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VW Brings Phaeton Flop Back to U.S. as Passat Sedan Fades

Photographer: Michele Tantussi/Bloomberg

Volkswagen AG Phaeton automobile chassis wait to be added to vehicles in the company's factory in Dresden. Close

Volkswagen AG Phaeton automobile chassis wait to be added to vehicles in the company's... Read More

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Photographer: Michele Tantussi/Bloomberg

Volkswagen AG Phaeton automobile chassis wait to be added to vehicles in the company's factory in Dresden.

Volkswagen AG (VOW) plans to bring back the Phaeton luxury sedan to the U.S. as the carmaker looks to reignite flagging growth in one of the few markets it has been unable to crack.

The Phaeton, the brand’s most expensive model, could be shown to U.S. consumers in January as VW prepares the car’s return after pulling it seven years ago because of weak sales. The reintroduction, which would complement the rollout of new sport-utility vehicles, is aimed at showing off VW’s engineering prowess as the lift from the mainstream Passat sedan fades.

“A brand as large as Volkswagen needs a halo project in the upscale segment,” Chief Executive Officer Martin Winterkorn told Bloomberg at a conference in the company’s hometown of Wolfsburg earlier this month, confirming that the Phaeton will return to U.S. showrooms. “We’ve seen what happens to brands that don’t have that kind of project.”

The Phaeton, a pet project of VW Chairman Ferdinand Piech, last year sold about half the volume worldwide that the company initially targeted. Its U.S. comeback is part of a plan to spend $5 billion over the next three years to roll out new models and boost sales in the U.S., where deliveries have started to slip after a two-year burst following the 2011 rollout of the Passat and Jetta sedans that were redesigned for American tastes.

Audi Underpinnings

The Crossblue concept, a seven-seat sport-utility vehicle that would compete with the Ford (F) Explorer and Toyota Highlander, was shown at the Detroit car show this year. It’s intended to be a big seller alongside the Tennessee-made Passat. The U.S. push is critical to VW’s strategy to surpass General Motors Co. (GM) and Toyota Motor Corp. (7203) in global deliveries by 2018.

A new version of the Phaeton may be presented at the Detroit auto show in January to test the response for an eventual rollout, three people familiar with the matter said. The car would share underpinnings with the Audi A8 sedan and a hybrid version is planned, said the people, who asked not to be named because the discussions are private.

At its current pace, the company will come up well short of its target of selling 800,000 vehicles in the U.S. by 2018. IHS Automotive predicts deliveries of 517,000 vehicles to American consumers in five years, missing the target by 35 percent.

The company has been losing ground this year. VW’s sales in the U.S. fell 0.9 percent to 206,792 cars in the first six months of 2013, while total light vehicle sales in the country rose 7.7 percent.

‘Give Gas’

Volkswagen shares rose 1.4 percent to 169.65 euros today in Frankfurt trading. The gain trimmed the stock’s decline to 1.5 percent this year, valuing the company at 77 billion euros.

The Jetta, Beetle and Passat models, which fueled VW’s gains over the past two years, “reached maturity in terms of their sales cycles,” said Tim Urquhart, a London-based analyst at IHS Automotive. The Crossblue SUV should revive growth, while the Phaeton may offer little help, he said.

To reinvigorate growth, CEO Winterkorn traveled to Washington last week to show off new models to more than 500 dealers and “motivate them to give gas again,” the executive said.

Still, the return of the Phaeton could jar Volkswagen’s recent U.S. strategy of appealing to mid-market buyers. The company made the Passat bigger and cheaper than the European version to appeal to U.S. drivers.

The Phaeton started at $66,700 before VW withdrew it. In Germany, the car starts at 70,000 euros ($92,100). Those prices would likely mean the Phaeton would cost more than Hyundai Motor Co. (005380)’s Equus, which starts at $59,250. It could also rival the $75,100 A8 from VW’s Audi unit.

Piech Project

The return of the Phaeton “would be a bad decision,” said Jesse Toprak, an analyst for TrueCar Inc., which tracks U.S. auto sales. “No one spends $80,000 on a Volkswagen. The company already has luxury brands that can cater to that segment,” such as Audi.

The 2006 withdrawal of the Phaeton from the world’s largest market for upscale vehicles was a move by Wolfgang Bernhard, the head of the VW brand at the time, to stem losses in the region. The decision helped trigger his departure because the move called into question Chairman Piech’s strategy.

The Phaeton was started by Piech while he was CEO, including the construction of a $238 million glass-walled factory in Dresden. The plant has become one of the city’s top tourist sites alongside the Semperoper opera house, attracting about 90,000 visitors a year.

White Robes

Production areas have parquet floors with workers wearing white robes -- sometimes even white gloves -- as they assemble cars by hand. The factory’s most eye-catching building is a 40-meter (131-foot) glass tower where finished Phaetons are parked prior to delivery.

VW has already sought to reintroduce the Phaeton to the U.S. public. In May, the New York Philharmonic played a concert at the Dresden factory. A raw body frame of a Phaeton dangled above the stage, the gray aluminum illuminated by a soft blue light. The performance featured percussionists clanging 43 body parts of the car as part of a special arrangement of Finnish composer Magnus Lindberg’s Kraft (German for “power”).

In the U.S., VW’s narrow lineup has cost it customers like David Smith. The former Golf and Jetta driver wanted a bigger car for his teenage son and two dogs and opted for Toyota Highlander in 2011 after considering VW’s Routan minivan. He’s in the market for a second car and would switch back to VW if the brand had the right car. The Phaeton might be stretching it.

“When I was a kid, VW was always an affordable car, and that’s what it should be,” he said.

To contact the reporter on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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