According to Volkswagen’s CEO in Mexico, the German automaker will be increasing its production capacity at its Puebla, Mexico plant to make room for a new compact sedan that will be sold in world markets. The plant is already operating at maximum capacity with a total of 450,000 units to be built this year.

“We can’t say what it will be, but it will be a world car, with the exception of China,” Otto Lindner told Automotive News.

Lindner says that the plan is to increase production capacity to 550,000 annually by 2011. He said that Volkswagen will be investing $1 billion in Puebla to build the new compact sedan.

What could the compact sedan be? We’re putting our money on a production version of the Volkswagen Space Up! concept that made its debut at the 2007 LA Auto Show last year. Volkswagen has previously said it is considering a competitor to the Smart ForTwo and the upcoming Toyota iQ.

Source: Automotive News (Subscription Required)