Volkswagen confirmed today that its new U.S. plant will be constructed in the southern state of Tennessee. The new Chattanooga site in Tennessee beat out rival bids from Alabama and Michigan because of its cost and logistical advantages, and production is scheduled to begin in early 2011.

The announcement came from Lower Saxony minister Christian Wulff, who also sits on the carmaker’s supervisory board.

The $1 billion plant will be a core element of VW’s North American strategy, and is crucial to its overall goal of increasing U.S. sales to 800,000 units by 2018. Initial production capacity for the facility is anticipated to be 150,000 vehicles, however output is expected to exceed 250,000 annually once full production is ramped up, with 2,000 workers servicing the assembly process.

VW will use the plant initially to produce a midsize sedan designed specifically for the North American market. The car is expected to be based on the Passat and is being designed to rival the Honda Accord and Toyota Camry. It could also be joined by a new midsized SUV designed to sit between the current Tiguan and Touareg models, and Audi CEO Rupert Stadler has also hinted at building some Audi models at the site to help avoid currency exchange rate fluctuations.