VW: The Wrong Focus

Guest Editorial
By Jerry Flint Forbes.Com

Aurban Hills April 13, 2004; Just when things were looking up, Volkswagen is falling into trouble again. Last year it sold 303,000 Volkswagen brand cars and Touareg sport utilities in the U.S., which represents a 10% unit decline from 2002. In the first three months of this year, sales are down 25% from last year. Things are so bad that the boss of VW in the U.S. flew to Germany to beg permission for incentives.

So what's the problem?

I don't agree with everything that VW's critics are saying, but some of their points are worth discussing:

The next-generation Golf is not coming to the U.S. in a timely fashion. The new car is already on sale in Europe but won't be here until 2006.

Volkswagen brags about a R32 Golf, a six-cylinder version of the lame duck current Golf. The R32 goes like Hades, but this is a low-volume model and it is a poor excuse for not having the new Golf here.

VW has been slow to respond to the rebates and discounts in the U.S. market.

VW quality is at the bottom of everybody's list.

The higher-priced VWs like the Passat W-8 and the very expensive Phaeton just never caught on here. A Forbes editor tells me: "I went car shopping a few weekends ago, and my local VW/Saab dealer had two Phaetons parked out in the front of its crummy and trashy-looking parking lot. The W-12 model had an added charge put on its sticker, which took the car over $100,000. Good luck trying to sell an ultra-premium luxury car in that seedy environment."

All these things may be true, but I say they aren't the BIG problem. The crux of the matter is that VW is not competing in half the American market. They still have a mostly sedan business, but conventional passenger cars just don't sell that well here anymore. American buyers want trucks--minivans, SUVs and pickups.

A VW Microbus--a gorgeous retro design of the '60s Microbus--is, allegedly, coming, but it's still years away--2007--and it probably will be high priced thanks to the strong euro.

VW is weak in the booming SUV market. The new Touareg SUV is fine but sells for $40,000 to $50,000. What VW need is a $22,000 SUV to compete with Toyota's RAV4, Honda's CRV, Ford Motor's Escape and General Motors' Saturn Vue--vehicles that are all in the fastest-growing segment of the SUV business.

The company doesn't have a single pickup-truck offering in the U.S. A couple of years ago, VW showed a concept at the Detroit auto show, a very handsome pickup-like vehicle built off the Touareg platform. But Honda ran with the basic idea and will build an all-wheel-drive pickup from its front-wheel-drive SUV platform. The upcoming Honda looks like a winner to me.

By lacking a minivan, a pickup and a low-end sport utility vehicle, VW is competing in only half the market. No wonder it is struggling.

Quality is also a problem. Last year VW had a huge callback for defective ignition coils, and its vehicles have lots of smaller problems. I personally know people who loved their New Beetles but gave them up because they couldn't stand those trips to the dealer.

I believe that VW's quality problems are being cured, but it takes time to convince the public that quality is on the mend.

A strong euro translates into higher export costs for German-made cars, too, which wipes out American profits. That's why VW won't export European-made next-generation Golfs to America while its Mexican plant is being retooled for the new model.

Don't forget the strategy of past management to move upscale, with vehicles such as the W-8 version of the Passat, $100,000 Phaeton, $300,000 Bentley, Touareg, Lamborghini and Bugatti. I give Volkswagen credit for having such high aspirations, but this is a risky strategy.

This "move up" strategy probably explains why VW doesn't have any lower-priced trucks for the American market. The past management was so busy looking up they missed the opportunity at the bottom

So how does VW hope to come back?

Personally, I don't think coming late with the Golf means much. It's not a big seller here (30,000 a year). But VW's bread-and-butter Jetta, which is built off the Golf platform, is also a year away.

What else is in VW's passenger car pipeline? In the fall of 2005, the U.S. should get the new Passat, which is VW's highly rated family-size sedan. A station wagon Passat will follow about six months later. There's a sport car and/or convertible coming, but it is not due for several more years.

In the meantime, VW is going to have to get more aggressive with its incentive game. You will see spring, summer and fall campaigns with special deals, like $179-a-month lease packages for the Jetta and $219 for the Passat.

But Volkswagen won't get fully back on track until it starts building vehicles for a wider swath of the American market.