Making cars has been giving an economic boost to the Volunteer State since the early 1980s, when Nissan built the state's first large-scale auto manufacturing plant in Smyrna. General Motors followed by establishing a plant in Spring Hill in 1990. The latest automaker to set up camp in Tennessee is Volkswagen, which opened its plant in Chattanooga in 2011. About a year ago, Volkswagen announced plans for an expansion at its Chattanooga facility. The Center for Business and Economic Research (CBER) at the University of Tennessee recently released a report detailing the economic impact of the Volkswagen expansion, which, needless to say, should be significant.

Image copyright Volkswagen of America Inc.

The purpose of the Volkswagen plant expansion is to manufacture a new midsize SUV for the U.S. market. State and local governments offered incentives of nearly $300 million to entice Volkswagen to build its new SUV in Chattanooga and, according to the CBER report, the state should receive a high return on its investment. The expansion will add more than 500,000 square feet to the facility and an additional 1,800 employees. Tied to the expansion, Volkswagen plans to establish the North American Engineering and Planning Center in Chattanooga, which will create 200 jobs. The plant expansion and the R&D center together will create 2,000 new jobs, which will nearly double Volkswagen's current Chattanooga workforce of 2,358. These numbers are impressive, but they only scratch the surface of the estimated overall impact.


The CBER report breaks down the overall impact of the plant expansion into two phases: the construction phase and the operations phase. The CBER projects the construction phase alone to be quite lucrative for residents of the state. It estimates that the construction and development stage will create 5,391 full-time jobs for a year. The report also anticipates the generation of $217 million in new income during that year for Tennesseans. State and local municipalities stand to gain a one-time increase in tax revenues equal to $20.5 million. During the operations phase (after the plant is fully operational), the plant is expected to create 9,799 new full-time permanent jobs in the state. These jobs would not only include new Volkswagen employees but also the jobs created at the numerous Volkswagen suppliers located in Tennessee.

New income for Tennesseans will be in the neighborhood of $372.6 million, according to CBER estimates. The income generated during the construction phase may be direct or indirect income. (An example of indirect income would be the hiring of construction workers who are employed by Tennessee construction firms, which then spend their earnings on goods such as food or clothing in the state.) The report estimates that every dollar spent on construction of the plant will result in 47 cents of income for Tennessee. (An example of direct income would be the salaries Volkswagen pays its new employees, and estimates indicate that Volkswagen will pay $100.9 million in salaries to its new employees.) In addition, Volkswagen plans to purchase many inputs directly from Tennessee suppliers, so every dollar spent during the operations phase is estimated to lead to $3.69 of income for Tennesseans.

There are also intangible benefits to consider, such as an increase in charitable giving as incomes rise. The multiplying effects of the plant expansion will touch many aspects of not only Tennessee's economy but also the entire regional economy. It will be interesting to watch as auto manufacturing continues to put down roots in the Southeast. Hopefully, the economic benefits are just beginning to rev their engines.

By Troy Balthrop, a senior Regional Economic Information Network analyst in the Atlanta Fed's Nashville Branch