Power To the People's Car

Power to the People's Car

Volkswagen is the "people's car" brand in search of more people. A lot more.

In 2008, they won over about 218,000 Americans. For 2018, they're hoping 800,000 of us buy one. That would make for an increase of nearly 400% over the next 10 years. It's 40% above VW's all-time American high water mark of 570,000 Beetles, Buses, Karmann-Ghias, and Squarebacks in 1970. Quite an ambitious goal, I think you'll agree.

VW isn't just thinking big for the American market, though. Their overall goal is to be the biggest auto manufacturer in the world, passing both GM and Toyota for world market domination.

Volkswagen has made grand plans before, though. In the late '90s, VW's Chairman and CEO Ferdinand Piech was on a high-end buying frenzy, scooping up luxury and exotic car manufacturers Bentley, Lamborghini, and Bugatti.

He laid the groundwork for Audi to move from a Tier 2 luxury brand to one that began to go toe-to-toe with BMW and Mercedes-Benz. In the '90s, Audi introduced proper competition to the BMW 7-Series and Mercedes-Benz S-Class with their own all-new aluminum-intensive A8 flagship. Audi took on the new luxury roadsters from BMW and Benz with the avant garde TT coupe and roadster. And the Munich and Stuttgart automakers saw massive attacks on their bread-and-butter compact and midsize sedans from Ingolstadt in the gorgeous A4 and A6. By 2001, Audi was on a roll, with its parent VW having worked hard to get Audi in the same thought as its German rivals.

So, with an ascendant Audi, a recently bought and successful Bentley line, an expanding Lamborghini portfolio, and hyper-car projects in the works for a reborn Bugatti, Piech and his Auto Group had the luxury market covered. But he wasn't satisfied.

The man was set to retire from the company in 2002 and before he left, he wanted to leave his mark on the VW brand by pushing it upmarket, as well. He surmised that, since Volkswagen owned SEAT brand from Spain and the Skoda brand from the Czech Republic, they had the low-price volume market covered, and he could start building more luxurious VWs.

There was one big flaw in his logic, however. In North America, the biggest auto market in the world, the company didn't offer any SEATs and Skodas. What they did offer were cheap, compact New Beetles, Golfs and Jettas and the relatively invisible midsize Passat. And for most Americans, the first car that came to mind when "Volkswagen" was mentioned was still the cheap, rear-engined Beetle of decades past.

That didn't matter to Piech, though. When the Passat came up for redesign in 1998, it was seen as a fantastic automobile, hampered only a little by the fact that it was priced thousands above the competing Accord and Camry. Sales did improve over its rather mundane predecessor, however. When the Golf was restyled in 1999, the quality of its interior improved drastically, and its much higher price reflected it. And when VW's bread-and-butter Jetta came in for its redesign in 2000, optioned-out models were leaving lots with window stickers as high as $26k. But more Jettas were finding garages than ever before.

VW changed its ad campaign to say "Drivers Wanted", and their vastly improved - if more expensive - vehicles did indeed sell better than their predecessors. But before long stories of faulty coil packs, bad transmissions, broken timing chains, dead headlights, self-destructing engines, and fragile interior switchgear became much more broadly known throughout VW's newly upscale model range. Before long, JD Power and Consumer Reports were showing VW at the bottom of their lists for initial quality and reliability.

Just as these reliability issues were coming out, VW began the second phase of its push upmarket. The Passat was facelifted in the middle of 2001 to look like a much more expensive car. In 2002, a new high-tech W8 (not V8) engine debuted under the new Passat's hood, pushing the Accord/Camry competitor up above $40k. It did not sell well. The next year, Piech's pièce de résistance - the $80k super luxury Phaeton sedan - hit the market just as he entered retirement. It didn't sell, either. They also announced that a new VW-badged mid-luxury sedan was in the works. By the time the $60k Touareg SUV was released, heads within the company were rolling, as VW sales and profits were in a freefall.

It's not that the Passat W8, Phaeton, and Touareg were bad vehicles. Quite the contrary, in fact. But there were three reasons they weren't meeting sales expectations:

1) Luxury car buyers - particularly in America - wanted the cachet that the BMW, Mercedes, Jaguar, and Audi brands brought. The VW brand was just too pedestrian for them, especially since VW's expensive models had to keep company in the showroom and service bay with $15k Beetles owned by college girls and Golfs, which were bought by guys with theirs hats turned backwards. Wealthy buyers weren't going to wait in line behind these customers to get their luxury car serviced. This logic is what led Honda, Toyota, and Nissan to move upmarket by launching separate Acura, Lexus, and Infiniti brands with separate dealer networks from their downmarket sister brands. VW simply got greedy and overestimated their brand's potential as a status symbol.

2) Volkswagen buyers weren't typically wealthy enough to afford the new, more expensive vehicles that VW was now offering. And the shock they got from reading the new cars' window stickers alienated some of them to the point where they looked at the more affordable and reliable competition.

3) VW worked so hard and put so much money into turning Audi into a legitimate luxury brand. And they were only just beginning to reap the benefits. Volkswagen was now launching vehicles that competed directly with Audi's. So people who wanted an upscale VW could just go to an Audi dealer instead, get the four interlocked rings on their grille, and head home with their heads held high.

