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Old Hummer plant now builds China-bound Mercedes SUVs

Lamar Ashford has been waiting a long time to see this.

Five years after General Motors shut down production of the Hummer at the AM General assembly plant in Mishawaka, Indiana, the assembly line that once built the H2 is cranking out another SUV.

This time, it's the Mercedes-Benz R Class.

"With this R series coming in, it is good for the community, good for everyone's family," said Ashford, who has worked 14 years for AM General.

Mercedes-Benz has contracted AM General to build the R Class because the luxury automaker no longer has the space to build the SUV at its plant in Vance, Alabama.

That plant, where Mercedes manufactures most of its SUVs, is running at close to capacity. To keep up with demand, the German automaker is cranking up production of popular models like the GLK and M Class.

So it's moved production of the R Class to northwest Indiana and hired AM General to build models that will be shipped to China, the only market where the SUV is sold.

Mercedes benz R Class being built at the AM General assembly plant in Mishawaka, Indiana.
Phil LeBeau | CNBC
Mercedes benz R Class being built at the AM General assembly plant in Mishawaka, Indiana.

Demand for SUVs in China has been strong, but the market overall is pulling back.

On Tuesday, the China Association of Automobile Manufacturers said retail sales of passenger vehicles dropped 6.6 percent in July. It was the third time in four months auto sales have dropped in China, the world's largest auto market. In addition, China on Tuesday devalued its currency by nearly 2 percent, a move that could cut Chinese luxury consumption.

But Mercedes-Benz is confident it can ride out any impact the devaluation action in China may have on its business.

"Let's wait and see what happens," said Jason Hoff of Mercedes-Benz. "You know we do a lot of hedging too. We protect ourselves obviously for different currency changes so we will just have to wait and see. But so far it has been a good year for us."

AM General President Howard Glaser maintains his enthusiasm.

After five long years, the R Class is helping Mishawaka heal from losing the Hummer.

"We are not just focused on the past, the Hummer and the H2. We are looking to the future, we are looking to the front windshield not the rearview mirror and we think it is going to be a great ride," said Glaser.

Mercedes' hiring AM General to build the R Class is the latest sign automakers are close to running at peak capacity.

After cutting U.S. auto production to 5.6 million vehicles in 2009, the auto industry has staged a huge recovery.

According to the consulting firm LMC Automotive, which tracks auto production around the world, U.S. auto plants will build more than 11.8 million vehicles this year.

"We are seeing some pretty serious capacity constraints," said Jeff Schuster, senior vice president for forecasting with LMC Automotive. "There are a few places where automakers have some room, but in many plants they are pushing capacity."

Right now, U.S. auto plants are utilizing 93 percent of their capacity, with some plants running over 100 percent, according to LMC.

"We're seeing some plants where they have added weekend shifts or they've increased the line speed in order to squeeze out a few more vehicles," said Schuster.

At the AM General facility in Mishawaka, there's plenty of capacity, and a skilled workforce ready to build the R Class.

Eventually, several hundred more workers are expected to be hired as R Class production ramps up.

For Ashford, it's welcome news that eases the pain of losing the Hummer during the recession. "We were just ready to get back into the plant. We love to work here," he said.

Questions? Comments? BehindTheWheel@cnbc.com.