Volkswagen AG Says Incentives, weather and logistics played a big role in its selection of Chattanooga, TN, as the site for its new car-assembly plant.

But Tennessee officials believe it was a meeting of the minds that ultimately closed the deal.

“I think it was our environmental stewardship — we were already aligned with what VW wanted to do,” Trevor W. Hamilton, vice president-economic development for the Chattanooga Area Chamber of Commerce, says about what put his region over the top in the site-selection process.

The final weeks came down to Tennessee, Alabama and Michigan as VW sifted through proposals before naming Chattanooga as the future home of its new U.S. plant. Construction is under way, and VW expects to be building an all-new sedan at the facility in first-quarter 2011.

State and local governments reportedly coughed up $557 million in incentives to lure the $1 billion plant, while VW's top manufacturing official cites time zones, likelihood of snow and tornadoes, labor costs and available suppliers as key drivers in the site-selection process.

Hamilton, one of about 50 Tennessee state and local officials in Germany recently for a backgrounder on VW's business strategy and a tour of its facilities, says the auto maker also liked the fact Chattanooga had rebuilt itself, from a heavy manufacturing area noted for its foundries and smog-filled air to a city with plenty of “green space” and a focus on recreational activity.

A 1969 CBS News broadcast in which anchor Walter Cronkite, citing a U.S. government report, called Chattanooga the dirtiest city in America, motivated the rebirth, Hamilton says.

Environmental-improvement measures were adopted ahead of requirements imposed on the city by the U.S. Environmental Protection Agency, he says, as manufacturers spent a combined $10 million on emissions-control technology. Within five years, much of the existing manufacturing base had either cleaned up or fell victim to competition, and Chattanooga became one of the first eastern cities to reach compliance with new federal clean-air standards.

VW saw a resilient city on its way back up and was drawn by the positive business atmosphere, Hamilton contends.

Tennessee Gov. Phil Bredesen, also at the event in Germany, says that during a recent environmental symposium in his state, Volkswagen of America Inc. CEO Stefan Jacoby cited the “shared values” between the state and the auto maker as critical in the selection process.

“What VW thinks is important is what Tennessee believes is important,” Bredesen says, adding there's a big opportunity for anyone ready to take advantage of a growing environmental consciousness among consumers.

“There's a whole new world out there for someone who can provide what people want — environmentally safe vehicles. I think VW and Tennessee can be leaders in this.”

The Chattanooga brownfield site, where a U.S. munitions plant once sat, is nestled among some 2,800 acres (1,133 ha) of nature preserve. Two streams on the property are being relocated to accommodate the plant, and a new stream is being added, Hamilton says. Trees uprooted for the facility will be replaced one-for-one elsewhere around the site and region.

VW isn't saying whether the new plant will be a zero-landfill facility, but it does say it is “committed to sustainable mobility and environmentally responsible manufacturing, and this plant will be developed and run based on these standards.”

J. Thomas Trent, an attorney with Nashville-based Boult, Cummings, Conners, Berry Plc, says Tennessee's legal environment also helped lure VW.

The government has been proactive in finding out what will draw companies and industries to the state, then making sure laws are in place to pave the way for success, according to Trent, who says he has played a behind-the-scenes role in several such deals.

Bredesen says if he's learned one thing from his dealings with VW and his deep-dive into the auto maker's marketing philosophy presented in Germany, it is this: The best bet for landing new business is to avoid the hard sell, “and make sure you have the product right.”

Some of Tennessee's draw stemmed from its placement along the I-75 and I-65 North-South interstate corridor, which is a hotbed for suppliers serving auto plants from Michigan to the Gulf of Mexico.

VW wants to achieve 80% North American content for the new midsize sedan at Chattanooga in the midterm, and would like to tap into the existing parts infrastructure to maximize economies of scale.

“We would like to have synergies with the supplier base for other products (from other auto makers) in order to get scale,” says Jochem Heizmann, in charge of manufacturing for VW.

Bredesen says Tennessee isn't in danger of being too focused on the auto industry, even though VW will be the third auto maker to put an assembly plant in the state, behind Nissan North America Inc. in Smyrna and General Motors Corp. in Spring Hill.

Nissan also has its U.S. headquarters in Nashville, and a number of suppliers have operations in the state.

With the VW plant, Ward's projects Tennessee moving up the ladder to become the sixth largest vehicle producer in North America in 2011, trailing only Mexico, Ontario, Michigan, Ohio and Kentucky.

Bredesen says manufacturing makes up about 30% of the Tennessee economy, with the auto industry accounting for about 18% of that.

“We don't want to be totally dependent on the auto industry,” but the state is a long way from that, he says.

The governor expects another three to four jobs to be created in the state for every one job directly at the VW plant, slated to employ 2,000 workers.

VW Finalizes Layout, Nears Construction of New U.S. Plant