The tepid sales of Volkswagen's upmarket cars, teamed with the rank unreliability of their volume models, began to metastasize and company fortunes spiraled. The Passat W8 was quietly dropped after 2004. The Phaeton was canceled after 2005. Plans for VW's midsize luxury sedan were scrapped. And the top-line V10 Touaregs became much rarer on dealer lots as the more reasonably priced V6 models got the emphasis. But the adjustments VW made weren't enough to stop the profuse bleeding. For three years in a row, they lost $1 billion annually in the American market alone. By 2007, rumors of VW pulling out of America altogether began to circulate. Things looked bad.

But before long, VW retrenched and sales began to stabilize. Their fortunes around the world improved to the point where their management could recommit long-term to the American market. So VW drew up plans to escape Euro-to-dollar exchange rate fluctuations by breaking ground on a new plant in Chattanooga, TN. They launched a new "Das Auto" advertising campaign that communicated that their brand was the only way of getting fine German engineering at non-luxury car prices.

They also announced the development of the NMS, or "New Midsize Sedan", to replace the Passat in their lineup. This new campaign was developed under the assumption that the main reason Americans weren't buying as many Passats as they were Camrys or Accords was because the Passat was engineered to European desires for greater feature content and more driver involvement. Camry and Accord buyers looked more for reliability, road isolation, fuel economy, and interior space. So VW set out to engineer a Passat for Americans, which will be bigger, cheaper, less distinctive, and handle less well. And they plan to follow suit with their next-generation Jetta, whose design project they've named "New Compact Sedan". Their hope is that it will compete more directly with the likes of the Corolla and Civic, and sell more like them, too.

Currently, VW sales and profits are growing in Europe and exploding in China and in Brazil. So VW is bullish on their goal of being the best-selling automaker in the world, and growing by a factor of 4 in America, too. They are quite close to achieving the former goal this year, but quite far from achieving the latter. And I am skeptical that they will ever achieve the latter goal.

While VW is one of the few companies that has shown healthy growth through the acquisition of other companies (i.e., Audi, SEAT, Skoda, Bugatti, Bentley, and Lamborghini), they're now in danger of their own brands stepping on each other's toes. Especially since they're planning to re-release the VW Phaeton on the American market. It'll still compete with the Audi A8.

Their dramatic acquisition of Porsche has been a wickedly expensive, dubious, and drawn-out affair this year. And it's coming just as Audi has released the R8, a respectable competitor to the Porsche 911. It's also coming just as Porsche launched their first luxury sedan ever, the Panamera, which competes with the Audi A7 and A8. Audi's Q7 crossover and Porsche's Cayenne SUV also overlap in their pricing structures and share underpinnings. And Audi's plans for a mid-engine sports car to slot in under the R8 are now in doubt because that car will compete directly with the Porsche Boxster and Cayman.

And as far as the American market is concerned, there are reasons to doubt VW's grandiose goals. For one, VW has done very little to address the quality and reliability concerns that are dogging their reputation. They can build as many so-called "American-focused" vehicles they want. If they don't improve reliability and build quality, people new to the brand just won't buy them over the known commodities Toyota or Honda offer. GM and Ford took about 25 years to learn that the hard way, and have only recently released products that compete and win on that front. Besides, as Toyota is now learning, the drive to be the biggest comes with its own set of problems. And with increased production tends to come a decrease in the focus on quality.

For two, VW's dealer body is small and not highly rated by their customers. They'll need many more dealers if they're going to sell as many cars as they're projecting. Adding dealers takes lots of time and money.

For three, they need to send a clear message to the consumer about what their brand stands for. Reintroducing $80k luxury sedans like the Phaeton next to $20k Beetles do just the opposite.

Fourthly, these New Compact and Midsize Sedans can't be mediocre and can't be priced higher than the competition if they're after mass-market appeal. They also have to perpetuate the "cool" and "German" image that their marketing has taken great pains to convey over the years. That'll be an incredibly tall order. If VW sacrifices its quirky, driver's car image, to deliver these more “American-focused cars”, they risk alienating their current, loyal customer base. Especially because VW hasn't really shown that they understand the desires of the bulk of American consumers. One of their newest vehicles, the Routan minivan, debuted with a huge and rather humorous ad campaign featuring Brooke Shields. However, in keeping with VW's desire to serve American tastes, it borrowed a platform and engines from America's best-selling minivans, the Chrysler Town & Country/Dodge Caravan. Yet the Routan sold so poorly in its first full year that VW at one point contemplated withdrawing it from the market.

And finally, in the American market, VW's share will have to triple from their present 2.1% to about 6% in order to meet their 2018 goal of 800,000 units. That means that they'll have to take that share from someone else. All the while, everyone else in the industry is planning new, increasingly competitive products they hope will drive share increases, too. The competition is getting tougher and moving faster by the day.

The people's embrace of VW depends solely on the company's ability to answer the challenges enumerated above. But if Volkswagen wants to become the "people's car" for the most people, they've given themselves a tough hill to climb and a short time to climb it. If they can manage it, though, then more power to 'em.