A BMW logo on a car at the 87th International Motor Show at Palexpo in Geneva, Switzerland. Picture: REUTERS/DENIS BALIBOUSE
A BMW logo on a car at the 87th International Motor Show at Palexpo in Geneva, Switzerland. Picture: REUTERS/DENIS BALIBOUSE

Munich/Budapest — BMW is building its first factory in Europe in nearly two decades, strengthening its footprint close to home as growing protectionism adds to the cost of shipping cars around the globe.

The car maker is investing €1bn in a new production plant in Hungary to produce 150,000 vehicles annually, according to a statement released on Tuesday.

It will be BMW’s first new manufacturing facility in the region since 2000, when it built a site in Germany, a spokesman said.

BMW, like other global car makers, is under pressure to adjust to shifting global trade politics that are undermining a decades-long move to lower barriers.

Depending on what type of cars the company will build in Hungary, the plant could help offset growing risks.

Making sport utility vehicles in Europe would help insulate BMW from rising trade tension affecting its US plant. It could also add flexibility to counter interruptions to the flow of Mini cars, made in Oxford, England, to the European Union after Brexit.

"It looks like this is a decision led by risk minimisation and cost optimisation," Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler, said.

"Western Europe is too expensive, Mexico and the UK bear tariff risks, and the US plant is already huge."

BMW said it had no plans to make Mini cars in Hungary, while declining to specify which models it will make at the new site.

The company exports most of its popular SUVs from its Spartanburg, South Carolina, factory to Europe, a strategy that could become increasingly challenged if tariff threats become reality.

The company picked Hungary as its newest production location, even as European sales of BMW and Mini cars rose only 1.2% during the first half, trailing growth elsewhere.

The German manufacturer announced on Sunday that it had raised prices for SUVs imported from the US into China after the Asian nation increased tariffs, retaliating against President Donald Trump’s increase in levies on Chinese imports.

Separately, the company is grappling with the risk of Brexit hitting its facilities in the UK. It exports Mini city cars, engines and Rolls-Royce vehicles worth about £2.4bn from the country.

The company warned again last month of the detrimental effect if a Brexit deal is not reached.

"We are now strengthening our activities in Europe to maintain a worldwide balance of production between Asia, America and our home continent," BMW CEO Harald Krueger said in Tuesday’s statement.

Construction near the town of Debrecen, about 200km east of Budapest, will start in the second half of 2019.

Earlier this year, BMW said it would add the X3 SUV to its lineup of China-made models for local buyers, a prescient move that preceded an increase of Chinese import tariffs for US-made cars to 40% as of July.

The car maker is also poised to become the first foreign car company to take majority control of its Chinese venture, a person familiar with the matter said this month.

Picking Hungary as its latest production site, adding to 31 production and assembly facilities globally, makes it the fifth major producer to start a plant in the central European nation, after Daimler, Volkswagen’s Audi brand, France’s PSA Group and Suzuki Motor.

Car makers’ output reached 8.08 trillion forint ($29.45bn) last year, or about 21% of economic product, according to official data.