Sean Gallup—Getty Images
By Doron Levin
July 14, 2014

Volkswagen AG, which been has stumbling lately in the United States, ended months of speculation by announcing it will expand a factory in Chattanooga, Tenn., and begin building a new crossover model there in 2016.

VW had been considering whether to build the new vehicle – so far unnamed – in Chattanooga or at its other North American factory in Puebla, Mexico. The carmaker delayed the crossover, known sometimes as an SUV, for reasons that haven’t been disclosed publicly, and much to the chagrin of its U.S. dealers. Dealers invested heavily in showrooms, expecting more sales than have materialized.

In the meantime, VW’s Chattanooga plant has been embroiled in controversy over an attempt by the United Auto Workers union to organize, a bid that was voted down narrowly by workers.

“The United States of America remains an important market for Volkswagen,” said Martin Winterkorn, VW chief executive officer, in Wolfsburg. “We are now taking the next step. Volkswagen is expanding its commitment to the United States. A key role here will be played by Volkswagen’s midsize SUV. It will be built by real Americans starting at the end of 2016.”

As part of VW’s stated goal of becoming the No. 1 automaker in the world by 2018, Winterkorn said the automaker intends to sell “about 800,000 vehicles” annually in the U.S. by then. Last year VW sold about 400,000 vehicles in the U.S.; sales are down this year more than 13%. A bright spot, in the U.S. and worldwide, has been VW’s Audi luxury franchise.

VW has been earning massive profit and enjoys a solid balance sheet. Analysts worry that weakness in the U.S. and in India partly reflect troubling defects in management. They point out that Ferdinand Piech, the octogenarian chairman of the company, has ruled the automaker by force of his will rather than by building a sustainable cadre of decision makers.

The German automaker said it will spend $900 million on the new crossover, a replacement for its Tiguan. That amount will include $600 million on the plant and a research and development center on the same site. About 2,000 workers will be hired at the plant, about 200 for R&D.

The future of VW’s relations with the UAW remain murky, leading to uncertainty about whether workers in Tennessee ultimately might be represented by the union. Following the ballot defeat earliest this year, the UAW last week announced it intended to inaugurate a local in Chattanooga, without power or authority, whose membership of VW workers would be voluntary. Presumably the union intends to build its credibility in advance of another vote or of a decision by VW to recognize the union unilaterally as bargaining agent for the work force.

Many of the state’s politicians have preached opposition to the UAW, hinting that state aid for future plant expansions could be imperiled.

VW has ambitious targets for growth. But the automaker faces a rocky road convincing U.S. dealers that this time, after some false starts, it has a viable plan for expanding its footprint. A familiar cliché of the automobile business is that popular new vehicle models can overcome other difficulties. That hasn’t been the case for VW, at least so far.

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