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The company known for the inexpensive Beetle is now launching its most expensive cars ever. Its first SUV, the Touareg, tops $42,000 with an eight-cylinder engine, putting it in league with hot models from BMW, Cadillac and Infiniti. And a loaded Phaeton, a sedan that cost more than $900 million to develop, will have a sticker price north of $85,000 when it hits U.S. dealerships in December. VW plans to launch dozens of new models over the next two years, including a new Microbus, smaller SUVs and crossover vehicles, and is considering a sexy convertible, the Concept R, which Pischetsrieder unveiled at the Frankfurt Auto Show in September. VW's new Golf, expected to hit North America in 2005, has received early positive reviews in Europe and should bolster profitability thanks to lower manufacturing costs.
Pischetsrieder insists the strategy will pay off once the new cars take hold with consumers. Investors seem to think so. VW's share price rallied 34% from the start of the year to early November, outperforming the Dow Jones auto index by 14 percentage points. The Touareg is off to a strong sales start, both here and in Europe. The Phaeton is not. Available in Europe for more than a year, it has been no threat to the Mercedes S Class and the BMW 7 Series, selling less than 8,000 units (in 2002 BMW sold 14,670 7 Series cars in Europe). Equity analysts cite the Touareg and the Touran multipurpose vehicle (MPV) as signs that VW is broadening its mix in Europe, enabling it to profit in hot segments such as SUVs and MPVs and to hedge against downturns in other segments. Some are skeptical. 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 difficult to move upmarket when the perception is that quality is heading down, so fixing that issue must be Pischetsrieder's first task. Next he has 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.
The VW boss also needs to take a grinding wheel to costs, which are among the highest in the industry because of expensive labor in Germany, where it runs 10 plants. VW has moved production to eastern Germany--to qualify for government aid and take advantage of lower wages--and to lower-cost countries like Slovakia. Pischetsrieder, known as a gearhead with a good grasp of finance and marketing, hopes to save $3.4 billion over the next five years. Some of the savings will come from sharing more components, like engines, transmissions and ventilation systems, across VW's models and brands. To instill a sense of entrepreneurship and accountability, he has also set profit targets and production goals for project managers.