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(Reuters) - Volkswagen will spend $900 million to build a mid-sized SUV at its U.S. plant in Tennessee, nearly doubling the factory's workforce, in an effort to revitalise sales in the world's second-largest auto market.
VW said on Monday it had chosen its factory in Chattanooga, Tennessee instead of a plant in Puebla, Mexico to produce a seven-passenger SUV starting in late 2016, creating up to 2,000 jobs at the site that currently has almost 2,500 staff.
VW's $1 billion factory in Chattanooga started operating in 2011, building a cheaper, roomier version of the carmaker's mid-sized Passat sedan specifically designed for American customers.
Wolfsburg-based VW became the world's No. 2 auto manufacturer last year, only trailing Toyota Motor Corp thanks to sturdy sales growth in China.
But in the United States, sales of its core passenger-car brand have been flagging since a 2011-12 surge that followed a push into competitive mid-size vehicles. Sales of the VW brand in the United States fell 7 percent last year and 13 percent in the first half of 2014 even as the overall market is growing.
"I admit that we may have dedicated too much time to China, Brazil and other states because the U.S. appeared to be working extremely well," Chief Executive Martin Winterkorn said at a press conference in Wolfsburg. "That's why we want to adjust things now."
"The VW brand is going on the attack again in the U.S.," Winterkorn said. "The United States will remain one of the most important markets for VW." Troubles at the VW brand, which has been slow to refresh models and plug gaps in its U.S. lineup, led to a change in the carmaker's North American leadership where Jonathan Browning quit as regional chief in January after about three years.
The new jobs at the Chattanooga factory will include about 200 positions in research and development and design to make sure the vehicles cater to the needs of the North American market.
"VW has lacked understanding of U.S. customers' needs and market dynamics," Stefan Bratzel, head of the Center of Automotive Management think-tank near Cologne, said. "They're taking the right step. Success in the U.S. is a must for them."
Of the $900 million investment, $750 million will be spent on production of the new SUV and the remainder on infrastructure, a VW spokesman said. The state of Tennessee said it awarded almost $178 million in financial incentives to secure the investment.
VW officials said unit production of the SUV would be in the six-figure range. The vehicle will be sold in North America and other markets, and built on the same platform as the Passat. The Chattanooga plant built 130,000 Passat cars at its peak in 2011.
The overall mid-sized SUV market in the United States has grown to more than 1.4 million vehicles from about 750,000 in 2009, VW said.
Michael Horn, VW's new U.S. chief, said at the press conference the carmaker would further expand its model range in the United States and has plans for more "derivative models." He declined to elaborate.
The company will appoint a team of product management officials in the second half of this year at the automaker's U.S. headquarters in Herndon, Virginia.
From 2014 to 2018, VW will invest more than $7 billion in the United States and Mexico. A 2007 goal to deliver 800,000 brand vehicles in the United States by 2018 - almost double last year's total of 408,000 - is still realistic, Winterkorn said.
VW also said on Monday that Bernd Osterloh, chairman of the Groups Works Council of Volkswagen, would join the board for the automaker's American operations to give its work force more of a voice in strategy planning.
U.S. Senator Bob Corker said in an interview the investment would not have happened without the UAW's February loss.
"There's no question the path that we followed was the only path that would have led us to this announcement," said the Tennessee senator, a former Chattanooga mayor who helped first lure VW to the state.
However, UAW Secretary-Treasurer Gary Casteel said in a statement VW's announcement coming four days after the American union's plans to open a branch in Chattanooga "reinforces the consensus that the UAW has reached with the company."
VW officials said the decision on the SUV was not related to the election loss in February by the United Auto Workers union. Some anti-union forces had said the loss cleared the way for the Tennessee plant to get the investment, while UAW officials said VW workers were improperly influenced by anti-union statements made by Tennessee Republican lawmakers and outside interest groups.
The UAW said last week that it had formed a local union in Tennessee for workers at the plant, taking another run at representing some of the employees. VW officials said they had no agreements in place with the UAW regarding its latest efforts.
VW officials have said they want the plant represented by some type of German-style works council, which typically includes both blue- and white-collar employees.
Reporting by Ben Klayman and Andreas Cremer.; Editing by Louise Heavens, Jane Merriman and David Evans