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Remember when Volkswagen was known for making cheap, dependable and, above all, lovable cars? So does Ann Jones, a Jetta owner from Corona, California. Jones was lured to the Jetta (known as the Bora in Europe) by its stylish looks and solid road handling — easily worth the $18,900 sticker price. But a few months after bringing her new sedan home in 2000, she returned it to the dealership because of a fluid leak. Then a door lock broke. Then a spring popped out of the driver's seat. With 80,000 km on it, her Jetta started to feel sluggish, says Jones, 28. But what especially disturbed her were the grim faces of other VW owners that she encountered at her dealership: "The majority of them weren't there for basic service," she says, "but because of some defect."
Ordinarily Volkswagen might say that Jones simply got a lemon — or a "Monday car" assembled by hungover workers. But that's a tough case to make these days. In the latest survey of three-year dependability by J.D. Power and Associates, an automotive consulting firm, American consumers ranked VW-brand cars fifth from last (of 37 nameplates), ahead of only Suzuki, Daewoo, Land Rover and Kia. The influential independent magazine Consumer Reports, which recommended three VW models in the late 1990s, now only keeps the Passat on its list of recommended cars. That's quite a tumble for Europe's largest automaker, which employs 332,800 people worldwide and manufactures some 5 million units a year, including the brands Audi, Bugatti, Seat and Skoda.
Those quality issues are also raising concerns about VW's hold over the North American market — the largest and most vibrant in the world and one critical for VW's profit growth. While VW is holding its own in Europe's anemic market — the VW group has an 18% market share in Western Europe, and sold almost 2 million cars in that region in the first nine months of 2003 — the company is struggling in the U.S. The VW brand's U.S. sales plummeted 14.6% over that same period and operating profits in North America shrank from $944 million to $68 million in the first six months of the year. While North American sales accounted for just 20% of Volkswagen's $101 billion in global revenues in 2002, they delivered an outsized 27% of its $5.4 billion operating profits. And VW clearly aims higher: around one-third of its $1.6 billion global ad budget is spent in the U.S.
The man in charge of revving up Volkswagen is CEO Bernd Pischetsrieder, who took over from domineering Ferdinand Piech in April 2002. A personable, goateed man who ran BMW from 1993 to 1999, Pischetsrieder, 55, knows he must do something to shake up the company's North American sales. But he is pursuing a risky strategy inherited from Piech — pushing his flagship brand into the U.S. luxury arena, where vehicle profit margins are higher than in the mid-priced segment where VW typically competes. Thus, the firm is launching its most expensive cars ever: its first SUV, the Touareg, hits $42,000 fully loaded, putting it in league with hot models from BMW, Cadillac and Lexus. And its Phaeton — a sedan that cost over $900 million to develop, with an optional 12-cylinder engine and a sticker price expected to top $85,000 — hits American dealerships in December with a modest sales target. (The Touareg, which is seeing growing demand in the States and was named Motor Trend magazine's SUV of the year, was introduced in Germany last November and sold 9,200 units in Europe in the first half of 2003; the Phaeton, available in Europe for more than a year, has been no threat to the Mercedes S Class and BMW 7 Series, selling less than 8,000 units.) The strategy is taking its toll: last week, the company announced that net profit was down 51% in the third quarter compared to a year earlier, and Chief Financial Officer Hans Dieter Pötsch warned that the company would take a charge of "a couple hundred million" euros this quarter to offset R&D costs. Pischetsrieder insists the high-end strategy will pay off once the cars take hold with consumers.
Others aren't so sure. Christopher Will, an analyst at Lehman Brothers in London, describes the Phaeton as a "mistake" and an "irrelevancy." Says Will: "The VW brand could become muddled if the quality issues persist or if VW launches more products that don't fit its core image." Certainly it's hard to go upmarket when the perception is that quality is heading south, so fixing that must be Pischetsrieder's first task. Next, he's got to ensure that VW's move into luxury doesn't come at the expense of sales in its higher- volume, mid-priced segments. "We know the premium segment is different from the mass market, and we need to make certain that Volkswagen lives up to its new image," he said in September. Considering how tough the U.S. luxury market is, that's an understatement. VW's challenge is to get more Americans to view it as a People's Car for the rich. And Phaeton's tepid European performance suggests it might also be a tough sell to status-conscious Yanks. Frank Maguire, vice president of sales and marketing at Volkswagen of America, admits it is "a real marketing challenge. The perception of the brand and the product don't match."
Can VW get groovin' again? Investors seem to think so — VW's share price has rallied 12.23% since the start of the year. Equity analysts cite the Touareg and Touran multi-purpose vehicle (MPV) as signs that VW is broadening its mix, enabling it to profit in hot segments such as SUVs and MPVs — a trend it was slow to pick up on — and hedge against downturns in other segments. Continuing down the road paved by his predecessor, Pischetsrieder plans to launch dozens of new models over the next two years, including a new Microbus, smaller SUVs and crossover vehicles and, maybe, a sexy convertible, the Concept R, which he unveiled at the Frankfurt Auto Show in September. VW's new Golf, rolling into European dealerships now amid positive reviews, should bolster profitability thanks to lower manufacturing costs.
