Porsche begins Leipzig plant expansion as German automakers head east

BERLIN (Bloomberg) -- Porsche broke ground today on a 500-million euro ($689 million) expansion at its factory in Leipzig.

The addition of paint and body shops will nearly double investment at the plant, home to the manufacturer's two best-selling models, the Panamera four-door coupe and the Cayenne SUV.

The plant is being expanded to prepare for output of the automaker's small Cajun SUV, which will be be the fifth model in Porsche's lineup. Production is expected to begin in 2013.

The investment, aimed at taking advantage of lower wages in the east, is part of a broader shift by German carmakers 22 years after the fall of the Berlin Wall. Porsche, BMW AG and Daimler AG are expanding factories in the former-communist region to escape the costs and congestion in the industrial southwest, where they all call home.

"There was nothing but green fields when we started out here," Siegfried Buelow, head of Porsche's Leipzig factory, said in an interview. "We have excellent conditions in Leipzig. We're well aware of our advantages here," said the executive, who joined the company in 2000 when construction of the plant started.

The Leipzig facility is the company's only assembly plant outside its home state of Baden-Wuerttemberg. Its current products, the Panamera and Cayenne, accounted for three quarters of Porsche's 10,560 global sales last month.

Outpacing the West

The planned spending at the facility will add to the 277 million euros invested there over the past decade, according to the office of Leipzig mayor Burkhard Jung. That spending would outpace the 350 million euros that Porsche has said is earmarked for facilities in western Germany.

Porsche's car-making operations, which is partly owned by Volkswagen AG, declined to comment on investment plans at Leipzig ahead of Tuesday's event.

"Leipzig is building the models that promise higher growth potential for Porsche" than sports cars like the Stuttgart-built 911, said Willi Diez, head of the Institute for Automobile Industry, a state-funded think tank in Nuertingen. "The enlargement will boost the factory's strategic importance."

Located in Germany's eastern state of Saxony where the smoke-spewing Trabant was built, Leipzig was the scene of protests that spread to Berlin and toppled communist East Germany in 1989. Federal aid helped develop the city's airport into an international cargo hub and construct modern highways and rail links. The new infrastructure and a skilled local labor force have also attracted investments by Amazon.com Inc. and Deutsche Post AG.

Low cost

Low wages in the region, which still trails western Germany economically, have also been critical. Manufacturers last year paid workers in Germany's eastern states 40 percent less than counterparts in the west, according to the Cologne-based IW economic institute. Labor costs averaged 21.76 euros per hour in the east, compared with 36.28 euros in the west, IW said in a study released this month.

"The Leipzig plant is buzzing," Porsche sales chief Bernhard Maier said in e-mailed response to questions. "The level of orders is huge and prospects continue to look positive. That's why we're putting a lot of effort into expanding capacities there."

Porsche, which is seeking to merge with Volkswagen, hopes to boost sales to about 140,000 vehicles next year from an estimated 120,000 in 2011, benefiting from revamped versions of the 911 and Boxster roadster, a person with knowledge of the matter said on Oct. 13. The carmaker is aiming to increase deliveries to over 200,000 by 2018 and expand the number of model lines to seven from four.

BMW expansion

BMW is turning to its Leipzig plant to build its first electric car. The factory, which already makes the 1-series compact car and X1 SUV at the site, will start manufacturing the emission-free i3 from 2013.

The area's infrastructure, qualified workers and university ties were key reasons behind a decision to spend 400 million euros on expanding the plant, according to the carmaker, which is hiring an additional 800 people at the site.

"Conditions to distribute vehicles and connect with suppliers couldn't be better," said Manfred Erlacher, head of BMW's Leipzig factory. "We've been able to develop the plant very quickly, also because local authorities cooperated very well."

Daimler's Mercedes-Benz too will spend about 90 million euros to build a new factory for engine components in Arnstadt, 114 kilometers (71 miles) southwest of Leipzig. The project will initially yield 80 jobs and is to be completed next year.

At the Porsche plant, which features a 32-meter (105-foot) tall diamond-shaped customer center and a 2.3-mile track, Buelow will oversee the addition of at least 1,000 new jobs at the factory. He's hoping for more models after production of the small SUV starts. "We'll toss our hat into the ring again when it comes to deciding on future models," he said, while overlooking a map of the 400-hectare (988-acre) area owned by Porsche. "The sheer size of the land will leave us with quite a few opportunities."

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