May 28, 2011
Reporting from Chattanooga, Tenn.-- Volkswagen, whose cars have been known to have nagging reliability problems, is hoping Passat sedans rolling out of its new $$1-billion factory here won't need a lift from the city's historical hallmark — tow trucks.
Nearly a century after claiming its fame as the birthplace of the wrecker, Chattanooga is again in the automotive spotlight as VW looks to regain traction in the U.S.
"We know what we have to do here, " said Hans-Herbert Jagla, who heads human resources at the factory. "Everyone should know that the customer is expecting a perfect car."
VW, the world's third-largest automaker, is looking to triple U.S. sales over the next seven years. But to reach that goal, it needs to overcome a troubled history.
Its previous effort to manufacture cars in the U.S. was an admitted debacle. Quality problems and slumping sales prompted VW to close its first U.S. factory in Westmoreland County, Pa., more than two decades ago.
It was a huge setback for the company that brought the iconic Beetle across the Atlantic, making VW America's first import darling.
VW has recovered some ground in recent years. The brand sold 256,830 vehicles last year, a 20% gain from 2009, according to Autodata Corp., but that was about half of what it sold during the boom years of the 1970s. Sales are up 17% through the first four months of this year.
VW continues to be plagued by quality problems, which is why Jagla said the automaker has been stressing high production standards to the 1,700 workers at the new factory. They are critical to the automaker's growth plan, he said.
The VW nameplate ranked 29th out of 34 brands in the J.D. Power and Associates 2011 reliability rankings of cars after three years of ownership. It ranked 31st out of 33 brands on the Power's 2010 initial quality survey of vehicles 3 months old.
"We have really tried to draw our lessons from the Westmoreland experience," said Frank Fischer, chief executive ofVolkswagen Group of America, Chattanooga Operations.
Built on 1,400-acre complex east of town at the site of a former explosives factory, the plant opened this week with a different management structure than VW's previous factory.
Managers of the failed Pennsylvania factory closeted themselves in Detroit and were rarely present at the plant. This time, VW pulled in more than 200 company experts from operations around the world, including its high-end Audi and Bentley divisions, to work at the factory.
The Passat built in Chattanooga was designed specifically for the U.S. market and won't be sold in Europe. It has an additional 3 inches of rear seat room. It also comes standard with options Americans expect such Bluetooth and dual-zone climate control. The base European engine produces 122 horsepower, contrasted with the U.S. model, which starts at 170 horsepower, providing the type of merging and freeway acceleration American drivers often equate with a sense of safety and security.
The car, equipped with a manual transmission, will start at about $$20,000. Automatic transmission models and versions with larger engines, including a turbocharged diesel with expected highway fuel economy of 43 mpg and a driving range of 800 miles, will start at about $$26,000.
VW needs the vehicle to be a success. An earlier Passat was once the automaker's star performer, selling more than 96,000 vehicles in 2002 and accounting for more than 28% of the company's sales volume, according to Edmunds.com. Sales dwindled to less than 12,500 last year.
Initial plans call for the factory to produce about 56,000 vehicles during its first year of operation, although VW officials say the number could change.
Growing volume will be key for Volkswagen to meet its target of U.S. sales — including its Audi division — of more than 1 million vehicles per year by 2018. It wants to reach a U.S. market share of 6% in that time frame. Currently, the company, including Audi, has annual sales of 360,179, accounting for 3% of U.S. auto sales.
"This is VW's first run at making cars tailored to the American tastes and at parity in price and size with the Toyota Camry andHonda Accord, the cars that dominate that segment." said Bill Visnic, an analyst with auto information company Edmunds.com.
Early reviews of the Passat credit VW for increasing the size and reducing the price from previous versions. Visnic, however, said its conservative styling won't draw much attention.
"The Passat is not a breakout car for VW and somewhere along the line they are going to need some breakout products if they are going to reach those sales goals," he said.
VW sees building cars in the U.S. as an important strategy. The new factory has the capacity to produce 150,000 vehicles a year and there's plenty of room to expand at the sprawling site.
"Localization reduces vulnerability of extended supply chains, and being closer to the consumer allows for a faster response to trends and demands," said Efraim Levy, a Standard & Poor's equity analyst.
It also limits exposure to currency exchange rate swings.
The heavy reliance on parts imported from Europe and unfavorable exchange rates contributed to the previous factory's demise, Fischer said. Now, about 85% of the content of the American Passat will come from NAFTA countries, which eliminates much of he currency risk, he said.
The plant may also benefit from its location along the southern tier of a corridor known as auto alley for its concentration of car factories. It has good highway connections to a Mercedes-Benz plant in Alabama and a BMW factory in South Carolina. Fischer said the German automakers tend to share suppliers, including a company that stamps sheet steel into car body panels.
VW officials also won't have to go far to be reminded about improving the quality its cars. A few miles from the factory is the International Towing & Recovery Hall of Fame, where a display pays homage to Ernest Holmes Sr., the inventor of the tow truck.
"An auto plant is the holy grail of economic development," said Chattanooga Mayor Ron Littlefield. "This is a wave that will carry us forward for a decade."
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Story posted 2011.05.27 at 04:03 PM PDT
