Volkswagen's Big Bet on Tennessee

Despite the industry's travails, the German automaker expects to boost U.S. sales with its $1 billion investment in a Chattanooga factory set to make midsize cars

By Jack Ewing

An aerial shot of Volkswagen's Chattanooga, Tenn. manufacturing site. Volkswagen

Detroit carmakers may be fighting for survival, but further south in Chattanooga, the auto industry is still making at least two guys happy. They would be Ron Littlefield, mayor of the Tennessee city, and Claude Ramsey, mayor of the surrounding county. In July, they learned that German carmaker Volkswagen (VOWG.DE) had chosen Chattanooga as the site for a new U.S. factory that will produce a new midsize VW by 2011. As Littlefield said during a recent stopover in Frankfurt, "An auto plant is the holy grail of economic development."

Certainly that has been true in the past. Auto plants are prized not only for the jobs they create directly, but also because they attract suppliers who create more jobs and generate sales for restaurants, builders, and other local businesses. Volkswagen has vowed to hire 2,000 people in Chattanooga and invest $1 billion. All told the VW plant will create 11,500 jobs, including the VW employees, and boost personal income in the region by more than $500 million a year, according to an August study by the Center for Business Research at the University of Tennessee.

But is a VW plant still so desirable when the global auto industry is going through one of its worst downturns ever? Quite possibly, yes. Although Ford (F), General Motors (GM), and Chrysler are in such dire shape that they had to beg Congress for a bailout, Volkswagen remains relatively healthy thanks to its strong presence in developing markets such as China, Russia, and Latin America. To be sure, VW also is feeling pain these days—sales worldwide fell 5.1% in October vs. a year earlier, to just over 500,000 vehicles. But that compares with a 16% plunge for the industry as a whole. VW's premium Audi unit even reported a slight uptick in sales in November. (VW hasn't yet reported November sales for the whole group.)

Intense Local Lobbying

Despite the global downturn, VW's reasons for building a U.S. factory may be more compelling than ever. While U.S. automakers must retool massively away from gas guzzlers, Volkswagen already has generations of experience building midpriced, fuel-efficient cars for the European market, where gasoline is at least twice as expensive as in the U.S. If Volkswagen can deploy that compact-car expertise in America, it could be in a position to profit when the economy recovers. "For them this situation holds a lot of opportunity," says Christoph Stürmer, analyst at market watcher Global Insight (IHS) in Frankfurt.

Chattanooga's civic boosters certainly wouldn't disagree. They began competing for the VW plant late in 2007, shortly after losing a bid to attract a new Toyota (TM) plant which the Japanese carmaker instead decided to build in Blue Springs, Miss. The city's first personal contact with Volkswagen came in January 2008, when Trevor Hamilton, vice-president of economic development for the Chattanooga Area Chamber of Commerce met with Stefan Jacoby, president of Volkswagen Group of America, at the North American International Auto Show in Detroit. The brief meeting gave Hamilton a chance to emphasize Chattanooga's virtues, such as good highway connections and 1,350 acres of vacant land located just 12 miles from downtown.