Can VW Find Its Beetle Juice?

It is betting on new models -- and an ad blitz -- to rescue sagging sales

When Volkswagen of America engineered a mid-1990s comeback, it did so amid a national love-in over the New Beetle and tons of attendant free publicity. But today, VW is trapped again by sliding sales and dismal reliability scores and has to rely on cash rebates to move cars. As VW embarks on its latest comeback try, the question is whether the company can restore its edge.

For five years, VW has littered the roadways with disgruntled owners. Models grew stale as management was distracted by an effort to market new luxury models that were priced between $40,000 and $100,000 -- far afield of VW's core image as an affordable German driving experience. As a result, U.S. sales, which are crucial to the German parent company, fell 15% last year and are off 28% from 2001 -- a decrease of almost 100,000 vehicles. Sales of the New Beetle are half what they were in 2000. Aggravated by the weak dollar and heavy rebates, VW lost more than $1 billion in the U.S. last year.

The road map for this latest comeback try is far from certain. For the first time in seven years, VW is updating its bread-and-butter models: Jetta, Passat, GTI, and Golf. The new models are bigger and better engineered in every respect, from computer-enhanced steering to better cup holders. But by Volkswagen's own admission, this latest push will lack much of the passion that surrounded the rollout of the much-anticipated New Beetle in 1998. "We need for the VW brand more emotion, as far as product is concerned and as far as the organization is concerned," says Volkswagen Chairman Bernd Pischetsrieder. Last year he scuttled plans to build an updated but costly version of the Microbus, which might have triggered another torrent of free media. The Jetta and Passat, arriving in 2005, are comparative wallflowers -- shy four-door sedans that will also be offered as station wagons. The 197-hp GTI, due in the fall, is a low-volume, high-performance version of the standard Golf. And a longer, wider version of the Golf, which has struggled against Japanese rivals, arrives in spring, 2006.

Lacking a new "retro" model to drive up interest, VW is counting on a second renaissance of its advertising. Starting in the 1960s, VW ads defined a generation of Madison Avenue writers. Seven years ago, Boston agency Arnold Worldwide Partners became the toast of Madison Avenue with 30-second ads that played more like short-form cinema and resonated with what would later become the iPod crowd. "VW ads led the way in integrating the coolest alternative rock music into commercials, and to those in the know about the music it became like a cult," says Adweek ad critic Barbara Lippert. Among the spots that resonated with the national media was one that tapped into the "slacker" ethos, showing two young men driving a Golf around town to the underground hit Da, Da, Da by the band Trio. That work is a tough act to follow. Alan Pafenbach, Arnold's creative director on VW, admits the company's ad past is "the elephant in the room that you try not to look at because, if you do, you can't concentrate on what you are doing."

Without a big publicity generator this time, VW will have to pay for its buzz. This month it announced a $200 million deal with NBC Universal Inc., on top of its $350 million media budget, to weave VW vehicles into films, TV shows, and theme parks. Sinking all that cash into mainstream media venues seems at odds with VW's counterculture image, what Pafenbach describes as "a club for people who don't join clubs." To tap back into the Generation X crowd that flocked to VW in the late '90s, VW will screen a seven-minute film at this month's Sundance Film Festival, starring actors Joe Pantoliano (Ralphie from The Sopranos) and Kevin Connolly (Eric in HBO's Entourage). The story, to be distributed over the Internet, involves people trying to hang on to their souls while jobs and family responsibilities tug at them.


Marketing ploys aside, one of VW's biggest challenges remains its own lineup. VW still has just one sport-utility vehicle, the $37,000-$58,000 Touareg, which is selling well. But VW also lavished scarce funds on developing the $68,000-$100,000 VW Phaeton luxury sedan, which is now on its way to becoming an international bust. All that while the Jetta, Golf, and Passat languished without updates. "One of our buyers could have leased the exact same Jetta three times on two-year leases," sighs VW's U.S. chief, Len Hunt. Hunt, on the job for almost a year after engineering a turnaround at VW's Audi of America unit, vows that henceforth all VW models will get substantial facelifts every three or four years, the way Honda does it. Even so, a much-needed budget-priced SUV and van won't arrive until 2007.

At Audi, Hunt drove an improvement in product, quality, and dealer service. Even though Audi sales were down last year, it was primarily due to the weak dollar and last sales of old A6 and A4 car models. New versions of those vehicles were launched to positive reviews in October and early this year. To improve quality, Hunt spurred the creation of "quality circles" that got U.S. and German executives together monthly to translate customer beefs into faster improvements on the assembly line and in future products. Hunt also had J.D. Power & Associates Inc. rigorously test preproduction VWs to weed out glitches that sink the quality scores. Now he's bringing the same tactics to VW, which languishes near the bottom of J.D. Power's rankings for reliability and service.

But even if all VW's reforms take hold, it is likely to take years to restore trust to the brand. "A lot of those customers drawn to VW as an island in a sea of mediocrity in the 1990s feel burned," says analyst John Wolkonowicz at Global Insight Inc., a Waltham (Mass.) research firm. Meanwhile, Toyota (TM ), Nissan, and Honda (HMC ) have only gotten better. And General Motors (GM ), Ford Motor (F ), Chrysler (DCX ), and Hyundai have been improving quality and flooding the market with new models that reflect their study of vw's craftsmanship, especially its interiors. VW, which celebrates its 50th anniversary in the U.S. this year, has proved resilient. But this time around, the trick is not to show its age.

By David Kiley in Detroit

    Before it's here, it's on the Bloomberg Terminal.