The VW expansion given current U.S. sales and Japanese competition appears extremely ambitious.

The Volkswagen Group confirmed this afternoon that it will build a new engine plant in Silao, Mexico as part of its long-term expansion strategy in North America. (See Paul Eisenstein’s New Mexican Engine Plant to Support VW’s Chattanooga Assembly Line )

Beginning in 2013, the new plant in Silao will supply the latest generation of engines to VW vehicle plants in Chattanooga, Tennessee and Puebla, Mexico.

Volkswagen Group has previously said it is planning sales of one million vehicles in the U.S. – including 800,000 VWs – annually by 2018. The core element of this ambitious strategy is vehicles tailored to the demands of U.S. customers, such as the all-new Jetta and the New Midsize Sedan (NMS). Year-to-date VW brand sales are 173,000 units.

The all-new Jetta is built in Puebla and the NMS will be produced in Chattanooga beginning next year. Both vehicles have a high degree of localization.

“This investment is yet another signal of the importance of North America to the Volkswagen Group,” said Jonathan Browning, President and CEO, VW Group of America. Browning has just joined the company leaving General Motors in Europe.

Strengthening the market position of the Volkswagen Group in North America is an essential component of the company’s global expansion strategy.

The new engine plant is designed for an annual capacity of 330,000 engines. The investment volume for the development of the new engine as well as for building the new site comes to a total of $550 million. Volkswagen said in a statement that it will create approximately 700 jobs over the medium term on site in Silao.

“North America is and remains one of the biggest and most important markets for the automotive industry,” explained Prof. Dr. Jochem Heizmann, member of the Volkswagen Aktiengesellschaft Board of Management for Group Production.

The Puebla plant of Volkswagen de México is under expansion to increase capacity by 300 units to 2,100 vehicles a day. The expansion of the plant will cost $410 million and, along with almost $600 million in supplier tooling, is part of preparations underway for a new model for the Mexican market.

Currently, the Volkswagen Jetta, Golf Estate and the New Beetle are produced in Puebla, Mexico. Production of the NMS will begin in Chattanooga in 2011.  The $1 billion factory in Chattanooga, Tennessee is the first currency hedging U.S. plant since VW abandoned the Rabbit factory in Pennsylvania in 1988 after a four year run of declining sales. The new car and the new plant have promise, but these are similar to promises that have been made – and failed – decades before with the Pennsylvania and Sterling Heights, Michigan plant announcements.

(See also Mexican President Visits VW’s Puebla Plant)