With VW now deciding on Chattanooga, Tennessee as the location for its U.S. plant, the next question the automaker needs to answer is where transmissions and engines for the cars produced at the plant will come from.

The plan is to build 150,000 vehicles on U.S. soil by 2011, and according to VW of America’s CEO Stefan Jacoby, engines for the new generation of the Passat will come from the automaker’s Peuabla, Mexico plant. With the Mexico operation building gasoline engines exclusively — 2.0-liter four cylinders and 2.5-liter inline-fives — VW will need to find a place to build other gas engine layouts as well as hybrid and diesel powerplants, according to Automotive News reports.

The Mexico facility is an option, as it produced 340,000 engines in 2007, significantly less than its half-million unit capacity. The bigger problem is that of transmissions, as VW does not currently have a U.S. plant to build them. Importing them from Europe will effectively diminish the unfavorable euro-to-dollar exchange ratio VW hoped to get away from by building a car factory here.

VW of Mexico’s vice president of corporate relations and strategy, Thomas Karig, said building an engine and transmission plant in Mexico is an option. This coincides with February’s announcement from VW of spending $1 billion to optimize capacity in Mexico over the next three years.

Any final decisions are likely to coincide with and hinge on sister company Audi’s decision to build a U.S. plant, expected to be announced by the spring of 2009.

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