Volkswagen AG (OTCMKTS:VLKAY) (ETR:VOW) announced on Monday, July 14th, that it will build a new seven-passenger SUV at its factory in Chattanooga, Tennessee. This will mean around 2,000 new production jobs for the area. The SUV is seen as a key part of Volkswagen’s attempt to stem declining U.S. sales.

Volkswagen seven-passenger SUV

The company also announced it plans to invest at least $600 million to expand and upgrade the factory, as well as establish a research center with more than 200 engineers. The new research facility is tasked with coordinating products for North America so as to include customer feedback into planned and existing models, a statement from the company explained.

Declining Volkswagen sales

Analysts note that Volkswagen sales declined by nearly 7% in 2013, and are down more than 13% so far in 2014. Volkswagen AG (OTCMKTS:VLKAY) (ETR:VOW) had a banner year in 2012, with sales rising 35% to more than 438,000 total units. However, sales dropped off to 408,000 last year, and Volkswagen  has only sold 179,000 vehicles through June of this year.

Volkswagen is seen as lacking a marquee vehicle in a key automotive segment, and the new SUV is supposed to fill that void.

Ongoing controversy over organized labor at plant

The negotiations between Volkswagen  and the state regarding  incentives for the expansion of the plant were hung up until a vote to form a union at the plant was lost by the United Auto Workers in February. Republican legislators in Tennessee had publicly said that a vote for the union would hurt the chances of the Legislature voting for the over $300 million in incentives.

The details of final incentive package were not made available, and the impact of the ongoing efforts by the UAW to be recognized at the plant on possible legislative approval of the deal are uncertain.

A spokesman for Tennessee Gov. Bill Haslam said there’s no need for a special legislative session to approve the incentives. He said the state is offering a $165.8 million grant to help with site development, infrastructure, equipment acquisition and installation and building construction. The state is also providing a $12 million grant for new employee education and training.

As part of the deal, Volkswagen AG (OTCMKTS:VLKAY) (ETR:VOW) has also waived its right to claim tax credits related to the plant expansion.