German Handelsblatt: VW Group: “Find back to old strength” – Audi is in a cost dilemma in the USA012273

Mexico instead of the USA: The Audi Q5 is mainly produced at the plant in San José Chiapa. Photo: Audi AG

New York, Düsseldorf. In Chattanooga, the big city in the US state of Tennessee, people seem to be used to Germans hesitating. The Volkswagen Group has been discussing building its own factory for its premium brand Audi in the USA for several months – so far with no result. This is not unusual for Charles Wood. “In a German company, the process of coming to a decision is always slower than in an American company.”

Wood is head of the local chamber of commerce and is currently trying diligently to convince Audi officials of the Chattanooga location. Volkswagen currently operates its only US plant there. Hopes are correspondingly high that Audi will also settle there. They seem to accept the long wait. “The implementation after the decision is always much quicker for Germans than for Americans,” praises Wood.

But when that happens seems to be completely unclear at the moment. The plans for an Audi factory in the USA are stalling. The car manufacturer is faced with a dilemma: Without its own US production, President Donald Trump’s tariffs are hitting Audi with full force. At the same time, there is no money for investments because of the special taxes.

US market is particularly important for corporate strategy

“If the burden of tariffs remains unchanged, a large additional investment cannot be financed,” explained Volkswagen boss Oliver Blume in an interview with Handelsblatt. Discussions with the US government have so far remained fruitless. And these are not the only challenges – the next ones are already waiting on site.

Back in the summer, people were confident that a decision would be made by the end of the year. The US market is essential for Audi boss Gernot Döllner. He relies on increasing US sales for his growth strategy. Instead of 1.6 million vehicles like last year, he wants to sell 2.1 to 2.2 million Audis worldwide in the medium term. To do this, Audi must at least double sales in the USA from just under 166,000.

2.2

Millions of vehicles
Audi wants to sell worldwide per year in the medium term.

Auto expert Christian Koenig, who worked for Porsche in North America and runs an industry consultancy in Washington, also emphasizes: “As regionalization increases, the USA is a particularly critical growth market for Audi and the VW Group. Audi must find its way back to its old strength here.”

In addition, the entire group will also have to significantly expand its US market share, said König. This must also be done as a counterweight to China, where the group is suffering significant sales losses due to increasingly tough competition.

VW boss Blume questions US investments – “Cannot be financed if the burden of tariffs remains unchanged”

But Audi is facing a cost problem: So far, a majority of the vehicles that Audi sells in the USA come from its factory in Mexico. There, the Ingolstadt-based company produces the Q5 mid-range SUV, which accounts for almost a third of Audi’s total sales in the USA. The USA, in turn, imposes a tariff of 25 percent on imports from Mexico, which is another ten percentage points more than on imports from the European Union. Last year alone, US business caused a deficit of around one billion euros because Audi has not yet passed on the customs burden to customers.

Audi boss Döllner in particular is considered a big supporter of having his own plant in the USA. The decision on this lies primarily in the hands of VW boss Oliver Blume, finance chief Arno Antlitz and supervisory board chairman Hans-Dieter Pötsch. The trio has been in talks with the US government about possible subsidies for the construction of an Audi plant in the USA.

Audi boss Gernot Döllner at a presentation in Munich. Photo: Sven Hoppe/dpa

However, the negotiations with the Trump team have not yet produced a solution, as Blume revealed in an interview with Handelsblatt. You need short-term cost relief and long-term reliable framework conditions, says Blume. “The President is informed about our investment plans and our strategy. However, our previous discussions with the Commerce Minister and the President have not yet produced the results we need for a further decision,” said the VW boss.

In fact, the company could use a financial injection from the US government. The ailing car manufacturer has imposed a tough austerity regime on itself. CFO Antlitz wants to reduce the investment amount across all brands from 180 to 160 billion euros over the next five years. There is no money for a billion-dollar Audi investment.

In addition, it will be difficult to convince the German employee representatives on the supervisory board of investing billions in the USA if VW and Audi make cuts in Germany at the same time.

Audi has to find its way back to its old strength here.
Christian Koenig
Auto expert and industry consultant

Meanwhile, locals in the USA are waiting for a decision from the car manufacturer. “It’s entirely up to them,” Chattanooga Mayor Tim Kelly told Handelsblatt in late fall. “Of course we want to see continued investment here. The state is working very hard to ensure that Volkswagen is successful and that we can continue this relationship,” says Kelly.

A decision in favor of the city of 181,000 in southeast Tennessee would be a big win for Chattanooga. When Volkswagen came to Chattanooga in 2011, the situation there had fundamentally changed, says Kelly. In addition to the billions in investments and the jobs created, the mayor particularly points to the local education system.

In addition to Chattanooga, South Carolina is also under discussion

“We are currently in the process of redesigning our entire education system so that it becomes more similar to the German model.” There is now a lot more emphasis on apprenticeships and dual studies. “We couldn’t do this without Volkswagen’s help,” says Kelly.

Nevertheless, the mayor is aware that Audi is also considering other locations, as he says. This includes South Carolina, where the Volkswagen Group is currently building a plant for its US brand Scout for around two billion dollars. The first electric vehicles are expected to roll off the assembly line in Blythewood, in the heart of the state, from the end of next year.

“We have, among other things, a large piece of land in South Carolina at Scout,” said VW boss Blume, referring to a possible Audi plant. “The collaboration with the local partners there is excellent,” he praised. In 2023, the state had put together an incentive package of almost $1.3 billion for the company, including $400 million in grants for the construction of the plant. The additional funds will be used, among other things, to expand the local infrastructure.

Volkswagen operates its only US plant to date in Chattanooga. Photo: Volkswagen AG

Regardless of the discussions with the US government, at least the states should try to offer Audi an attractive package, explains industry expert Koenig. “In addition to tax breaks and subsidies, this usually also includes the provision of suitable factory premises and support in recruiting and training staff.”

Chattanooga is also already advertising cost advantages. Chamber of Commerce boss Wood does not want to comment on the details. However, he points to a cost-effective factory model. Instead of building its own plant, Volkswagen’s existing facility still has room for expansion, Wood said. The infrastructure is in place and the site is structurally ready for it. In addition, the workforce is already well trained. “In practice, you would simply enlarge parts of this work,” says Wood. This would be quicker than looking for a new location somewhere else.

In fact, the costs for a US factory vary greatly, as Handelsblatt reported last summer. If Audi were to set up a kind of “twin factory” in Chattanooga, the costs could be in the low single-digit billions. The costs for a new plant at a new location are estimated to be in the mid-single-digit billions.

In Chattanooga, economic developer Wood points to another hurdle: negotiations are currently underway with the powerful UAW auto union. “It’s going to increase costs. I don’t think that surprises anyone,” Wood said. “Volkswagen will have to decide whether to expand their operations here, knowing that their labor costs will be higher in Chattanooga.”

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In April 2024, a large majority of Volkswagen workers in Chattanooga voted to join the UAW. The decision made the plant the first unionized foreign auto plant in the Southern states. Tough collective bargaining is currently underway, and at times there was even a threat of a strike.