Volkswagen's Big Bet on Tennessee

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But VW was also looking at sites in Michigan and in Alabama, where German carmaker Daimler (DAI) already produces Mercedes SUVs and station wagons. As the mayors remember it, a critical point came in May, when Chattanooga hosted VW executives for a presentation at a local hotel. Actually, what the city representatives heard was not encouraging. Volkswagen execs were concerned about the condition of the proposed factory site, which had been abandoned for many years and was overgrown with forest and shrubs. As Ramsey, the county mayor, remembers it, VW execs said, "We like your city, but your site is in third place. We can't see it, we can't get a feel for it."

Crash Site-Clearing

That very afternoon, Ramsey says, local officials began dispatching equipment to the site, which was once home to a dynamite factory. Within three weeks, after an all-out effort involving some 200 earth movers, wood chippers, and other heavy machinery, the Chattanoogans had cleaned up the land. "I think Volkswagen saw that our community wanted this plant and was committed to making things happen," Ramsey says. (Chattanooga's crash brush-clearing effort indeed made a big impression on VW execs, a company spokesman confirms.)

Of course, money also played a role in winning the hearts of VW execs, who announced their choice of Chattanooga last July. Local and state governments committed $577 million in incentives to win the VW plant, including tax breaks, road construction, and training of local workers.

Volkswagen representatives say the global downturn hasn't dampened their ambitions for Chattanooga. VW, which currently has only 2% of the U.S. market, plans to triple sales there to 800,000 vehicles by 2018. To do that, VW needs local manufacturing to protect against currency fluctuations. All of the German carmakers have suffered in recent years from the strength of the euro vs. the dollar, which makes their European-built products more expensive in dollar terms.

More important, having a strong base in the U.S. may help VW better understand American drivers. Volkswagen has lagged in the U.S. in part because products such as the $16,000 Rabbit (sold as the Golf in Europe) don't correspond to U.S. tastes, says analyst Stürmer. The suspension in VWs tends to be stiff for American tastes, and the cars lack popular details such as cup holders for supersize beverages. "They don't have a product portfolio the average American would buy because it's just too European," Stürmer says.

For Volkswagen to get the maximum payoff from Chattanooga, Stürmer says, the company should use it as more than just a production site. "If the location is not just a dumb factory, but more a transplant organization, there is a chance they will be able to develop a staff that has the authority to produce and translate the VW core values into American products fit for the American user," he says.

Leveraging Diesel

VW designers based in Wolfsburg, Germany, and Los Angeles are currently at work on a new model that will be built in Chattanooga and aimed at U.S. drivers. The new car will be slightly larger than VW's $28,000 Passat and begin rolling off the Chattanooga assembly line in early 2011. VW plans to build 150,000 a year, of which 30% will be diesel-powered. VW hopes to leverage its expertise in fuel-efficient diesel engines, which are popular in Europe but have yet to catch on in the U.S.

The Chattanooga mayors allow that they're concerned about the state of the economy, but are confident things will be better by the time VW starts producing cars in their city. "The important thing is for the economy to be in substantial recovery two years from now," Mayor Littlefield says.

Ewing is BusinessWeek's European regional editor.