Volkswagen AG has had the grand opening of a $1 billion (Dh3.67 billion) US assembly plant that looms large in its 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 plan, which faces numerous hurdles and doubters within the auto industry.
By shifting production to the US and using local parts suppliers, Volkswagen can guard against exchange rate fluctuations that can eat away at profit. It also allows the company to keep close track of changing tastes in the world's No.2 auto market, where consumer trends often originate.
In addition, Volkswagen can demonstrate its commitment to the US market, analysts said.
The company aims to nearly triple its sales in the US to one 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."
At the ribbon-cutting ceremony, Martin Winterkorn, chairman of Volkswagen AG, said the plant represented a "new chapter for VW in America". He shared the stage with several state and local politicians, including Tennessee Senator Bob Corker, who pushed for tough conditions on the US government bailout for automakers.
On stage, Volkswagen displayed a black Passat with an American flag vanity plate.
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 three per cent market share in the US, according to Autodata. By contrast, Toyota had about 15 per cent and GM about 19 per cent.
Adding to its challenges are the revamped vehicle line-ups of the Detroit Big Three automakers, 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 US auto industry is on the rise.
On an annualised basis, industry-wide US sales as of April were 13.17 million vehicles. Winterkorn told reporters in Chattanooga that he expects 2011 to be a record one for Volkswagen and the auto industry, which he projected to reach total US sales of about 15 million by 2018.
"I see the figures the books are full," Winterkorn said.
Jonathan Browning, head of Volkswagen's US 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."
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."
Toyota Camry ranked No.2 in US 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 US, 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 was hurt by currency fluctuations, Chattanooga plant manager Frank Fischer said at a press conference. Labour practices represented another difference, he said.
"The people were selected not on their capabilities and their skills, but more on the time and how long people were unemployed," Fischer said. Production at the Tennessee plant is scheduled to rise to 150,000 vehicles annually by 2012.
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.
Labour 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 labour costs, according to a Barclays Capital estimate.
Analysts said the wages are strong for the area.
At $27 an hour, Volkswagen's labour costs are well below those of both the Detroit Three and other foreign automakers.
For example, Ford's labour costs are around $58 an hour including wages and benefits.
Detroit (Reuters) The parts shortages and resulting production shutdowns caused by the Japanese earthquake and tsunami could cause the global auto industry to rethink how it sets up its supply lines, a top industry economist said.
"What this says is that there might be some cracks, some inefficiencies, some unplanned-for problems not only in nuclear power plants, but in our global supply system for the auto industry," Sean McAlinden, chief economist for the Centre for Automotive Research, said. "We may have consolidated our suppliers too much.
"We may have shared parts across too many models. We may have built regional models with global parts, which means lines will go down here for cars that don't sell anywhere else, really. And maybe there will be some pull-back because of this particular disaster. Who knows?"
Numerous automakers closed factories or scheduled downtime for plants due to shortages of parts coming from Japan.
About 13 per cent of worldwide auto output has been lost due to parts shortages and IHS Automotive has estimated it may cut output by as much as 30 per cent within six weeks in a worst-case scenario.
McAlinden said simply shifting some of the affected parts work to China will not solve the problem, especially if the next disaster happened to hit that market, and suggested North America could see more investment as a result.
From / Gulf News