confirmed months of speculation yesterday that it will indeed build a new greenfield plant for the production of Audi vehicles in Mexico to assemble sport utility vehicles (SUVs), with production set to start in 2016. There was no mention of which vehicle Audi will make at the plant but the second-generation Q5 SUV would be the most logical candidate. Commenting on the decision Audi chairman Rupert Stadler said, "Good infrastructure, competitive cost structures and existing free-trade agreements played a significant role in the choice of Mexico. This trailblazing move will help us safeguard our position on the world market. Our German locations, too, stand to benefit from it." This is the company's first Audi-specific plant in North America, joining its massive VW manufacturing complex at Puebla, Mexico, and the new VW Passat factory in Chattanooga, Tennessee, US. It did not disclose exactly where the new plant will be, although a location at or near the existing VW plant in Puebla would appear to be the logical choice. At the same time it has been reported that the VW supervisory board has given the green light to build a new vehicle manufacturing plant in Western China, according to a Reuters report. The project will be undertaken by VW and Shanghai Automotive's joint venture (JV), Shanghai VW, and is expected to involve capital expenditure of CNY2 billion (USD316.5 million). The final contract on the investment is likely to be signed when Chinese prime minister Wen Jiabao and German chancellor Angela Merkel visit the VW headquarters on Monday (23 April). In an additional report, the German news agency DPA stated the facility is likely to come up in the provincial capital Urumqi of Xinjiang Province with initial production capacity of up to 50,000 units per annum (upa) in 2013.

In addition it has also been confirmed that subject to regulatory approval Audi will complete the acquisition of the Ducati motorcycle company. The acquisition has been approved by the VW supervisory board. The acquisition means that Audi now owns three different companies in Northern Italy, in addition to Lamborghini and Ital Design. As well as being a superbike and sports bike manufacturer Ducati is also a leader in small capacity engine and desmodromic valve technology, as well as lightweight construction. Commenting on the acquisition, Rupert Stadler said, "Ducati is known worldwide as a premium brand among motorcycle manufacturers and has a long tradition of building sporty motorcycles. It has great expertise in high-performance engines and lightweight construction, and is one of the world's most profitable motorcycle manufacturers. That makes Ducati an excellent fit for Audi." Audi did not specify a value for the transaction for the deal but an Automotive News Europe (ANE) report stated that it was paying EUR1.1 billion (USD860 million) to Ducati's owners, Investindustrial, for the company including its debt.

Outlook and Implications

These investments shows VW flexing its corporate muscle and dipping into some of its near-EUR20-billion war chest of liquid capital as it looks to accelerate its strategy to become the world's biggest carmaker by profitability and volume. The investment in Mexico to build a plant for Audi is particularly strategically important. Audi has ambitions to overtake BMW as the world's leading premium passenger carmaker, and until recently its focus in the US market has been weak, with the brand taking a long time to recover from reputational issues it suffered from unintended acceleration problems in the Audi 5000 in the 1980s. Audi had two major factors to consider in its decision—by building the plant in Mexico, Audi can take advantage of low labour cost compared to the US and Canada, and also take advantage of free-trade agreements with Brazil, Argentina, and special status for exports back to Europe as well, avoiding a 10% surcharge. In addition to the likely production of the Q5, the Audi plant is also expected to produce a North American version of the Tiguan, in a similar vein to the Passat and Jetta (a less-expensive, less contented version of the European-spec model that will cover a broader span of the marketplace). The Chinese investment will be VW's seventh plant in China and will underpin its market-leading position in the world's biggest car market. VW plans to invest USD19 billion in new plants and products in China by 2016. The Urumqi plant will be VW's fifth car factory in China where it operates 11 vehicle assembly and component plants with JV partners SAIC and FAW. The OEM also has plans to establish an additional four plants in the country where sales of VW nameplates have remained strong despite a struggling market (see China: 14 March 2012: Chinese Vehicle Market Down 6% Y/Y in YTD, Exports Up—CAAM). During the first quarter of 2012, VW sales stood at 633,800 units, up 15.6% year-on-year (y/y). 

With regards to the Ducati acquisition there are those that accuse VW supervisory board chairman Ferdinand Piëch of making something of a vanity acquisition, which is outside the realm of VW's core expertise and business. Coincidentally the acquisition was announced the day after Piëch's 75th birthday. Piëch has long been keen to add a motorcycle brand to the Group's portfolio and in Ducati, it has acquired one of the most famous motorcycle brands in the world. As well as continuing to develop and market the traditional superbike and sports bike offerings, it would not be surprising for Ducati to expand its range further into the touring bike category in order to take on BMW's motorcycle operations. Ducati is very profitable, albeit on small overall volumes, selling 28,000 units worldwide in 2011, but given the company's expertise in small capacity engine technology and lightweight materials, there could be some interesting synergies between Ducati and VW's performance car brands. This is especially the case with the drive towards performance cars with higher overall efficiency and lower emissions. As such it appears slightly unfair to view the purchase as ill-considered or a vanity purchase.