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Volkswagen building Tennessee assembly plant during hard times

Published: Thursday, Nov. 27 2008 10:48 a.m. MST

CHATTANOOGA, Tenn. — With huge dirt movers shaping the site of Volkswagen's $1 billion assembly plant at Chattanooga, Europe's largest automaker says it has no regrets about announcing its arrival as an American employer in hard times.

"We have stuck with our goals of growing our sales in the U.S. market," Volkswagen AG spokeswoman Jill Bratina said. "This plant is critical to that."

Since Volkswagen announced plans to build the plant in July, the global economy has been deflating. Following the housing, credit and financial crises in the U.S., the possible collapse of General Motors Corp. or Chrysler LLC would likely drag down some auto suppliers and manufacturers of steel, aluminum, electronics and plastics.

Volkswagen AG spokeswoman Jill Bratina said the company is "absolutely not" having any regrets about the timing of the Chattanooga plant. Volkswagen is also building assembly plants in Russia and India.

Kia Motors Corp. plans to open an assembly plant at West Point, Ga., in 2009, and Toyota Motor Corp. said earlier this month that it is sticking with plans to open its new plant at Blue Springs, Miss., in 2010. They'll join other foreign automakers like Nissan Motor Co., Honda Motor Co. and BMW AG that have opened plants in the South.

Otherwise, the Tennessee Department of Economic & Community Development is "not aware of an automotive company seeking to locate a large assembly facility," spokesman Mark Drury said this week.

Not only are VW executives sounding spirited about the early 2009 groundbreaking for the Chattanooga plant that will employ about 2,000 people, they already have expanded the planned size of the site's paint shop to accommodate 1,000 vehicles per day instead of 650 when production starts in 2011.

"We expect to see a turn in the economy by the time these cars will be available," Bratina said.

The plant will be able to make 150,000 vehicles a year when it opens, but Volkswagen already is planning to start construction in 2011 of a second phase that would increase capacity to 592,000 vehicles a year.

Building a new sedan in Chattanooga is part of VW's plan to expand sales in the United States to 1 million a year by 2018, or more than four times the number sold last year. Volkswagen has sold 191,255 vehicles in the first 10 months of 2008, less than a 1 percent decrease from the same period last year, while U.S. auto sales overall have fallen 15 percent.

David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., said Volkswagen's timing appears sound, even though the global economy has drastically changed since the company's July announcement and the value of the euro has fallen, eroding the cost advantages of manufacturing in the U.S.

Cole predicted we "will be past the bottom of this huge financial mess" by the time production starts two years from now.

Volkswagen's plans are moving forward while the Big Three U.S. automakers are asking for $25 billion in federal loans to stay alive through next year. GM, Chrysler and Ford Motor Co. say they've burned through a combined $34.6 billion in cash through September of this year as high gas prices and then the economic downturn pulled auto sales to a 25-year low.

Bratina said Volkswagen supports government financial help for the auto industry but in a way that treats "all investors in the U.S. market fairly. It should focus on all companies that have invested in creating jobs in this country."

She said VW needs a "vibrant supplier network" and also has a stake in consumers having credit available to help get them back in auto showrooms.

Erich Merkle, auto analyst with the consulting firm Crowe Horwath LLP, said Volkswagen has no reason to second guess the timing of its new plant to build a new midsize sedan aimed at American buyers.

He said automakers "have to be able to produce in the markets in which they sell."

"If you plan to be a player here in North America, it doesn't make sense to export," Merkle said. "That's what Volkswagen is finding out."

Merkle said Volkswagen's plans for making a midsize sedan in Chattanooga is right on target for the growing population of baby boomers in the United States and will compete with the Honda Accord and Toyota Camry. He said Toyota, Honda and Nissan should be "paying very close attention to what Volkswagen is doing."

"As baby boomers retire and become empty nesters they are not want to get in a Mini, but they are not going to want a Suburban either," Merkle said.

Volkswagen has not disclosed the design of the car that will be built in Chattanooga but plant manager Frank Fischer has said it will be slightly larger than the midsize Passat.

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