Volkswagen will start production of a new compact car at its plant in Mexico early next year following a US$1bn investment, according to Otto Lindner, head of the company’s operations in the country.

He added that VW would spend $400m of its previously announced $1bn capital expenditure in Mexico on creating a new assembly line at its plant in Puebla. The rest of the investment will go toward the modernization of existing production lines and the development of the new vehicle known internally as the new compact sedan.

VW’s investment is a vote of confidence in the future of Mexico’s auto industry, which accounts for a fifth of the country’s total manufactured exports. A slide in US demand has seen Mexico fall into its steepest recession since the so called tequila crisis of 1995.

Volkswagen is Mexico’s second largest automaker, sending most of its cars to the US, Canada and Europe. But falling demand has forced the company to slow production there.