Will Yankee Drivers Buy VW Luxury?

Its upscale move is meeting resistance in Europe, so the U.S. push is crucial

The black Volkswagen Phaeton gleams in the moonlight as it edges toward Castle Wolfsburg near VW's headquarters in Northern Germany. Will the rich and famous alight? Not this time. Volkswagen was using the $75,000 sedan to ferry journalists to a presentation of its new-generation $18,000 Golf compact. For one night, the opulent Phaeton was taking a back seat to the decidedly plebeian Golf.

But that's back home. In the U.S., the Phaeton will soon be in the spotlight, as VW gears up for a November rollout. The American debut is a critical milestone in Volkswagen's brash bid to compete with Mercedes-Benz (DCX ) and BMW in top-tier luxury cars. It comes just five months after the U.S. introduction of the $40,000 Touareg, VW's long-overdue entry in the popular sport-utility segment. With these two upmarket models, the German carmaker is looking to break out of its "people's car" image and into the ever more crowded premium market. It's a high-stakes gamble, but one that VW's management insists will pay off. "It's an investment in the future," says Jens Neumann, Volkswagen executive board member in charge of strategy. "It takes time to change people's perceptions."

So far, VW's premium drive has produced stop-and-go results. The March issue of Car & Driver rated the Touareg No. 1 SUV of the year, citing its superior off-road performance and luxurious interior. In the first half of 2003, VW sold 9,200 Touaregs, which share a platform with the Porsche Cayenne SUV. The Touareg's success should help bolster VW's U.S. sales, which were down 12% in the first nine months of this year.

Americans may not be familiar with the North African nomadic tribe that lent the Touareg its name. And they are only beginning to get the pronunciation down (TOUR-regg), aided by new TV spots. But they've confounded VW dealers by snapping up fully loaded models with 310-horsepower V-8 engines for $50,000, instead of the $36,000 V-6, which dealers overordered. "I think it will be a winner," says George Petersen, president of market researcher AutoPacific in Tustin, Calif.


But what fate awaits the Phaeton? Since it was launched in Europe in August, 2002, the car has won accolades for its engineering and plush interior, including 18-way adjustable seats and a cutting-edge climate control system. But getting Europeans to fork over $75,000 for VW-badged luxury has been a struggle. Only 2,574 Phaetons were sold in the first seven months of this year, and analysts say VW's chances of meeting its 2004 sales target of 15,000 are slim. In the U.S., pricing is key: If VW positions the Phaeton close to the lower end of the luxury spectrum inhabited by Lexus at $55,000, "it would have a smash hit on its hands," says Wesley R. Brown, a partner at Los Angeles-based auto consultancy Nextrend Inc.

VW spent $1 billion on the Phaeton, yet experts say it will take at least two model generations to establish a luxury-brand image needed to drive higher-volume sales. "A better strategy would have been to bridge the gap between a $30,000 Passat and the $75,000 Phaeton by building a midsize premium sedan to compete with Mercedes' [$50,000] E-Class," says Arndt Ellinghorst, an analyst with WestLB Panmure in Düsseldorf. Others think VW would have been better off putting that money -- plus the billions it has lavished on luxury carmakers Bentley, Bugatti, and Lamborghini -- into its premium marque, Audi, which trails Mercedes and BMW.

VW is playing it safe with the American launch of the Phaeton. It is waiting to launch its ad campaign until the cars have arrived in some 200 newly renovated VW dealerships and sales personnel have been trained. It's clear why: After stalling in its European launch, VW badly needs the Phaeton to gain traction in the U.S.

By Gail Edmondson in Frankfurt

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