* Brazil a possible site as market overtakes Germany in size
* BMW group sales rose 54 pct in Brazil in 2011
* Sees well over 1.5 mln car sales, record profits in 2011
* Automobiles EBIT margin to surpass 8 pct in 2011
* Shares fall 2 pct vs 4 pct drop in autos index .SXAP
By Christiaan Hetzner
MUNICH, March 15 (Reuters) - Germany’s BMW (BMWG.DE) looks set to replace rival Mercedes-Benz (DAIGn.DE) as the only luxury carmaker in Brazil, if it decides to assemble cars there for the first time, underlining the region’s growing ecomonic importance.
The move would diverisfy BMW’s geographic footprint in Latin America and in Brazil in particular, where living standards are rising swiftly as the country prepares to host the 2014 World Cup and 2016 Olympics.
Sales are still small in Brazil at just about 10,000 units out of 1.46 million last year worldwide, but grew at an annual pace north of 50 percent - far and above that of mature markets.
“For us, it is really about the significance and prominence of the market, since we believe it has a big future. The development of Brazil over the past ten years is impressive,” BMW production boss Frank-Peter Arndt told Reuters on the sidelines of the company’s annual news conference on Tuesday.
At the news conference, BMW predicted another record year for earnings, helped by new model launches like the 1-Series MkII which would boost vehicle sales significantly above the 1.5 million mark.
This would raise BMW’s automotive operating margin above 8 percent as currency tailwinds mostly offset added raw material burdens in the low hundreds of millions of euros.
“2009 was the year of the economic crisis. 2010 was our year of a new beginning,” said Chief Executive Norbert Reithofer, adding “2011 will be our year of opportunities.”
Brazil clearly could be one of them.
Light vehicle sales in Brazil rose 11 percent to 3.33 million units last year, surpassing for the first time in size Germany, Europe’s largest car market, according to data from the German automotive industry association VDA.
Daimler was the first luxury carmaker to start car production in Brazil, where it began building the Mercedes-Benz A-Class in 1999. But it ceased car production in December and is re-fitting its Juiz de Fora plant to build heavy trucks.
Arndt said a key criteria in judging whether to expand BMW’s motorcycle assembly in Manaus to include cars or to set up an all-new plant would be finding easy logistical links to a strong supplier base.
This is because BMW only accounts for some 20-30 percent of the manufacturing value-added in its vehicles.
If approved, BMW would initially start with a pure assembly operation where cars are made from “completely-knocked-down” kits comprised of major component groups -- a common first step when entering an untested market.
“In India, we started with a maximum capacity of 2,000 vehicles in two shift operations but you can imagine almost any size,” Arndt said.
“This will more likely be determined by the number of models and derivatives you decide to build there than by the (sales) volume. The team there has to first deal with this complexity before it is able to guarantee the same quality found at any other BMW plant,” he said.
Depending on the development in demand, BMW could then expand the plant to include anything from its own steel stamping operations to welding car bodies together and painting them -- which always means a higher fixed cost base and capital spending that can be 10 times the initial investment.
When asked whether this kind of decision would first require volumes of at least 100,000, he said: “For years, if not decades, we’ve done very well in South Africa with our Rossyln plant producing only around 50,000 cars a year, so I can imagine other increments as well.”
BMW already runs CKD assembly sites in Cairo, Egypt; Chennai, India; Jakarta, Indonesia; Kulim, Malaysia; Kaliningrad, Russia; and Rayong; Thailand.
Often carmakers resort to these small-scale plants just to circumvent trade barriers that impose punitive import duties. (Editing by Hans Peters, Louise Heavens and Jane Merriman)