Why German cars sold in Beijing are made in South Carolina

FORTUNE -- Very few are pleased with the U.S. auto industry these days, but those few include the good people in and around Spartanburg County, near Greenville, South Carolina.

Amid the gloom of a sluggish national economy and depressed U.S. vehicle sales, the German automaker BMW is hiring 1,600 South Carolinians at its single U.S. plant, opening a $750 million manufacturing line to build its new X3 sport-utility vehicle and exporting about 70% of its output to countries like Germany, China and Great Britain.

BMW's plant has turned into a showplace for South Carolina economic development and state politicians eager to attract business, especially manufacturers, to a region known mostly for agriculture and textiles. A year ago Boeing (BA, Fortune 500) announced that it will be assembling its 787 Dreamliner in Charleston, employing 3,800 workers. State officials say BMW helped woo Boeing by giving South Carolina rave reviews for providing infrastructure support such as roads and helping to train and hire skilled, motivated workers.

"When anyone asks me if South Carolina is a good place to locate, I tell them to ask BMW,'' said Lindsey Graham, U.S. Senator from South Carolina who spoke at a celebration at the plant Wednesday for the X3 assembly line. "They're part of the reason Boeing came."

The new X3, which starts at $37,625, is priced $2,100 lower than the model it replaces, suggesting stiff competition in the luxury segment, as well as deflationary economic forces that makes pricing difficult for sellers. Leadership of the segment in the U.S. is closely contested among Lexus, BMW and Mercedes. Norbert Reithofer, BMW's CEO, said Wednesday "the BMW brand wants to remain the best-selling European premium brand in the U.S."

Graham said "BMW's decision to open a plant here" in 1992 "changed our state by validating what we knew about ourselves." Graham believes the BMW venture "has made it easier to talk about how the global economy should work. So many people want to think of globalism as us buying goods overseas and exporting jobs, but it doesn't have to be."

The new workers will start as "contingency hires," earning about $14 an hour. Assuming worldwide demand for BMW models stays strong, the new workers can be promoted to full-time employees, earning about $25 an hour, plus benefits. Josef Kerscher, president of BMW's U.S. manufacturing group, said absenteeism at the plant is "less than 3 percent, better than in Germany."

Bespoke Bimmers

The automaker said the new X3 line was designed for highly-flexible production to facilitate "tailor-made" cars for individuals. U.S. customers may order their car with particular colors and options, and change their orders up to six days before the car is built.

BMW, which operates 24 assembly plants worldwide, claims the title as top U.S. automotive exporter to non-North American countries, generating about $2 billion annually toward the U.S. trade balance. The automaker imports engines, transmissions and electrical components from Europe and exports finished vehicles. Almost all the trade arrives and leaves the state by ship, a major reason why Charleston has grown to become the fourth largest port on the east coast of the U.S.

The new line assembling the X3 will boost BMW's U.S. capacity 50% to about 240,000 vehicles annually from the current 160,000 by 2011. The X3, X5 and X6 models are built exclusively in the U.S.

But South Carolina still faces serious economic difficulties, said Rebecca Gunnlaugsson, an economist with the state. After peaking at 13% during the worst of the recession, the unemployment rate has dropped to 11.5%.

"We're the fourth largest net importer of college educated adults, and not just retirees," she said. "We're getting a high concentration of engineers that are coming here" for employers like BMW and Boeing.