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Why Magna International May Soon Build a New Auto Factory

By John Rosevear - Dec 14, 2016 at 7:05PM

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A Magna subsidiary is the world's only high-quality contract auto manufacturer, and it thinks business may be about to boom.

Auto-industry supplier and contract manufacturer Magna International (MGA 1.89%) may soon build a new auto factory, a key executive said this week.

Magna's primary business is focused on making components for the big global automakers. But it also manufactures complete vehicles: The company's Magna Steyr unit runs an auto factory in Austria that has made vehicles for several different automakers over many decades.

Apparently, demand is growing for these services -- and that has implications for all automakers, as well as some companies that might be looking to enter the auto industry.

Mercedes-Benz G-Series SUVs roll down the production line at Magna's contract auto factory in Graz, Austria. Image source: Magna International.

What Magna said

The head of Magna Steyr's European business, Guenther Apfalter, told a German trade magazine this week that demand may be strong enough to warrant construction of a factory near its existing plant in Graz, Austria.

Right now, the Graz plant builds Mercedes-Benz G-Class SUVs for Daimler AG (DDAI.F 1.74%). It recently wrapped up production of the Mini Countryman for BMW AG (BAMXF -2.04%), and will begin building BMW's 5 Series starting next spring. Later in the year, it's expected to begin building the battery-electric Jaguar I-Pace SUV for Tata Motors (TTM 1.33%). Another yet-to-be-announced model from Jaguar Land Rover is also headed to Graz, possibly in 2018.

Apparently, there's demand for even more, and one factory might not be enough. In a German-language interview with Germany's Automobil Produktion, Apfalter said that the Graz factory is likely to hit its maximum production capacity by the end of 2018, if not before.

"We are looking at potential locations in Europe, North America, and China," for a new factory, Apfalter said. "Should Graz overflow, a new plant nearby would be an option," possibly in Slovenia.

He said a decision was likely sometime in the next few months.

Why this is important for the whole auto industry

There are huge contract manufacturers for many things (like cellphones) in Asia. But auto manufacturing requires hugely expensive specialized tooling, some of which is specific to a given model. There are no contract manufacturers for cars -- aside from Magna Steyr.

For decades, Magna Steyr has had a profitable business making vehicles for the big automakers. Sometimes it's a small-volume model like Mercedes' highly specialized G Series, and sometimes (as with the BMW 5 Series) Magna provides extra production capacity to help meet strong demand. The Graz facility can build internal-combustion, hybrid, and fully electric vehicles.

With companies from Apple to Alphabet to a host of start-ups contemplating various ways to enter the auto business, demand for contract auto manufacturing could increase sharply in coming years.

Magna's strong hint that it will add a second factory to its contract-manufacturing operation suggests that it wants to position itself as an option for those new industry entrants. That could be very profitable for Magna -- and very helpful to upstart would-be automakers.

The upshot: Another area to watch as the auto industry evolves

Building a new high-volume auto factory from scratch can be a billion-dollar investment, out of the range of many start-ups and emerging companies. Tesla Motors (TSLA 0.58%) has essentially bootstrapped its factory, expanding from a small production line as its business (and income) has grown. But that has been a slow process, and other potential market entrants might not be willing to wait.

For companies that want a high-quality contract manufacturer for vehicles, Magna Steyr is (right now at least) the only game in town. Its hints that it will soon invest the considerable sums needed for a second factory suggest that it knows a lot of new business is on the way. For those interested in the ongoing transformation of the auto industry, this is something worth watching.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Rosevear owns shares of AAPL. The Motley Fool owns shares of and recommends GOOGL, AAPL, and Tesla Motors. The Motley Fool has the following options: long January 2018 $90 calls on AAPL and short January 2018 $95 calls on AAPL. The Motley Fool recommends BMW.

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Stocks Mentioned

Magna International Inc. Stock Quote
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Bayerische Motoren Werke Aktiengesellschaft Stock Quote
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