Remember Fahrvergnugen, the German tongue twister that Volkswagen adopted for ad campaigns in the early 1990s to express the thrill of driving its cheap, dependable, even lovable cars? For VW owner Ann Jones of Corona, Calif., the experience has been more like far from groovin'. Jones was lured to the Jetta by its stylish looks, elegant interior and solid road handling, which made it seem worth the $18,900 price. But a few months after bringing her new sedan home in 2000, she returned it to the dealer because of an oil leak.
Then a door lock broke. Then a spring popped out of a seat. By the time she had put 50,000 miles on her Jetta, it already felt sluggish, says Jones, 28. And what especially disturbed her were the grim faces of fellow VW owners whom she encountered at her dealership. "The majority of them weren't there for basic service" of their cars, she says, "but because of some defect."
Ordinarily, Volkswagen might be able to argue that Jones received a rare lemon. But in the latest survey of three-year depend-ability by J.D. Power & Associates, American consumers ranked VW-brand cars 34th, ahead of only Suzuki, Daewoo, Land Rover and Kia. Consumer Reports, which recommended three VW models in the late 1990s, keeps only the pricey Passat on its list of recommended cars. That's quite a tumble for the Volkswagen Group, Europe's largest automaker, which turns out 5 million units a year under brands including Audi, Bugatti, Seat and Skoda.
These quality issues are raising concerns about VW's hold on the North American market--the largest and most vibrant in the world, and a critical one for VW's profit growth. While VW is puttering along in Europe's anemic market--the firm has an 18% share in Western Europe and has sold almost 2 million cars in the first nine months of 2003--it is struggling on this continent. The VW brand's U.S. sales fell 14.6% over that same period, to 221,177, and operating profits in North America shrank to $68 million in the first six months of the year, down from $944 million during the same period in 2002. While North American sales accounted for just 20% of Volkswagen's $101 billion in global revenues in 2002, they delivered 27% of its $5.4 billion in operating profits. And VW clearly aims higher: around a 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 the domineering Ferdinand Piech in April 2002. A personable, goateed man who ran BMW from 1993 to 1999, Pischetsrieder, 55, is pursuing a risky sales 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 in which VW typically competes. At the same time, he is wringing costs out of manufacturing through design changes and by getting relief from VW's expensive German work force. The firm recently announced that net profit was down 51% in the third quarter compared with a year earlier, and CFO Hans Dieter Potsch warned that the firm would take a charge of "a couple hundred million" euros this quarter to offset R.-and-D. costs.