AP Human Geography
Unit 5 – Industrialization & Economic Development
Weber’s Theory of Industrial Location
May 24, 2011
By NICK BUNKLEY
CHATTANOOGA, Tenn. — Volkswagen hopes that more seat padding and larger cup holders will help it to become competitive in the
United States again and to achieve a lofty goal of becoming the world’s largest carmaker this decade.
Signaling that it is more committed to the North American market than ever before, the company has designed a version of its midsize sedan, the Passat, specifically for American tastes and is building it in a $1 billion plant in Tennessee rather than importing the same car sold in Europe.
The new version is bigger and significantly less expensive, with a starting price of about $20,000, roughly $7,000 less than the current model.
“Our goal is to put Volkswagen back among the very best in this key market,” Michael Macht, the carmaker’s top manufacturing executive, said Tuesday at an event here to open the plant.
But Volkswagen’s big investment will pay off only if many more people buy its cars. Only 12,497 Passats were sold in the United States last year, well below the model’s peak of about 80,000.
For the Passat to succeed, it must take on the stalwart Toyota Camry and Honda Accord, along with vastly improved offerings from
Hyundai and the Detroit automakers. It also must overcome some skepticism from loyalists and critics who do not regard the revamped, cheaper model as an improvement.
Automobile Magazine, in a review of the 2012 Passat published Monday, said Volkswagen had created “the lowest common denominators of the American midsize sedan.”
“There’s the sense that with every crease of the sheet metal, every tenth of an inch of legroom, and every penny of the price, Volkswagen vigilantly calculated how many buyers would be won and how many buyers would be lost,” the review said.
In February, Volkswagen drew plenty of positive attention to the new Passat, which will arrive at American dealerships this year, using a
Super Bowl commercial featuring a child dressed as Darth Vader. He reprised the role at the plant on Tuesday, flanked by an army of storm troopers, to raise a wall exposing the plant floor to the audience at the event.
“It’s a very daunting effort,” said Jack R. Nerad, executive market analyst for the vehicle information provider Kelley Blue Book. “If they’re going to grow to the level that they want to, they’re going to have to take it out of somebody else’s hide. That’s a tough task, because there are no weak sisters in this market.”
Still, Volkswagen executives say they are confident that annual sales in the United States will surpass a million vehicles by 2018, nearly triple last year’s total of 360,179. The company, based in Wolfsburg, Germany, aims to become the world’s largest automaker by then.

Central to those ambitions is the large investment in the United States. Building the Chattanooga plant, Volkswagen’s only factory in the
United States, and developing new versions of the Passat, Jetta and Beetle add up to $4 billion, executives said.
By manufacturing locally, and buying 85 percent of the North American Passat’s parts from nearby suppliers, the company is able to greatly reduce its costs. Executives said the savings was the biggest reason Volkswagen could charge less for the Passat, even while adding standard features like dual-zone climate control and Bluetooth connectivity. Some specifications were also changed from the
2010 version — no 2011 model was built — like dropping a turbocharged engine from the base model.
Building Passat in Tennessee reduces shipping and labor costs, but more important it keeps profits from being wiped out by unfavorable currency exchange rates. That is a big reason other foreign carmakers like Toyota and Honda build a majority of the vehicles they sell in
North America at plants on the same continent.
“Currency fluctuations can really clobber a European manufacturer,” Mr. Nerad said. “All of a sudden your cost basis is a lot better.”
The Chattanooga plant, which employs 1,700 people and builds cars for the United States, Canada and Mexico, has a capacity of
150,000 a year. Only the Passat will be built there initially, though executives left open the possibility that other models would be added later. Martin Winterkorn, Volkswagen’s global chief executive, told reporters before the plant opening that the company would decide within a year whether to build cars for its Audi luxury brand in the United States as well.
The opening of the plant is Volkswagen’s return to building cars in the United States. It closed a Pennsylvania plant in 1988. Frank
Fischer, chief executive of the Chattanooga operations, said the new plant and the Passat would not suffer any of the problems that doomed the original plant, which was bought from Chrysler and was plagued by poor quality and labor disputes.
Unlike the Pennsylvania plant, the one in Chattanooga is not unionized. Executives declined to discuss the possibility that the United
Automobile Workers union might focus on the newly hired work force as it seeks to organize at least one foreign-owned auto plant this year. Senator Lamar Alexander, Republican of Tennessee, said during brief remarks Tuesday that the plant has a “first-rate work force in a right-to-work state.”
Analysts said unionization could increase the plant’s labor costs, which Barclays Capital estimates at $27 an hour, including benefits, for each worker — on par with those earning so-called second-tier wages in the Detroit carmakers’ plants and roughly half as much as firsttier Detroit workers earn.
Questions
1.
Why is Volkswagen, a German car company, building a large manufacturing plant in the United States instead of building it in their own country?
2.
Why is Volkswagen building it’s car manufacturing plant in Tennessee instead of Michigan, the traditional car manufacturing center?
3.
In what manner does this development relate with Weber’s theory of Industrial location?
4.
If bulk gaining industries tend to locate near markets in order to reduce transportation costs, than why do most multinational corporations place their assembly plants in China and other developing countries if the markets for their products are mostly in North America & Europe?