Bloomberg News

Volkswagen to Build SUV in Tennessee to Confront Toyota

July 14, 2014

Volkswagen AG (VOW), seeking to revive flagging U.S. sales, will add a mid-sized sport-utility vehicle in 2016 to its factory in Tennessee that’s been a battleground for labor seeking to organize at foreign-owned carmakers in the U.S. South.

Volkswagen, based in Wolfsburg, Germany, said today at a news conference that it would spend $900 million, including $600 million at VW’s factory in Chattanooga, Tennessee, to build the seven-seat model. The company, which ranks second to Toyota Motor Corp. (7203) in global auto sales, is looking to the expansion to shore up its lineup in a growing segment.

The prospect expanding the factory, which now makes only Passat sedans, became a central element in the fight by the United Auto Workers to form a union there in February. Opponents said voting to unionize could jeopardize Volkswagen’s plans, a contention the UAW said was an effort to intimidate workers. Ultimately, workers in a close vote rejected the UAW push to unionize the factory.

Today’s announcement by the company came four days after the UAW said it opened a branch office at the plant as part of a plan to form a German-style worker council on the site.

The company plans to invest $7 billion in North America by 2018 to almost double the namesake brand’s annual U.S. sales to 800,000 vehicles and become more than a niche producer. A previous effort to broaden its appeal to U.S. drivers with a bigger, cheaper version of the Passat sedan has stalled.

On ‘Attack’

“The Volkswagen brand is going on the attack again in America,” Chief Executive Officer Martin Winterkorn said in the statement.

U.S. June sales by the Volkswagen brand plunged 22 percent, accelerating the unit’s six-month delivery decline there to 13 percent. That ran counter to a 4.2 percent first-half increase in the U.S. automotive market.

In the lead-up to the February vote to form a union, Senator Bob Corker, a Republican, had warned that joining the UAW could lead Volkswagen to reconsider expanding the plant, though plant officials contradicted his contention.

Corker said in a phone interview today that there was “no way the announcement would have occurred without the vote going the way it did.”

“I’m confident that’s a fact,” he said.

In a statement, the UAW said the Volkswagen announcement was related to the union’s decision to withdraw its challenge of the vote with the National Labor Relations Board, a federal body that adjudicates labor disputes.

“The UAW knew that withdrawing its objections to February’s tainted election, in consensus with Volkswagen, would expedite the company’s decision on the new product line,” Gary Casteel, secretary-treasurer of the UAW, said in a statement.

‘Success Factors’

In addition to its expansion plans, Volkswagen said Bernd Osterloh, the head of the company’s worker council, will become a member of the Volkswagen of America board of directors.

“This is in line with the codetermination culture of Volkswagen, which is one of our key success factors,” Winterkorn said in a statement.

The new SUV will be based on a prototype, dubbed the Crossblue, that was displayed at the Detroit auto show in early 2013. The vehicle is positioned between VW’s existing models in the segment, the $23,305 compact Tiguan and $44,570 mid-sized Touareg. The vehicles compete with Dearborn, Michigan-based Ford Motor Co. (F:US)’s Explorer and the Highlander from Toyota.

Industrywide demand for SUVs is rising, with the models likely to account for 20.1 percent of auto production worldwide by 2018 compared with 17.6 percent in 2012, according to consulting company PwC. In the U.S., SUVs and crossover vehicles widened their share of the auto market to 30.9 percent in 2013 from 29.7 percent a year earlier, research company Autodata Corp. estimates.

Expand Capacity

VW chose the $1 billion Tennessee factory, its only U.S. production site, for the new SUV over its plant in Puebla, Mexico, after weighing local incentives. The Chattanooga plant can produce about 150,000 vehicles a year, and its capacity is being expanded 67 percent to 250,000 vehicles annually.

Casteel said last week that he was confident Volkswagen will recognize the newly formed Local 42 once the union demonstrates a “meaningful portion” of the workforce joins.

The union lost a Feb. 14 election supervised by the National Labor Relations Board by a vote of 712 to 626. The loss set back UAW efforts to organize workers at manufacturing plants in the U.S. South, which has long resisted labor unions, though the union is pushing forward with plans to form worker councils at other plants.

The councils can only operate as bargaining units where a union is in place.

To contact the reporters on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net; Dorothee Tschampa in Wolfsburg at dtschampa@bloomberg.net; Jim Snyder in Washington at jsnyder24@bloomberg.net

To contact the editors responsible for this story: Chris Reiter at creiter2@bloomberg.net Jon Morgan, Elizabeth Wasserman


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