July 15 (Bloomberg) -- Volkswagen AG plans to build a plant in Tennessee, resuming manufacturing in the world's largest automobile market to help end more than five years of losses in North America, a person familiar with the decision said.

The supervisory board of the German carmaker, Europe's biggest, today approved the factory in Chattanooga, which will begin production in early 2011 and initially build a midsized sedan developed for the U.S. market, said the person, who declined to be identified because the decision has not been announced. Locations in Alabama and Michigan were also considered.

The plant will be Volkswagen's first in the U.S. since it closed a factory in Westmoreland County, Pennsylvania, in 1988. Producing vehicles in the U.S. is part of Chief Executive Officer Martin Winterkorn's strategy to boost sales and reduce the effect of the dollar, which fell to a record low against the euro today. Volkswagen spokesman Andreas Meurer declined to comment on the location of the plant.

``Volkswagen needs the factory to reduce its exposure to the dollar and develop products for the U.S. market,'' said Georg Stuerzer, a Munich-based automotive analyst with Unicredit.

The new midsized sedan will be priced in between the Jetta and Passat sedans, the person said. Chattanooga won the site because of incentives and tax breaks offered by Tennessee and better infrastructure, the person said. Alabama was a close second while Michigan had been out of the running for some time, according to the person.

Gas-Guzzling Trucks

The German company's U.S. expansion will add pressure on General Motors Corp., Ford Motor Co., and Chrysler LLC, which are reeling as U.S. consumers turn away from gas-guzzling trucks and sport-utility vehicles. Volkswagen's first-half U.S. vehicle sales rose 0.6 percent, in contrast to a 10 percent industrywide drop.

Volkswagen, which has lost money in the U.S. since 2002, backed off in February from a target of breaking even in the country in 2009. The company sold 329,000 vehicles in the U.S. in 2007, giving it a 2 percent market share. Volkswagen estimates that it accounted for 9.8 percent of the worldwide car market last year.

The carmaker aims to triple sales in the U.S. to 1 million vehicles by 2018 and has begun designing vehicles specifically for the market. Volkswagen's first U.S.-only vehicle was the Routan minivan, made jointly with Auburn Hills, Michigan-based Chrysler and introduced in February.

Volkswagen's only North American factory currently is in Puebla, Mexico, which supplies New Beetle and Jetta cars to the U.S.

Increasing North American sales is crucial to Winterkorn's plans to boost worldwide deliveries to 8 million vehicles in 2010 from a record 6 million last year and eventually matching Toyota Motor Corp. in sales and profitability. Volkswagen is the world's fourth-biggest carmaker, behind GM, Toyota and Ford.

Volkswagen opened a 500 million-euro car factory about 100 miles southwest of Moscow in November. The company has a target of tripling its Russian market share to 10 percent by 2010. Volkswagen is also building a 410 million-euro plant in India that's scheduled to start production in 2009.

To contact the reporters on this story: Chad Thomas in Helsinki at cthomas16@bloomberg.net; Chris Reiter in Berlin at creiter2@bloomberg.net

Last Updated: July 15, 2008 10:03 EDT