Volkswagen flags up its plans for US market

As Volkswagen opened its first US assembly plant for more than 20 years this week in Chattanooga, Tennessee, the German carmaker decided to dispense with subtlety.

The ceremony began with a prayer from Lady Cynthia Adams, from a local Baptist church, and children from a nearby school singing ‘The Star-Spangled Banner’, while a gently waving US flag filled a huge video screen behind them.

The transport secretary, who apologised for the absence of president Barack Obama, and both the state’s senators were present, and the unveiling of the $1bn plant was led by the cute child dressed as Darth Vader first seen in VW’s TV commercial shown during the Superbowl.

Short of spraying every car red white and blue, there is little more VW could do to make its point that the Passats it will be selling in the US this year will be “German engineered, American made”.

Behind the hype, however, VW’s executives repeatedly make a point that provides genuine grounds for optimism about the future of US manufacturing. If the group wants to sell in the US market, likely to be the world’s largest after China for many years to come, it has to manufacture there.

VW has set an ambitious target of selling 1m cars a year in the US by 2018, up from about 360,000 last year. But it also wants the business to be profitable, and today it is losing money. With the euro at about $1.40, it is very difficult to make a profit importing cars from Europe to the US.

While the exchange rate will move, of course, VW believes it is essential to protect itself against currency fluctuations. Its previous US plant, in Pennsylvania, was shut in 1988 in part because it relied on high-cost European components. The Passats built at Chattanooga will include 85 per cent local content.

Jonathan Browning, VW’s chief executive in the US, says: “To be competitive in the US market, we need a very strong footprint in North America.” As well as keeping costs down, VW’s return to the US is also about strengthening its ties to the country’s industry.

With the Chattanooga plant’s capacity at 150,000 cars per year, and a further 525,000 capacity at the vast factory at Puebla, Mexico, VW is likely to need significant investment in the US.

Martin Winterkorn, VW’s chief executive, said in Chattanooga the company was already thinking about adding further US capacity, and would make a decision within a year.

Industry analysts believe a new plant could make the group’s Audi models, possibly its sports utility vehicle.

Production in the existing facilities at Chattanooga could rise to a maximum of 250,000, Mr Browning says, and the site has space to double its size.

The appeal of manufacturing in the US has been reinforced by the ability of companies setting up plants in southern states to pay much lower wages than the traditional earnings of workers for the “big three” Detroit-based car-makers.

VW in Chattanooga, like Hyundai’s plant in Alabama and Toyota’s in San Antonio, Texas, is paying wages that are roughly half those paid to workers in older car plants, according to Brian Johnson, an analyst at Barclays Capital.

A lower cost base, however, does not guarantee that VW will reach its sales goals. The brand came 31st out of 33 in an influential study of quality by JD Power, and VW executives say they are working on improving it. Analysts have also raised questions about the specifications of Passats aimed at the US market.

Mike Jackson of IHS Automotive, a consultancy, says: “The right product set is going to be crucial.”