These days, the rise in German beer being offered at local pubs in the southern city is due to the ramp up of Volkswagen's sprawling factory complex that could one day manufacture a half million vehicles a year.
The plant, which has begun making an all-new redesigned VW Passat mid-sized sedan, has brought 11,477 new jobs so far to the region including VW's direct employment and all the businesses feeding the plant, according to the Chattanooga Chamber of Commerce.
While the assembly plant and manufacturing park is a boon to the southern Tennessee economy, it also marks a significant turning point in Volkswagen's history in the U.S.
VW closed its first assembly plant, in Pennsylvania, in the late 1980s when quality problems and high pricing due to currency fluctuations drove down demand for VW vehicles, especially the ones made in the U.S. But VW has roared back from a low-point in the mid 1990s. when it sold so few vehicles it considered leaving the U.S. And the Chattanooga plant is a lynchpin to the company's ambitious goal of selling 800,000 vehicles a year in the U.S. by 2018.
VW Meets Value Pricing
The first of the new Tennessee Volkswagens is the Passat. The mid-sized sedan has been around since the late 1980s, but has never sold well. Each design of the car was too small and too expensive compared with rivals like Toyota Camry, Honda Accord and Ford Fusion. Last year, when VW sold just a little over 11,000 Passats, the sticker price was above $28,000 and could easily nudge over $30,000 without adding too many features. That's about $5,000 more than a comparable Camry or Fusion.
"The old Passat was a terrific car, but it was made for Europe first, and you had to really want a Volkswagen to buy that car because of the pricing," says Frank Fischer, CEO of the VW plant.
The old Passat, along with the current VW Tiguan and Touareg SUVs, was built in Europe with primarily European-sourced parts, making them more expensive in the showroom. When European parts priced in Euros were converted to U.S. dollars, the sticker price went up.
The new Passat has been designed to be built with 85% of its content derived from North American-based suppliers and manufacturing. That insulates VW from the profit-crushing fluctuations between the U.S. dollar and the euro.
The new sedan has a starting price of just under $20,00 to make it price competitive in a category --mid-sized sedans -- that is a battleground of value pricing. The 2011 Camry starts at $20,195. The Honda Accord starts at $21,380 and the Ford Fusion starts at $19,850. The entire price range for the Passat is from $19,995 to $32,950.
The Passat is only the beginning for VW in Chattanooga. Right now, the factory is set up to build about 125,000 vehicles. But the facility has been planned to ramp up to 250,000. If sales go well for the Passat and a crossover vehicle that VW plans to add to the plant (perhaps a replacement for the Tiguan crossover), it could then double the plant output on the factory site to build 500,000 vehicles a year. That would make it one of the single biggest auto plants in the U.S, comparable to Toyota's sprawling manufacturing site in Georgetown, Kentucky.
Volkswagen Was Once The Import King
Volkswagen's sales goals are ambitious, but stem from its own history. Volkswagen in 1970 was the leading import brand in the U.S with 577,000 U.S. sales, mostly Beetles; before Toyota, Honda and Nissan began their American surge with baby boomers. It is the number-one brand in Europe. And the Volkswagen Group, which includes Audi, Bentley, Skoda, Seat, Lamborghini and Bugatti brands, and soon Porsche, is the third biggest carmaker in the world after General Motors and Toyota.
To attract more customers, VW has been driving down the cost of its vehicles by sourcing its factories in North America, and making the cars a bit larger. The 2011 Jetta sedan, VW's top seller, built in Mexico and launched last Fall, has a starting price of $15,365 and is considerably roomier than the old model. Sales of the new Jetta are up 58% percent through May, compared with last year.
One of the primary obstacles to better sales for VW, say company executives, is the relatively poor showing VW has made on third party quality rankings from J.D. Power and Associates and Consumer Reports. In Power's most recent Initial Quality Study, which measures quality rated by buyers in the first three months of ownership, VW ranked well below industry average and 30th out of 33 brands.
VW's quality at its U.S. plant in the 1980s was so poor that buyers began specifiying they would only buy Rabbit hatchbacks made in Wolfsburg, Germany, and not the Pennsylvania plant. VW officials do not foresee that problem, especially since Mercedes-Benz and BMW build vehicles in Alabama and South Carolina respectively without losing quality. Indeed, the Tennessee plant has a chance to outshine VW's German plant.
To give it a better chance, VW hired a Toyota executive, Don Jackson, to run manufacturing at the Tennessee plant.
"There is no doubt that we have to do better with this vehicle than any Volkswagen we have sold before, and be competitive with or better than the competition in order to achieve what we want," says Fischer.
Experts say VW can improve quality and cut down on complaints if the company doesn't make to many engineering changes after it starts building the cars.
"The biggest enemy to German companies improving quality is their own tendency to make continuous changes to a vehicle after it starts being manufactured," says Ron Harbor, of industrial consulting firm Oliver Wyman, who has studied manufacturing plants for decades. "A lot of ongoing changes that translate to changes on the line tend to create problems."
The Passat, if it can score high with Consumer Reports and Power, has a chance to get into the same league with the stalwarts of the mid-sized sedan category: Toyota Camry, Honda Accord, Nissan Altima, Hyundai Sonata and even the new Kia Optima. While the exterior of the Passat seems conservative, the tailored silouhette and crisp lines of the sedan give it a well-tailored, rather than dull, look. On the inside, well-turned out wood trim on the SEL model ($28,395), top-notch seats and overall tight seams, fit and finish, and quality materials make the Passat a contender just in the aesthetics. The 400-watt Fender audio system is a first in the auto industry and give the whole package some added punch and appeal.
View Gallery: 2012 Volkswagen Passat
Try The Diesel
Powering the 2012 Passat is one of three engines-a 2.5 liter, five-cylinder engine producing 170 horsepower; a 3.6 liter V6 producing 280 hp; and a 2.0 liter TDI Clean diesel engine.
Despite the sub-$20,000 starting price, you can get still above $30,000 without too much trouble. The V6 SE packages, which include 18" wheels, navigation, leather seating, the Fender premium audio system, heated seats and few other amenities, will crest $30K.
The best values with the Passat? We think it's the SE with sunroof and navigation ($26,795), which gets you the smooth 2.5 liter engine, six-speed auto transmission, smartphone interface, heated seats, aluminum trim dash and leather-wrapped seats. The other good value is the TDI SE ($25,995), though that pricing does not provide sunroof and navigation. For that, you have to climb the ladder to $29,495. But the TDI engine, for the uninitiated, packs V6-like power and more than 40 mpg on the highway.
The Volksagen Jetta, a new version of which was launched last Fall, is VW's best selling model. But the hope is that the Passat will soon rival the Jetta for popularity and sales. The company, anxious to make a much bigger splash in America than it has in recent years, is also launching an all-new design of the Beetle this Fall, a model that is sure to drive a lot of showroom traffic that should benefit the new Jetta and Passat.
If the economy gives overall auto sales a little boost to help VW's new product onslaught, 2012 could be a year for VW to remember.
Bottom Line: The new 2012 Passat is a classy, very well-turned out car. By the time you spec it out the way you want it, though, it could still come at a price premium to a Camry or Fusion. Volkswagen's $1 billion investment in Tennessee to build vehicles for the U.S. is a smart and laudable investment. Like the 2011 Jetta, though, the Passat perhaps lacks some of the Volkswagen German engineering feel that has been a hallmark for enthusiasts and customers of the brand. Right now, we would say the driving dynamics are better than Camry, Accord and Fusion, but on par with Hyundai Sonata and Kia Optima.