Volkswagen’s Big North American Problem

Volkswagen XL1
Source: Volkswagen

On the surface, last year was a banner year for the Volkswagen Auto Group. The German automaker enjoyed its best sales year in company history after spending the past two decades aggressively building one of the most competitive automotive portfolios in the world. Volkswagen AG sold over 10 million cars worldwide in 2014, overtaking General Motors as the world’s second largest automaker, and its aggressive expansion into China means the company is poised to overtake Toyota as the world’s largest automaker in 2015. But these numbers don’t tell the whole story. They belie some very real problems that put the future of the company at stake. The truth is that all is not well is Wolfsburg, and the root of the problem lies in a small underperforming export market called North America.

To the American buying public, Volkswagen is still little more than a niche import that got its start selling the Beetle over six decades ago. Yes, the U.S. is home to a loyal and active fan base for Volkswagen, and it houses undisputed gems like the GTI, CC, and Golf R, but to the overall buying public the Volkswagen lineup is filled with mid-market niche cars. After launching an ambitious plan to sell 800,000 cars a year in North America by 2018, Volkswagen’s U.S. sales fell 6.9% in 2013 when the brand sold 407,704 cars – accounting for only 2.6% of cars sold in the American market. The news was worse for 2014, as only 366,970 cars left Volkswagen lots, and the brand slid down to a 2.2% market share. In one of the strangest statistics in the automotive world, the flagship brand of the world’s second largest automaker is the 16th best-selling carmaker in America.

Volkswagen Golf GTI Mk.II
Source: Volkswagen

Volkswagen’s latest U.S. sales crisis comes exactly two decades after the company reached its nadir in the American market. By the early 1990s, Japanese imports had completely overtaken their European competitors, and within a few short years, Renault, Peugeot, Fiat, Merkur (German Fords rebadged for the U.S. Market) Sterling (rebadged British Rovers), and Alfa Romeo had all vanished from the American market. Volkswagen was hardly faring any better – after sales fell to 54,000 cars in 1993, the company considered joining its European competitors and pulling out of the U.S. market altogether. As the company was at its lowest ebb, it turned to an icon from the company’s past to give the brand an unlikely second act in the American market.

1998 Volkswagen New Beetle
Source: Volkswagen

Volkswagen’s American comeback starts squarely with the Concept One, unveiled at the Tokyo Motor Show in 1994. The car, which became the New Beetle in 1997, struck a chord with the American public and brought the company some much-needed attention. With its blend of nostalgia and avant-garde design, the car was a major hit for the company, winning Motor Trend’s 1999 Import Car of the Year award, and becoming a massive success in the American market. Development costs for the New Beetle were kept down as the car borrowed its platform and powertrain from the all-new Mark IV Golf and Jetta models, which also became much-needed hits for the company. By the end of the decade, Volkswagen had fielded a lineup of sporty, fun-to-drive cars with well-appointed interiors that could compete with cars far above their price range.

By the early 2000s, the novelty of the New Beetle had worn off, but it still remained a respectable seller for the company along with the Golf hatchback and Passat sedan. Then as now, the Jetta sedan was the best-selling Volkswagen in America – in 2014 the car accounted for 141,354 of Volkswagen’s sales. As the automotive landscape had begun to shift by mid-decade, Volkswagen sought to diversify their car-based lineup, focusing on developing vehicles specifically for American buyers while also moving the brand upmarket.

Source: Volkswagen

While Volkswagen’s new models have been relatively adventurous, not many of them have been particularly successful. A mid-size luxury SUV called the Touareg was introduced in 2002, but a crowded marketplace and high price kept it from being a success stateside. A premium full-size luxury sedan called the Phaeton debuted in 2004, but a prohibitively high price (the all-wheel drive W12 version had a base price of $83,515) and dismal sales showed the company that Americans weren’t ready for a luxury Volkswagen, and the car left the market in 2006. A smaller Crossover called the Tiguan was introduced in 2007, but it has faced many of the same sales problems the Touareg has. The hardtop-convertible Eos coupe followed suit in 2007, but its high price (the V6 Model started at over $37,000) and modest sales numbers led Volkswagen to discontinue the model after the 2015 model year. In 2009, the brand introduced the Routan, a mildly restyled Dodge Caravan built under license that was discontinued after underwhelming sales in 2014. 

Source: Volkswagen

These misfires aren’t to say that Volkswagen hasn’t had some success with new models. The CC sedan was introduced in 2009 to fit above the Passat in the model lineup, and has been positively reviewed as a premium German luxury sedan at a bargain price. The redesigned 2012 Beetle (the “New” was dropped after the redesign) breathed new life into the aging model, and the Golf R takes the already legendary performance of the GTI hot hatch to an even higher level. In a diverse and quickly-changing auto market, the bulk of Volkswagen’s sales are still driven by the Jetta, Golf, Passat, and Beetle cars, and that lineup just might not be diverse enough to lure many more American buyers.

In their quest to move upmarket while appealing to a broad audience, Volkswagen has developed a bit of an identity crisis. The company’s upward mobility is seriously undermined by the current-generation Jetta and Passat models, two cars designed specifically for American buyers that were shifted down-market to compete with Toyota’s Corolla and Camry. These models were completely redesigned for 2011, and while both entered the market with a lower base price than their predecessors, the Jetta drew sharp criticism for a shocking decline in quality. Once-standard features on the base model like four-wheel disc brakes and a premium interior were dropped in favor of more cost effective rear drum brakes and hard plastic interior appointments. The redesigned Passat proved to be more successful, and as the midsize sedan proved to be an attractive alternative to the Camry and the Honda Accord, it was awarded Motor Trend’s Car of the Year award in 2012.

