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VW hopes America gets the bug again

Will build U.S. plant as part of comeback

By W.J. Hennigan (Contact) | Tuesday, July 15, 2008

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Volkswagen is looking to reconnect with American consumers by building its first U.S. manufacturing plant in 20 years.

The German automaker's management board is scheduled to meet Tuesday to decide on a location. The company has narrowed its options to Michigan, Tennessee and Alabama, according to Jill Bratina, a VW spokeswoman.

"We are looking to be more responsive in the U.S. marketplace and reintroduce the brand to American consumers," she said.

VW was the first foreign automaker to build cars in the U.S. after the end of World War II. The company built an assembly plant in Westmoreland, Pa., but closed it in 1988 because of slow sales and intense competition in the small-car market.

Its return to the U.S. represents VW's new approach to North America, where it has not been profitable since 2002. The losses prompted VW Chief Executive Officer Martin Winterkorn to announce plans to double North American sales to 1 million by 2018.

The company took its first steps toward adopting its new strategy in 2007, when it announced it would move its U.S. headquarters from Michigan to Herndon, lured by Northern Virginia's friendly business climate, educated work force and proximity to VW's East Coast customer base. Democratic Gov. Tim Kaine sweetened the deal with an upfront cash payment of $1.5 million and another $4.5 million over five years beginning in 2011.

Moving a manufacturing plant to the U.S. is another "step in the right direction," said Tom Libby, an analyst with J.D. Power and Associates. VW will have to import fewer vehicles, reducing transport costs and the company's exposure to unfavorable currency exchange rates, he said. Those savings can be passed along to the consumer, boosting sales and market share.

"It is a much lower cost structure," Mr. Libby said. "They're eliminating obstacles that would otherwise drive up expenses."

But there are risks in constructing a manufacturing plant, Mr. Libby said. Building a factory is a fixed-cost, long-term project, meaning it could take years before VW recoups its expenses.

Analysts estimate the plant will cost about $1 billion to build, but the three states on VW's shortlist could be willing to shoulder some of the cost if that would mean 2,000 jobs for their residents.

"Alabama has recruited this project aggressively," said Todd Stacy, spokesman for Republican Gov. Bob Riley. Mr. Stacy would not say what incentives the state is offering VW to build its plant there.

Another German automaker, Mercedes-Benz, built a plant near Tuscaloosa, Ala., while German steel maker ThyssenKrupp built a plant near Mobile.

Tennessee has a General Motors assembly plant in Spring Hill and a Nissan engine plant in Decherd near Chattanooga, a transportation hub that would make a logical location for an automaker. Laura Elkins, director of communications for Tennessee's Department of Economic & Community Development, would not comment, citing "ongoing negotiations."

Michigan has a large number of well-trained, unemployed auto workers, but a long history of labor strife could scare VW away, according to George Magliano, automotive director at New York financial analysis firm Global Insight Inc.

No matter which state VW chooses, Mr. Magliano believes the company will come out ahead.

"Aside from the obvious cost benefits, it will help them," he said. "If they want to grow in North America, it helps to have an assembly presence in the United States. People will see them, making it easier to reclaim what they lost."