Volkswagen Waltzes Into Tennessee

In order to cap losses, the German automaker needs to build in the U.S. It's great news for Chattanooga, but another blow to the rust belt

by David Kiley

Volkswagen (VOWG.DE) has selected Chattanooga as the site for a new U.S. assembly plant. Tennessee, the home of Jack Daniel's, beat out Alabama and Michigan for the investment and jobs that go along with it.

Volkswagen needs a plant stateside to combat the devastating effect of the weak U.S. dollar on its profits. The German automaker is currently forced to import all of the vehicles it sells in the U.S.—the primary reason its American operation has been averaging losses of $1 billion a year since 2004. Even vehicles made at VW's Mexican plants have been a drag on earnings because those cars have too many euro-denominated parts.

In an interview with BusinessWeek earlier this year, Volkswagen of America Chief Executive Stefan Jacoby said manufacturing in the U.S. is an imperative to staying viable. "The U.S. dollar, we think, could stay quite weak against the euro for some time, so we must build a big percentage of our vehicles here rather than rely on imports," Jacoby said.

VW's supervisory board approved an investment of as much as $1 billion in the new factory, which is scheduled to start production in early 2011. The company says a midsize sedan will be the first product in the new plant, priced between today's Passat and Jetta models. Though the company has not been specific about what models will be rolling off the Tennessee assembly line, VW executives have hinted for months that the car would be built off the Passat engineering platform, and designed to match U.S. tastes. There will likely be a crossover SUV built on the same engineering platform. Executives have also hinted that VW could shift production of the Jetta from Mexico to Tennessee. VW's sister company, Audi, is also looking at building a product at the plant.

An Audacious Plan

Volkswagen has a storied history in the U.S., going back to the days when it sold Beetles and Microbuses in the 1960s and 1970s. But today it has merely 2% of the U.S. market. Last year, the company sold just 231,000 Volkswagen-branded vehicles in the U.S., down more than 100,000 from four years earlier. This year, sales are flat—which is a pretty good performance compared with deep drops at General Motors (GM), Ford (F), and Chrysler, and better than some other imports, such as Toyota (TM) and BMW (BMWG.DE).

For Volkswagen, the Tennessee plant is the cornerstone of an audacious plan to build up to 1 million in U.S. sales by 2018 (the figure covers both the VW and Audi brands). Few automotive analysts believe VW will be able to reach that target, characterizing the forecast as propaganda. "A goal like that pushes the whole organization in the same direction internally, and shows enormous confidence to owners and car shoppers," says Los Angeles-based marketing consultant Dennis Keene. Jacoby told BusinessWeek: "We know it is an ambitious goal, but it is the one our company's management has set for us."

The Chattanooga operation will have an initial capacity of 150,000 vehicles and will include body production, a paint shop, and assembly operations, Volkswagen said. Most plants are built to expand to between 200,000 to 300,000. For purposes of comparison, Toyota spent $1.3 billion on its San Antonio plant, which began making pickup trucks in late 2006. That factory, which has a capacity of between 150,000 and 200,000 vehicles, employs 1,900 workers directly and supports additional jobs at 21 on-location suppliers. The VW plant will employ 2,000 initially, but may not generate as many supplier jobs. It remains to be seen whether supplier companies—now located in Alabama and Georgia to supply plants operated in Alabama by Mercedes-Benz (DAI), Honda (HMC), and Hyundai, as well as those supplying Nissan (NSANY) at its Tennessee plant—will build new facilities to service VW, or leverage the facilities they have and truck the parts to Chattanooga.