2015_passat_18t_sel__3358 (640x427)

The new Americanized Passat was the first car built at Volkswagen’s all-new Chattanooga, Tennessee plant, and their first attempt at building cars in the U.S. since 1988. The plant was a state-of-the-art industrial complex and a centerpiece of their expansion plans in North America. The $1 billion environmentally friendly plant opened in 2011, currently employs 3,200 workers, and has the capacity to produce 150,000 cars a year. But while it was intended showcase Volkswagen’s success in America, it has become known as the site of one of the most contentious labor disputes in recent memory.

Source: Volkswagen

For years, foreign companies have opted to build factories in Southern anti-union states where they can keep labor costs down and avoid labor disputes. With the opening of the Chattanooga plant, the United Auto Workers launched a major campaign to organize the Volkswagen’s employees, in hopes of making it the first successfully organized union plant in the South. After gaining early support with the workers, outside pressure from political groups and national politicians began to take its toll. Heavy influence by outside right-wing groups began to inundate the region, and the Volkswagen plant became a national topic of conversation on the state of labor relations in America. The original vote narrowly defeated the UAW’s push, but by early 2015, the UAW had collected enough signatures for Volkswagen to officially recognize it as the official representatives for their workers. While the battle may be over, it was hardly the attention Volkswagen hoped for when the plant opened.

While Volkswagen’s Americanization has been fraught with setbacks, its European brands haven’t fared much better stateside. The longtime owner of Audi and Porsche, Volkswagen has grown exponentially in the past 30 years, and its expanded lineup is a major reason for the company’s global success. As the company clawed its way back to relevancy in the U.S. in the 1990s, they were busy acquiring Seat from Spain, Skoda from Czechoslovakia, Lamborghini, Bentley, and Bugatti. And while Seat and Skoda aren’t sold in the U.S., the other brands are, and they’ve done little to boost the company’s overall sales due to their inherently limited production.

Audi Prologue
Source: Audi

Audi has long been hailed as the comeback kid of the German luxury brands. After decades as an also-ran, Volkswagen spent years reviving the brand, and for the past two decades, its been a legitimate contender to premium standard bearers Mercedes-Benz and BMW. While Audi’s reputation for tasteful styling and tech-laden luxury have earned it a reputation as one of the most formidable automakers in the world, the premium luxury market’s influence on the automotive world belies its relatively small real-world marketplace. On top of falling in a relatively small segment, Audi trails a distant third to its German rivals in U.S. sales. In 2014, Audi sold 182,011 cars in the U.S. – roughly half of what Mercedes sold. The rest of the Volkswagen Group didn’t fare any better. Overall, the combined sales of the Volkswagen Group brands commanded only 3.6% of the U.S. market in 2014, slipping from 3.9% in 2013.

Volkswagen Sport Coupe Concept GTE
Source: Volkswagen

So with a lineup in disarray, labor woes, and weak sales plaguing Volkswagen, what are the company’s plans for the future? In short, full steam ahead. Since taking the helm in January 2014, Volkswagen’s Group of America’s Chief Executive Officer Michael Horn has been frantically working to improve dealer networks, and modernize the company’s lineup. Despite the company’s current woes, Horn is still confident that the original goal of 800,000 U.S. sales in 2018 will be met. An aggressive plan to expand the dealer network by 100 new locations is expected to be completed by 2019, and refreshed versions of the Jetta, Passat and Golf are all due by 2018. The Sport Coupe Concept GTE unveiled at this year’s Geneva Motor Show highlights Volkswagen’s future design direction, and from the looks of it, the company cars will continue to move upmarket after all. These refreshed models will be joined by two all-new American-focused crossover models in 2017, hopefully giving the company some long-overdue success in the crossover and SUV markets.

While the company continues to enjoy growth in Europe and China, it will turn its focus on cost cutting and becoming a more streamlined global corporation. Volkswagen was an early champion of modular vehicle platforms and will continue to invest heavily in versatile architecture that can be used by all their brands well into the future. Modular platforms keep engineering costs down and will free up resources to introduce new vehicles and update existing models more frequently. Volkswagen’s slow model refreshes have long been a major complaint from American buyers, and putting their cars on a more competitive five-year cycle (instead of their current seven year cycle) should entice more new car buyers into their showrooms.

Source: Volkswagen

Today, Volkswagen excels in markets with either a strong demand for small city cars or high-end luxury cars. In North America, the demand for both those cars is small, and Volkswagen is acutely feeling the pressure. The American marketplace is unique to the rest of the world, and Volkswagen’s inability to gauge the demands of the world’s second largest auto market is one of the company’s few glaring flaws. While its American problems are very serious, Volkswagen’s 2011 declaration of becoming the world’s biggest automaker by 2018 was met with hostile skepticism by many, and it managed to come within striking distance of it four years early – and largely without the cooperation of the American market. It may be down in the U.S., but it certainly isn’t out. With some important changes, Volkswagen could soon be living up to its “People’s Car” moniker.

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