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There are also signs that VW is finding creative solutions to hold down labor costs. Under pressure from the state of Lower Saxony, which owns a 22% stake in the automaker and occupies two seats on its supervisory board, VW in 2001 agreed to hire 5,000 unemployed people and work with local government agencies to train them. In return, VW will have greater leeway in setting their hours according to production demands. Part of the deal also entails that workers form teams to solve assembly-line glitches.
Cost-cutting isn't enough, though. For VW to grow profits, it will need to sell plenty of those higher-margin luxury cars. And to do that it needs to win back America's trust. VWs late-'90s U.S. renaissance came after nearly two decades of slack sales that led it to consider pulling out of North America. What turbocharged sales was the New Beetle, launched in 1998; baby boomers with fond (if pot-hazed) memories of Microbuses and Beetles gravitated to the car, or at least to the dealership, where they saw Jettas and Passats that appealed to their more practical side. Teenage boys and young men turned the Golf gti into a hit on the "tuner" scene. And the New Beetle and Jetta found an adoring audience in young college-educated women. From selling just 49,000 cars in the U.S. in 1993, VW sold 352,000 vehicles in 2000.
VW may now face a fan revolt. At the website myvwlemon.com, owners gripe about faulty brake lights, knobs that fall off, clutches that blow after just 96,000 km. VW says many of these problems are minor and that its cars remain solid over the long haul. It's also true that the Internet is home to complaints about almost all car brands. The problem, says Jamie Vondruska, who runs vwvortex.com, is that "VW owners are so attached to their cars, they take it personally when things go wrong."
Analysts say that VW's reputation for durability isn't suffering as much in Europe; its cars stack up well against rivals from Opel, GM's European subsidiary, and France's Renault (and far better than Italy's Fiat and France's Peugeot). In the U.S., the benchmarks for high quality are Toyota and Honda, nameplates that haven't sold as well in Europe (though that's changing). But the Golf V and its variants are facing a tougher European marketplace. The Golf will take on a new Opel Astra, which launches early next year, and faces formidable foes in the Peugeot 307, Renault Mégane and Mazda's upcoming Mazda3. Analysts say the Golf already loses sales to other VW brethren, such as the Audi A3 and models from Skoda and Seat.
Japanese and Korean automakers are cutting into VW's core segment: compacts. In a European market down 1.5% this year, Honda's sales are up 7.4%, almost entirely thanks to its new Jazz subcompact. Hyundai, with sales up 10.8%, boasts a European market share of 1.7%, now on par with VW's Skoda brand. And Toyota's Yaris, packed with features and options for under $17,000 in most markets, is a bargain compared to VW's $18,000 Golf. The euro's strength against the yen is also bolstering Asian automakers' profit margins, putting pressure on higher-cost manufacturers.
VW's competition is also heating up in China, now the world's hottest car market. The firm's market share has fallen from 60% to under 40% in only two years as more than 100 local and foreign automakers have entered what amounts to a demolition derby; after sales grew 56% last year to about 1.1 million vehicles, they rose 82% for the first half of 2003, according to the industry publication Automotive News. VW and a partner recently broke ground on a new factory in China, amid plans to expand capacity from 800,000 to 1.6 million vehicles annually, at a cost of $7 billion over five years. Other manufacturers are also adding capacity. But a price war has slashed VW's operating margin in China from 15.5% in 2001 to 14% in 2002, according to a report by Merrill Lynch.
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None of that will fix a basic Touareg glitch: its name. After dealers heard it in 2002, some begged VW to change it, fearing U.S. customers wouldn't have a clue how to pronounce it. VW has tacitly admitted that they were right. Some of the first TV ads for the Touareg parody its pronunciation (which, for the record, is "tour-egg"). VW says that Americans had difficulty pronouncing Passat when it launched. But that doesn't dispel the sense that VW's marketing department is in triage mode. Touareg, it turns out, also refers to a rugged tribe of African nomads that held and traded slaves until the 20th century — a poor association for a company that used slave labor during World War II. Last summer, Pischetsrieder's worldwide sales and marketing chief, Robert Büchelhofer, resigned under pressure and was replaced with several executives who now each command one brand.
Will such moves be enough to lure back customers like Ann Jones? A few weeks ago, she grew fed up with her Jetta and traded it in for a new Honda Accord. It's a testament to VW that she did so grudgingly. "I will miss the Volkswagen style and I was saddened to leave my Jetta," she says. But her Accord provides her with something the Jetta never could: "I have more peace of mind."
- DAREN FONDA
- Volkswagen's boss tries to boost flagging sales