Rx for VW USA

VW is failing badly in the U.S. But does the company understand what its North American customers want?

Volkswagen of America CEO Stefan Jacoby will start his new job on Sept. 1. But he flew into Volkswagen's Auburn Hills (Mich.) headquarters the week of July 9 to meet with the senior management team he is inheriting.

It's no wonder he's in a hurry to start work. Volkswagen lost almost $900 million last year in the U.S., and around the same the year before. This year, sales of Volkswagens are flat, the U.S. dollar is a little weaker than it was last year against the euro, and VW has had a heck of a time finding more fixed costs to cut in its American operation. That is going to make it awfully difficult to reach new Volkswagen Chairman Martin Winterkorn's target of breakeven in the U.S. by 2009.

Jacoby, 49, in the late 1980s briefly worked for Volkswagen in the U.S., but he is no expert on the hardscrabble U.S. automotive market. Most of his experience has been in Europe, for both Volkswagen and Mitsubishi, as well as Asia where he has had senior posts for VW.

Volkswagen sales are up 2.7% this year, but that's misleading. Sales are off by more than 100,000 units a year from 2003. Sales of the Jetta are off 6.3%, and Passat sales are off 30%. Touareg sales are down 28%. The New Beetle is down 20%. Incentive spending on those four models by Volkswagen exceeds the average spending for each of those segments, according to Edmunds.com. That's anathema to Volkswagen, which has historically discouraged incentive spending to maintain brand integrity and resale values.

What's propping up sales even 2%? The addition of the Eos, which VW didn't sell last year, as well as an 80% boost in Rabbit sales (see BusinessWeek.com, 11/28/06, "The Dawn of the VW Eos"). Ironically, ad agency Crispin Porter & Bogusky's idea of renaming the old Golf the "Rabbit," the name it carried in the 1970s and the early 1980s, was controversial inside and outside of VW (see BusinessWeek.com, 10/23/06, "VW's Rabbit Redux"). But it seems to have paid off. VW brought a new Golf/Rabbit to the U.S. last year, but it had already been on sale in Europe for two years and so there was no buzz on the car in America until it was renamed.

Volkswagen's problems in the U.S. are difficult, and could take years to solve—more than the two years Winterkorn is giving Jacoby to erase nearly $1 billion in annual losses. Here are the problems he's facing and some possible solutions.

High Costs

Volkswagen is heavily dependent on high-cost European manufacturing. Experts say the weak dollar relative to the euro is a long-term condition companies should get used to. Even VW's Mexican plant, which makes Jettas, New Beetles, and commercial vehicles, relies on 40% European-made parts that cost too much after currency conversions. Jacoby is said to be on a mission to determine if VW needs a U.S.-based plant. That seems like an overly ambitious idea. Instead, he should work with his German bosses on a plan to make better use of the Mexican plant and complement the cars made there with more Latin American- and U.S.-made parts.

Wrong Products

VW has had the wrong mix of products in the U.S. The new Jetta and Passat designs, VW's two highest-volume models, were styled too conservatively. They look more like an amalgam of Japanese and Korean designs than anything uniquely German or uniquely Volkswagen. The New Beetle is the only iconic design in the showroom, and it's almost a decade old. The Touareg, a luxury SUV costing around $50,000 when properly equipped, was never the right product for VW. The Rabbit, formerly the Golf, has picked up some steam, but hatchbacks remain a limited niche in the U.S.

New products are on the way, but only one looks like a clear winner. And that's only if VW does everything right with the marketing launch and packaging of the SUV. The Tiguan compact SUV, which will be priced under $30,000, will arrive in 2008 and fills a hole in the VW showroom that has existed for a decade since Toyota (TM) launched the RAV4 and Honda (HMC) brought out the CR-V. Minivan lovers had hoped the Tiguan would be based on the Microbus show car that wowed so many VW enthusiasts five years ago, but that popular prototype will be launched as a re-packaged Chrysler minivan, the result of a deal VW made with the American carmaker. As a result, anticipation has cooled somewhat. On the upside, the recently launched Eos convertible is selling around 1,000 units per month.

VW says it needs a car priced below the Rabbit in the $13,000-to-$17,000 range. I disagree. It's crazy to compete with Korea, and soon the Chinese, at the low end of sticker prices. Sales volumes can come back for the Jetta and the Passat in the next redesign if the pricing is made reasonable, and the designs reflect a bit of VW whimsy and funkiness that American VW enthusiasts look for and that Japanese and Korean companies have difficulty producing.

