German auto maker Volkswagen AG (VOW.XE, VLKAY) Wednesday confirmed it will build a new engine plant in central Mexico with an investment of EUR400 million to supply its car-production plants in North America starting in 2013.

"North America is and remains one of the largest and most important car markets," Jochem Heizmann, a member of the Volkswagen board for group production, said in a statement.

Europe's largest auto maker by sales, Volkswagen is building a new production plant in Chattanooga, Tenn., and executives previously indicated the company plans to build a new engine plant in Mexico as part of a wider effort to turn around its North American operations and increase local production to reduce the exposure to currency fluctuations. Volkswagen is already operating a production plant in Puebla, Mexico.

At an event in Mexico City, the president of Volkswagen de Mexico, Otto Lindner, said construction of the new plant at Silao, in central Guanajuato state, will begin in October. The facility in its first phase will have an annual production capacity of 330,000 engines, and will supply the Chattanooga and Puebla assembly plants.

Mexican President Felipe Calderon said that in addition to the 700 people the Volkswagen plant will employ, the project will create around 2,000 indirect jobs in the central region known as the Bajio.

Volkswagen said it targets sales of around 1 million vehicles in North America as of 2018.

Returning its North American business to profitability is a cornerstone of the company's ambitious global expansion plan in coming years, which includes an effort to dethrone Toyota Motor Corp. (7203.TO, TM) as the world's largest auto maker.

In July, Volkswagen confirmed it plans to invest up to $1 billion in Mexico over the next three years as part of this expansion plan. Volkswagen plans to use some of these funds to prepare the Mexican production plant for the successor to its Beetle model. The new-generation Beetle is due to be launched in 2011.

-By Christoph Rauwald, Dow Jones Newswires; +49 69 29 725 512; christoph.rauwald@dowjones.com

(Anthony Harrup in Mexico City contributed to this article.)
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