When Audi announced last week in the wake of Ducati acquisition that it had also decided to place its much-rumored North American production facility in Mexico rather than the U.S., the story may have fuelled more conjecture than talk of Italian sport bikes. “They pushed it out behind Ducati like the White House dumps bad news on a Friday,” stated one P.R. rep at a competing company in casual conversation. Even conversations in our own discussion forums compared the move to issues Apple is experiencing with Chinese iPad factories and even caused readers to accuse each other of bigotry. The amount of misconceptions and stereotypes being brandied about in the wake of the announcement has been admittedly surprising.

Clearly Audi’s move is one based upon a business formula. Still, for enthusiasts and even general consumers, the decision is also proving to be both emotional and highly charged. There’s clearly more to the story, and that was our thinking when we joined American Audi PR representative Brad Stertz on a conference call this week that tackled the subject from a more analytic perspective.

One thing that seems most obvious around the virtual water cooler is that Audi’s move is distinctly different from chief rivals BMW in Spartansburg, SC or Mercedes-Benz in Tuscaloosa, AL. The move was even a surprise for owners and enthusiasts who assumed Audi would likely build near Volkswagen’s own just-opened Chattanooga, TN plant that builds the new VW Passat. So why the move to Mexico?

Greenbacks and Chips Stacked

In the end, it was a question of money, but not in the way most assume, i.e. cheap labor. First and foremost, this is about strategy. The plan, we’re told, for the new Audi factory is to perform world production of Q5 and Q5 derivatives (rumored Q4 and Q6 models) for nearly everyone but China who will have their own Q5 facility. An estimated 150,000 units are planned for annual production, with only 25-26% projected for the USA. Volkswagen’s Chattanooga facility, by contrast, builds 85% of its capacity for the USA and a whopping 95% for NAFTA trade zone markets.

The disparity in strategy begins to tell nearly the entire story once you consider the factor of trade tariffs, something over which neither Audi or even the USA have much control. With rest-of-world production accounting for an estimated 75% of the plant’s volume, tariff strategy is critical. By moving the plant from the US to Mexico, Audi navigates around a significant 15% tariff for vehicles shipped to Europe and a World Trade Organization capped 35% tariff. In comparison, Audis produced in Europe and shipped to the USA are only taxed at a rate of 2.5%.

Citing Mercedes’ and BMW’s facilities in the American south as two examples contrary to Audi’s logic becomes a bit of a dead end. Market factors weighed by these other two German firms were completely different at the time – in the mid 90s. The impact of NAFTA hadn’t been realized and the supplier network was much more limited. Also, factories at that time were more tied to the Peso, then suffering from inflation. We’re told the U.S. dollar is more of a basis when considering a plant today.

The “Cheap Labor” Misconception

Most think of Mexico and assume cheap materials and cheaper labor. And in the pre-NAFTA era of third-generation Volkswagen Golfs built in the group’s Puebla facility, this might be accurate. However, much has changed at both Puebla and within the Mexican automotive manufacturing industry in the nearly 20 years that have passed since then.

It is worth noting that Volkswagen’s Puebla plant is one of the oldest in Mexico. A lot has been learned since its construction, and even more has been learned by Audi converting existing plants like SEAT’s Martorell Spain facility (now used for the Q3) or setting up wholly new facilities in markets like China and India.

Brad Stertz from Audi emphasized the Mexican plant would qualify as the latter – a “Green field” and all-new unit. It is now up to Audi to find a location with qualities such as strong supplier base and well-educated labor force.

Methodology will be another key factor here. Ingolstadt and its representatives point to their Audi production system whereby latest production practices are implemented across the board. This includes intensive workforce training in Germany, a process that even begins with mini production lines producing Lego-based cars. By the time the training is over, Audi says lessons have moved well beyond toy cars and into a level they’d confidently stake against any other out there… maybe even their own given the fact that Mexican-built Q5s will be sold in Germany as well.

The sentiment that Mexico isn’t capable of this sort of model is something Audi representatives suggest is out of touch. The aforementioned Puebla plant is already building Jetta and Jetta Sport Wagon (a.k.a. Golf Variant) for Europe. Also, GM and Ford/Lincoln have plants in Mexico that rate by J.D. Power as high or higher than any other within their respective companies U.S. production facilities.

Mexican Plant Details

Many details regarding the new plant are still being determined, but we have been able to put together some important points. Audi AG says that expects to identify a location by the end of the year. Construction will begin in 2013 and actual plant production is expected to begin sometime in 2016.

While details on suppliers still haven’t been finalized, sources tell us that components such as Tiptronic transmissions and most engines will be shipped in from other existing factories outside of Mexico. Volkswagen recently opened a plant in Silao, Mexico to build the new 1.8 TFSI engines for transverse applications. Setting up production of a longitudinal fitment 2.0 TFSI application of these modular EA888-generation engines wouldn’t take much.

Speed of production will also be improved says Stertz. Ordering a Q5 from the Mexican plant is expected to take half the time for delivery as it currently does from Germany. That global production is planned, we also believe that the plant will have at least the same level of customization from Audi Exclusive as is available on the Q5 today.

More Benefits from Better Numbers

There’s one other element at play here, and one that will benefit more than just Q5, Q4 or Q6 customers going forward. By moving so much production into the dollar zone, Audi saves a considerable amount in its overall profitability – to the tune of $250 million should the dollar weaken by 10-20 cents. Insulation from exchange fluctuation and additional profitability will give Audi the profitability breathing room that will allow it to seriously widen its product availability in the United States. Whereas Audi sold 16 model variants here in 2011, Stertz says it will could ramp up to more than 25 variants by MY2020.