A full-size crossover SUV that would compete against the Mazda CX-7 and Honda Pilot, for example, that embodies that same German, slightly funky design aesthetic would be on my wish list for the German parent.

The brand needs a piece of showroom excitement that draws on VW's history to enliven the brand and juice up VW enthusiasts. The Microbus would have been the right design. The new Eos makes it difficult to do a modern interpretation of the 1960s-to-'70s Karmann Ghia coupe. One idea could be to put a new model in the Mexico plant to replace the New Beetle line, and let the New Beetle go away. Then, bring a new New Beetle back after people have had time to miss it.

Poor Packaging

Volkswagen has one of the youngest buyer profiles in the auto industry. Dealers have been complaining, though, that the tire-and-wheel packages VW puts on Jettas and Rabbits, and even GTIs, are closer to European tastes than American.

Having to spend up to get the wheel packages young people want adds cost that takes the vehicles out of competitive pricing with Asian cars. Interiors in VWs are sharp and clean, considered among the best in the business in terms of looks. But complaints about how durable they are have hurt VW's overall quality scores. Europeans tend to baby their cars, and they don't do a lot of eating in their vehicles the way Americans do. VW needs to address these issues for what it says is its most important export market.

Brand Image and Advertising

Volkswagen got off to an interesting and promising start resuscitating its advertising in 2006 with agency Crispin Porter & Bogusky. A controversial ad campaign for the GTI, for example, featured a blonde dominatrix named Helga and an effete engineer named Wolfgang. Another campaign for the Jetta featured arresting TV commercials showing real-time crashes with people emerging unscathed from crumpled cars. Another campaign, though, featuring heavy-metal guitarist Slash offering an electric guitar with a new VW purchase seemed too niche for all the media spending it received. Some of the ads were attention-grabbing but they were all over the lot, offering no clear idea in the marketplace around VW.

VW's German parent has not been happy with the direction of the advertising and is beginning to push for a more coherent campaign. Crispin said over a year ago that it would replace the "Drivers wanted" theme with a new idea, but we have yet to see it.

In the 1990s, VW brought itself back from the dead through product excitement ignited by the New Beetle and a string of memorable, outstanding ad campaigns centered on a single idea: "Drivers wanted." The further VW got away from ads linking products with emotion and the feeling VW owners have for their cars, the worse sales got and the less memorable the ads became.

There needs to be a new beginning for VW in the ad department. But that doesn't necessarily mean a new ad agency. Crispin has created some of the most memorable and buzzworthy marketing in the industry in the last five years. With a stable client operating with clear direction, I suspect Crispin can ring the bell again. But VW, under Jacoby, has to be sure what VW aims to be in the U.S., listen to dealers and consumers about what that is, and stick to it. If a brand positioning is dictated to Jacoby from Wolfsburg, Germany, by Winterkorn or supervisory board chairman Ferdinand Piech, it will surely fail. American VW customers and enthusiasts are not the same as European customers. Example: The U.S. embraced the New Beetle and wanted the new Microbus, while Europe couldn't have cared less about either one.

Fix the Cars

As much love as Volkswagen fans have had for the brand, since 2000 owners have become more vociferous on the Internet about their problems. They are increasingly less willing to put up with bad service and problems that land their cars in the shop.

I have heard VW executives jokingly refer to glitchy vehicles as "Monday cars," which are cars built by workers on Monday morning after a weekend of revelry. I have never heard Toyota or Honda speak of Monday cars. In any case, the problem is worse than that. VW ranks in the bottom fifth of J.D. Power's rankings for initial quality (first three months), vehicle dependability (first three years of ownership), and sales satisfaction (service). (Like BusinessWeek, J.D. Power is a unit of The McGraw-Hill Companies (MHP).)

Other VW executives who have come before Jacoby have tried to fix this problem, and focus the organization on engineering higher-quality vehicles. And scores on those rankings have improved. The problem is that everyone else is improving, too. VW needs to overachieve on fixing quality or risk losing more sales in the U.S.

VW has undergone a huge change in management and ownership in the last nine months. There is a new chairman in Winterkorn. And Porsche now holds a controlling stake in VW, which gives it a lot of say at the board level on policy and product investments. Jacoby's strength, besides having turned around VW's brand in parts of Europe, is that he has enormous credibility with VW's decision-makers back home. In other words, he is supposed to be able to get what he needs to fix the U.S. part of the business. The question will be whether this German executive will ask for things Americans value most.

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