Can VW Finally Find Its Way In America?

A last-ditch drive must correct disastrous turns to make the U.S. profitable again

Volkswagen's (VLKAY ) experience in the U.S. has always been one of highs and lows. But rarely have its fortunes sunk so low as now. Less than a decade ago, the quirky reinvented Beetle helped VW come roaring back from a previous crisis. But for the past three years, its U.S. operations have lost close to $1 billion annually.

Now it's trying again to save the brand in the U.S. To head U.S. operations, it's bringing in Stefan Jacoby, a German with close ties to VW Chairman Martin Winterkorn and Supervisory Board Chairman Ferdinand K. Piëch, who took control of the company this year after a shakeup that left Porsche as VW's controlling shareholder. Jacoby, 49, an accountant by training, made his mark as head of VW's global sales and marketing. Since Jacoby took charge, the company boosted its European market share to 20.3% from 18.1%, helping keep it solidly in place as the Continent's leading brand. With its U.S. fortunes in long-term decline, Jacoby is facing his biggest challenge yet. His mission: to meet Winterkorn's target of breaking even in the U.S. by 2009.

Only a year ago, VW was gearing up a huge marketing campaign to relaunch a revamped Rabbit and Jetta in a bid to recapture its niche as the affordable, stylish European car of choice for younger buyers. VW hired former MiniUSA marketing chief Kerri Martin, who recruited super-hot U.S. ad agency Crispin Porter + Bogusky. The plan, as chronicled in a BusinessWeek cover story (May 22, 2006), was to create a VW renaissance.

It didn't work out that way. A string of attention-grabbing ads—one campaign showed people surviving crashes unscathed and another starred a German dominatrix named Helga—did little to juice sales of VW's two most important models, the Jetta and the Passat. "I've never seen a brand struggle so hard to understand the U.S. market and fail so miserably," says Rebecca Lindland, a director at consulting firm Global Insight Inc. VW's sales slid to 235,000 last year, from 338,000 in 2002. Martin left last December, part of a shakeup when Porsche took over.

Making matters worse is the perception in the U.S. that VW's quality lags vs. its Japanese rivals. VW's interiors, for example, don't stand up to the kind of abuse they get from U.S. drivers, who do a lot more eating, drinking coffee, and applying makeup in their cars than Europeans do. That's one factor in J.D. Power & Associates Inc. (MHP ) ranking VW in the bottom 20% for reliability, quality, and service. "That really hurts VW when its young customer base does so much online comparative shopping," says Power Information Network analyst Tom Libby.

To turn operations around, Jacoby has to battle the punishingly high euro and VW's limited manufacturing presence in North America. Even more important, the company needs to introduce new models that build on its long tradition of quirkiness and connect with U.S. consumers. Instead, the carmaker's more recent offerings feel bland. Dealers think VW blew a golden opportunity when it chose not to introduce an updated version of the wildly popular Microbus from the '60s and '70s. Instead, the company is launching a repackaged, Volkswagen-branded, Chrysler (DCX ) minivan. Casey Gunther, VW's top-selling U.S. dealer, in Coconut Creek, Fla., is worried. "We're missing the funkiness" that U.S. buyers expect from VW, he says. "The Germans don't understand." And unlike in Europe, affluent buyers don't see VW as an aspirational brand.

Winterkorn vows the turnaround of the U.S. business is his "No. 1 priority." But there's only so long any management can put up with nearly $1 billion annual losses. Says one executive close to VW: "For the first time in some time, the phrase If we are to stay in the U.S.' precedes a lot of conversations at VW."

By David Kiley and Gail Edmondson

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