[6] South Motors Bmw On Monthly Headline

BMW is most likely to begin manufacture in Brazil with CKD kit assembly, much as it did in India (file photo)

BMW is set to build an assembly plant in Brazil to benefit from growing demand for luxury cars in South America's largest economy.

"We are on track and will now submit an investment plan [to] the Brazilian government," finance chief Friedrich Eichiner told Reuters. He did not provide details on the size of the investment, pending ongoing negotiations with the government.

Brazil's trade minister, Fernando Pimentel, had said earlier on local radio BMW would announce plans within days, the news agency added.

The decision ended months of uncertainty that company sources told Reuters began when the federal government in Brasilia started to impose additional barriers to trade that risked rendering BMW's investment plans unprofitable.

Last July, a company source told just-auto in Brazil the chance of a plant being confirmed soon was about 80%.

It would all depend on what the federal government administration decided about import quotas for automakers willing to establish manufacturing operations in Brazil. Expectations were that those new measures, under negotiation since the end of 2011, would soon be announced.

“To invest in a plant, a sustainable business plan is a must. This includes a two to three-year transition time span during which the dealer network and the import activity itself provide minimum turnover support until local production starts. If this could be fulfilled by means of import quotas with tax breaks to generate compensation for investment in the plant, surely conditions for a quick decision would be created,” the source said.

Henning Dorsnbusch, president of BMW in Brazil, had been scouting for plant sites. He was recently in Joinville, in the southern state of Santa Catarina, for a conference. This city is heavily industrial, has a strong German expat community and very probably would be a good choice, just-auto's correspondent noted at the time.

Earlier, BMW had threatened in March to pull the plug on the entire endeavour after Brazil introduced a new import levy in December 2011. The company said this effectively added 30% to the price of a car and the two sides had been in talks over the amount of local parts needed to classify the vehicles as built in Brazil.

Reuters noted that production chief Frank-Peter Arndt had previously stated that BMW would start with assembly of completely knocked down kits [in much the same way as BMW entered China with the Brilliance JV there and how it currently makes cars in India - ed].

CKD assembly allows annual volumes as small as the 2,000 vehicles that BMW started with when it first built an assembly plant in Chennai, India, in March 2007. Its initial investment was less than EUR20m (US$26.18m).

Its smallest full-scale manufacturing plant is Rosslyn in South Africa, with over 53,000 cars produced last year, Reuters said.

Arndt has said that the Brazil plan initially entailed choosing a site either in the province of Sao Paolo or Santa Catarina, but Eichiner declined to comment to Reuters whether this has changed.

BMW, which first announced in March 2011 that it would examine local production, would be the only luxury car maker in Brazil, where living standards are rising swiftly as the country prepares to host the 2014 rugby World Cup and 2016 Olympic Games.

It sold only about 15,200 cars in the country in 2011 but sales have increased at an average annual rate of 74% over the past three years.

Daimler, which built its first plant outside Germany in Argentina over 60 years ago, was the first luxury car maker to begin building cars in Brazil.

It made the Mercedes-Benz A-Class in its Juiz de Fora plant from 1999 and later assembled some C-class from German kits for sale in North America but ceased car production entirely in December 2010 and refitted the site to make trucks.

Meanwhile, Tata Motors' Jaguar Land Rover last month put plans for Brazilian assembly on hold, saying an investment no longer made sense after a court decision that regional governments in the South American country could not use tax breaks to attract foreign investors and that the difference between importing vehicles and producing them locally had disappeared.

However, that may change following BMW's decision and government revisions to its local vehicle production rules announced last week.