BMW decision costly for Magna's Austrian operation

BMW AG plans to shift some production of its X3 sport utility vehicle from a Magna International Inc. plant in Austria to the auto maker's own plant in South Carolina in a move that is likely to create a major hole in Magna's vehicle assembly operations.

BMW said at its annual meeting yesterday that only some production of the next generation of the SUV will be moved, but industry analysts said the auto maker is almost certain to build all its X3 models in the southern U.S. plant because it's too expensive to build the vehicle at two plants.

Losing all X3 production could cost Magna more than $2-billion (U.S.) in revenue based on last year's vehicle sales of 113,000, which represented more than 45 per cent of the 240,000 vehicles built at the MagnaSteyr assembly complex in Graz, Austria. Magna reported assembly revenue of $4.4-billion last year.

"We believe that BMW will in-source the entire program and that this is a setback to Magna's assembly operations," Fadi Chamoun, who follows Magna for UBS Securities LLC in Toronto, said in a note to clients yesterday.

Magna also supplies metal stampings and engine parts estimated to be worth more than $1,000 a vehicle for the X3, analysts said yesterday, but it could easily build those components in North America. Stampings, for example, could be supplied by an existing Magna plant near Spartanburg, S.C., that already supplies metal parts to the BMW operation.

The production shift has been expected for some time, but Magna officials have said on several quarterly conference calls that no decision had been made.

BMW is increasing capacity at the Spartanburg plant to 200,000 vehicles a year from 140,000 as part of a plan to protect itself against the weak U.S. dollar and produce more vehicles in its largest market. It's also the largest single market for the X3, a compact, luxury SUV being redesigned for the 2010 model year.

"This is a part of our future strategy," said BMW chief executive officer Norbert Reithofer.

Magna spokeswoman Tracy Fuerst said yesterday afternoon the company was planning to issue a news release.

Because of the X3, MagnaSteyr ran virtually flat out last year. The assembly operation also produces vehicles for DaimlerChrysler AG and the Saab division of General Motors Corp.

But the Chrysler group is shifting production of minivans out of Graz later this year, which represents another 25,000 or so vehicles that will need to be replaced.

Magna has been seeking customers that are willing to contract out vehicle assembly in North America, but so far has not signed any contracts.