Published on June 2, 2014

Audi scrutinzes suppliers before opening Mexican plant

By Ryan Beene, Crain News Service

SAN JOSE CHIAPA, Mexico (June 2, 2014) — Audi A.G. is applying an unusual level of scrutiny to its supply base, even working directly with raw-material vendors, as it gears up to open the first European luxury auto assembly plant in Mexico.

The plant under construction will build the next generation of Audi’s Q5 crossover. It is poised to become a major global export hub for Audi and a crucial piece of its growth plans. Most of the 150,000 Q5s produced there annually will be exported, including about 40,000 units to the U.S. and Canada.

Local sourcing of parts is critical to that effort. Audi says that 75 percent of the Q5’s parts content will come from North America, more than the 65 percent required to qualify for duty-free status under the North American Free Trade Agreement. Audi hopes eventually to boost North American content to 90 percent of the Q5 after production begins in 2016.

To that end, Audi has taken extra steps to ensure that each tier of its supply base in Mexico is capable of delivering luxury-caliber goods, an effort to apply some of the lessons German luxury auto makers learned the hard way in past efforts to erect supply chains in the U.S. and Europe.

“In the past, we did not struggle with the first tier, but most of them struggled with the second tier,” Bernd Martens, Audi AG’s board member for procurement, told journalists this week.

The 130 direct suppliers contracted for the next-generation Q5 have had to go through a rigorous screening, in which Audi reviewed their processes and looked down the line at their supply chains, to ensure that every component and raw material used in the Q5 meets the same quality standards as those in vehicles built in Germany, Audi executives said.

When required, teams from Audi work directly with Tier 1, 2 and 3 suppliers on quality initiatives. If a particular supplier isn’t sophisticated or experienced enough to meet Audi’s needs, Audi invites employees from that supplier to its plant in Ingolstadt, Germany, to learn Audi’s production system firsthand.

“This is what we are emphasizing,” Mr. Martens said. “They have to show us their plans and they have to show us where the parts are coming from that go into subassemblies. We are going to train the supply chain. This is a huge effort.”

That type of involvement is unusual in the auto industry, where auto makers typically deal directly only with their Tier 1 suppliers and have little knowledge about the companies farther down the supply chain.

The industry was reminded of this dynamic in 2011, when Honda, Toyota and other Japanese auto makers scrambled for weeks to identify breakdowns in their supply chains from parts makers affected by the earthquake and tsunami disaster.

Audi began building its Mexican supply chain a year and a half ago. First it rounded up raw-material suppliers directly. Audi’s labs in Germany reviewed everything needed for the next-generation Q5, from metals to plastic resins, to ensure they were up to company standards.

Mr. Martens says Audi has selected about 80 percent of the Mexican plant’s suppliers so far. A key component of the supply chain will be Audi’s supplier park on the plant’s sprawling 1,100-acre compound, housing seven suppliers.

Other suppliers for the plant will have dedicated production lines for their Audi business, and 11 suppliers will feed the plant from all-new facilities, Mr. Martens said.

Audi says it has enough land on the site and capacity in its paint shop to add another 150,000 annual units of output should it decide to expand.

“Doubling the plant is not a big issue,” Mr. Martens said. “The supplier structure is here; the infrastructure is here; but we make it in steps ... because we want to have sustainable growth.”

This report appeared on the website of Automotive News, a Detroit-based sister publication of Tire Business.

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