VW chooses Tennessee for US plant

VW has said that the strong euro is "hurting" its business

German carmaker Volkswagen (VW) has chosen to locate its new US car plant in Tennessee, a move that could pump $1bn (£498m) into the local economy.

VW opted for a site in the city of Chattanooga in preference to possible locations in Alabama and Michigan.

The euro's rise against the dollar has made it costly to make cars in Europe and export them to the US, leading VW to explore manufacturing again there.

The move is good news for a US car industry shedding thousands of jobs.

New car

Earlier on Tuesday, GM said it planned to make further cutbacks forced upon it by declining sales in its home market.

VW's decision, however, is disappointing news for Michigan - the home of the US car industry - which it suffering bitterly from the job cuts at GM and close rival Ford.

This project will have a significant impact on the economy of Tennessee and the region for decades to come Phil Bredesen Tennessee Governor

When it is up and running in 2011, the new plant will employ 2,000 people directly as well as offering business to hundreds of suppliers.

The new facility will eventually have an annual capacity of 150,000 vehicles and will be used to build a new midsized vehicle for the US market.

VW said its decision was based on a range of factors including financial incentives offered by the state linked to job creation, investment and training.

"This is a significant step forward in achieving our goals in the US market and a clear sign of VW's commitment to the North American consumer," Stefan Jacoby, president of Volkswagen's North American business, said of the project.

Economic impact

VW closed its last US plant, in Pennsylvania, in 1988.

Exchange rate movements in the past two years have made European carmakers look for cheaper production solutions, with VW also building plants in India and Russia.

On Tuesday, the euro hit a fresh high again against the dollar.

State officials welcomed the VW investment, claiming that it put Tennessee on course to eventually become the main site for US car production.

"This project will have a significant impact on the economy of Tennessee and the region for decades to come," said Tennessee Governor Phil Bredesen.