Volkswagen Waltzes Into Tennessee

Tag : Whole Rabbit

Volkswagen needs a plant stateside to combat the devastating effectof the weak U.S. dollar on its profits. The German automaker iscurrently forced to import all of the vehicles it sells in the U.S.-- the primary reason its American operation has been averaginglosses of $1 billion a year since 2004. Even vehicles made at VW'sMexican plants have been a drag on earnings because those cars havetoo many euro-denominated parts.
In an interview with BusinessWeek earlier this year, Volkswagen of America Chief Executive StefanJacoby said manufacturing in the U.S. is an imperative to stayingviable. "The U.S. dollar, we think, could stay quite weakagainst the euro for some time, so we must build a big percentageof our vehicles here rather than rely on imports," Jacobysaid.
VW's supervisory board approved an investment of as much as $1billion in the new factory, which is scheduled to start productionin early 2011. The company says a midsize sedan will be the firstproduct in the new plant, priced between today's Passat and Jettamodels. Though the company has not been specific about what modelswill be rolling off the Tennessee assembly line, VW executives havehinted for months that the car would be built off the Passatengineering platform, and designed to match U.S. tastes. There willlikely be a crossover SUV built on the same engineering platform.Executives have also hinted that VW could shift production of theJetta from Mexico to Tennessee. VW's sister company, Audi, is also looking atbuilding a product at the plant.
An Audacious Plan
Volkswagen has a storied history in the U.S., going back to thedays when it sold Beetles and Microbuses in the 1960s and 1970s.But today it has merely 2% of the U.S. market. Last year, thecompany sold just 231,000 Volkswagen-branded vehicles in the U.S.,down more than 100,000 from four years earlier. This year, salesare flat -- which is a pretty good performance compared with deepdrops at General Motors (NYSE: GM - News ), Ford (NYSE: F - News ), and Chrysler, and better than some other imports, such as Toyota(NYSE: TM - News ) and BMW ( BMWG.DE ).
For Volkswagen, the Tennessee plant is the cornerstone of anaudacious plan to build up to 1 million in U.S. sales by 2018 (thefigure covers both the VW and Audi brands). Few automotive analystsbelieve VW will be able to reach that target, characterizing theforecast as propaganda. "A goal like that pushes the wholeorganization in the same direction internally, and shows enormousconfidence to owners and car shoppers," says Los Angeles-basedmarketing consultant Dennis Keene. Jacoby told BusinessWeek : "We know it is an ambitious goal, but it is the one ourcompany's management has set for us."
The Chattanooga operation will have an initial capacity of 150,000vehicles and will include body production, a paint shop, andassembly operations, Volkswagen said. Most plants are built toexpand to between 200,000 to 300,000. For purposes of comparison,Toyota spent $1.3 billion on its San Antonio plant, which beganmaking pickup trucks in late 2006. That factory, which has acapacity of between 150,000 and 200,000 vehicles, employs 1,900workers directly and supports additional jobs at 21 on-locationsuppliers. The VW plant will employ 2,000 initially, but may notgenerate as many supplier jobs. It remains to be seen whethersupplier companies -- now located in Alabama and Georgia to supplyplants operated in Alabama by Mercedes-Benz (NYSE: DAI - News ), Honda (NYSE: HMC - News ), and Hyundai, as well as those supplying Nissan (NasdaqCM: NSANY - News ) at its Tennessee plant -- will build new facilities to serviceVW, or leverage the facilities they have and truck the parts to Chattanooga .
Leaving the Rust Belt
Chattanooga, looking to replace some of the textile industry jobsit has lost, presented VW with a compelling plant site. OffInterstate 75, the state and city had prepared a 1,350-acre"megasite" complete with its own exit and interchange offthe highway, industrial utilities, and connecting rail line. Theshort-line rail tracks that roll into the site connect with bothCSX and Norfolk Southern freight lines. "We have been pursuingan opportunity like this for a number of years, and we'reready," says Trevor Hamilton, vice-president of economicdevelopment at the Chattanooga Chamber of Commerce .
Officials declined to give any specifics about the incentives thestate, city, and county offered. Jacoby, Volkswagen of Americapresident, said the VW site assessment team was impressed with many"intangibles" about Chattanooga, including itslivability, sustainability focus, mountain and river setting, andenvironmental record.
While a boon to Tennessee, VW's decision is another blow toAmerica's rust belt -- Wisconsin , Michigan, Ohio, Pennsylvania, Indiana -- where Detroit 's three automakers have been closing plants. Despite the readyworkforce in those states, foreign automakers have mostly opted tobuild greenfield plants far away from the organizing bases of the United Auto Workers union . Toyota is building a plant that will make Prius hybrids inMississippi where Nissan already has a plant. BMW's plant is in South Carolina . Kia Motors' new plant is in Georgia . But it's Alabama, which also was in contention for the VW plant,that has scored the most auto-related jobs in the last decade --30,000-plus. None of the foreign-owned plants, except forMitsubishi's Illinois plant, has been organized by the UAW, andthat arrangement dates back to when it was a joint-venture plantwith Chrysler.
Volkswagen is now in the process of moving its U.S. headquartersfrom Auburn Hills, Mich., to Fairfax County, Va. The company haslong bristled at being located in the shadow of Detroit's BigThree, and said it was moving to be closer to its customers in acoastal market.
This is not the first time VW will be building vehicles in the U.S.In the 1970s, the company opened a plant in Westmoreland, Pa., tobuild Rabbits and small Rabbit-based pickups. It had planned toopen a plant in Sterling Heights, Mich., in the 1980s. But with itssales plunging, the company moved to shutter the Rabbit plant andsold the Sterling Heights location to Chrysler. Clearly the Germancarmaker hopes its newest American venture will meet with a betterfortune.