Volkswagen sees U.S. plant as key to topping Toyota

CHATTANOOGA, Tennessee Tue May 24, 2011 3:15pm EDT

The Volkswagen logo is seen on display at the New York International Auto Show in New York City, April 20, 2011. REUTERS/Mike Segar

The Volkswagen logo is seen on display at the New York International Auto Show in New York City, April 20, 2011.

Credit: Reuters/Mike Segar

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CHATTANOOGA, Tennessee (Reuters) - Volkswagen AG on Tuesday marked the grand opening of a $1 billion U.S. assembly plant that looms large in the German automaker's plan to unseat Toyota Motor Co as the world's largest automaker.

The plant in south-central Tennessee, where Volkswagen is already building its 2012 Passat car, is a key part of the company's plan, which faces numerous hurdles and doubters within the auto industry.

By shifting production to the United States and using local parts suppliers, Volkswagen can guard against exchange rate fluctuations that can eat away at profit, analysts said. Making cars in the United States also allows the company to keep close track of changing tastes in the world's No. 2 auto market, where consumer trends often originate.

By having a plant in the United States, Volkswagen is also demonstrating its commitment to the U.S. market, analysts said. The company aims to nearly triple its sales in the United States to 1 million vehicles in 2018 from about 360,000 in 2010.

"A car company can only be really successful and get a big market share if it is on location," said Juergen Pieper, an analyst at Metzler Equities in Germany. "The Japanese are stronger than VW in North America because they are already there."

Volkswagen's growth plans represent a tall order for an automaker that has long been seen as a niche player, analysts said. Including its luxury brand Audi, Volkswagen ended 2010 with just a 3 percent market share in the United States, according to Autodata. By contrast, Toyota had about 15 percent, while GM had about 19 percent.

(For a graphic on Volkswagen's U.S. sales and market share over the years, click on r.reuters.com/xuz69r.)

Adding to its challenges are the revamped vehicle lineups of the Detroit Big Three automakers -- General Motors Co, Ford Motor Co and Chrysler Group LLC -- as well as Korean companies Hyundai Motor and Kia.

"Most people don't think they can do all those things," Edmunds.com analyst Bill Visnic said. "There are a lot of headwinds. There are a lot of things that have to go right for Volkswagen to pull it off."

The automaker is pushing for growth at a time when the U.S. auto industry is on the rise. On an annualized basis, industrywide U.S. sales as of April were 13.17 million vehicles.

Martin Winterkorn, chairman of Volkswagen AG's board, told reporters at the ceremonies here that he expects 2011 to be a record one for Volkswagen and the auto industry.

"I see the figures -- the books are full," Winterkorn said.

Jonathan Browning, head of Volkswagen's U.S. arm, said underlying consumer demand could support sales of about 13.5 million cars and trucks this year.

"I think it's clear that we've got a lot of work to do," Browning said. "We're running a marathon at the pace of a sprint."

NO MORE WEAK SISTERS

The company's push for growth comes as GM, Ford and Chrysler are offering more attractive and fuel-efficient vehicles. GM and Ford enjoy a well-liked stable of small and mid-sized cars, including the Chevrolet Cruze and the Ford Fusion.

"There was a time when there were some weak sisters out there," Kelley Blue Book analyst Jack Nerad said. "There's not that many car companies out there that are providing weak products in that segment. And those that do, don't have much share."

The Toyota Camry ranked No. 2 in U.S. sales in April, while Honda's Accord was No.5.

"You don't suddenly unseat the Accord and the Camry just because you have a new product," Visnic said. "It's going to take a while for Americans to understand what VW is up to right now."

Back when the VW Beetle was a top import in the United States, the company had a production plant in Pennsylvania. But by 1988, sales had slowed and the plant, which built the Rabbit, was closed.

The plant failed in part because the company still imported a large number of auto parts, and it was hurt by currency fluctuations, Chattanooga plant manager Frank Fischer said at a press conference.

Labor practices represented another difference, he said.

"The people were more selected not on their capabilities and their skills, but more on the time and how long people were unemployed," Fischer said.

The Tennessee plant is Volkswagen's first in the United States since its departure in 1988. Production at the plant is scheduled to rise to 150,000 vehicles annually by 2012.

The company is relying on the Passat and the Jetta to drive its volume in coming years. When asked what other models could be built at the Chattanooga plant, Browning said the automaker was focused on the Passat.

Winterkorn told reporters there was "no consideration" that Porsche cars could be built in Chattanooga.

The first Passat rolled off the assembly line in Chattanooga last month. Volkswagen announced in 2008 that it would build a new plant in Tennessee that would include body production, paint shop and assembly. Tennessee beat out Alabama and Michigan for the contract.

Barclays Capital estimates that labor costs at the Tennessee plant, including wages and benefits, will average $27 an hour, on par with the "Tier Two" workers that make up a small part of the Big Three's labor costs. Analysts said Volkswagen should still be able to attract top talent because the wages are strong for the area.

At $27 an hour, Volkswagen's labor costs are well below those of both the Detroit Three and other foreign automakers. For example, Ford's labor costs are around $58 an hour including wages and benefits.

The United Auto Workers union said publicly that it would like to organize a "transplant" automaker. Winterkorn declined Tuesday to discuss the union's efforts.

(Reporting by Deepa Seetharaman in Chattanooga; additional reporting by Maria Sheahan in Frankfurt; editing by John Wallace)

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