VW's New U.S. Chief Out to Triple Sales
Newly installed Volkswagen of America Chief Executive Stefan Jacoby made quite an impression on just his sixth day on the job. He announced a shift of the company's headquarters from Michigan to Virginia and the cutting of around 400 jobs. That's the bad news for VW's workforce. The more promising news, though, is that he has an audacious plan to triple Volkswagen's North American sales in the next five to eight years.
Such projected growth seems as unlikely to some analysts and critics of Volkswagen as it is surprising from a company that lately has seemed much more interested in growing sales in developing markets such as Russia, China, and Brazil than slugging it out in the U.S. with models that go head-to-head with growing Asian brands such as Toyota Motor (TM), Honda Motor (HMC), and Hyundai.
U.S. Workers Blame Germany
Volkswagen sales, on track to reach about 235,000 this year, are flat from last year, but even that is misleading. Sales are actually off by more than 100,000 units a year from 2003. Sales of the Jetta are off 8.5% this year, and Passat sales are off 31%. Touareg sales are down 24%. 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.
Volkswagen employees, who were given the news of the job cuts Sept. 6 in a town-hall meeting, have complained that the biggest problem dogging VW the last decade has been the micromanaging of the U.S. operation from Germany, which has deprived its American unit of the right mix of products it needs to compete. VW, for example, won't launch its first sport-utility vehicle priced under $30,000, the Tiguan, until next year, even though that has been the fastest-growing category since 2000. The German management did, however, force an $80,000 sedan, the Phaeton, on the U.S. that flopped. Jacoby said he did not disagree with the complaint. "We have not done a good job of creating the right product mix for America, but that is going to change, and it is already underway," he said.
Jacoby said VW's product plan for the U.S. calls for four core, high-volume products, each of which will generate between 135,000 and 150,000 sales per year in North America. Those products, he says, would include a midsize sedan, probably the next Jetta design, to compete against the Honda Accord and Toyota's Camry. He also says he envisions a smaller sedan/hatchback that would compete against the Toyota Corolla. And he is thinking of selling two crossover SUVs, the Tiguan and one other. He says that a small car priced below $15,000 is in the plans, and that he would even like to introduce a small city car, like Mercedes-Benz's (DAI) Smart, to the U.S.
Battling the Exchange Rate
It is a surprisingly ambitious plan that will demand that VW build a new North American manufacturing facility. "We are looking at making the business case for this plan now," says Jacoby. Jacoby's master plan would result in VW hitting about 700,000 sales a year in North America, a very tall order considering the strength of Asian automakers and the weakness of VW's brand and its reputation for poor quality.
Volkswagen is bedeviled by the lopsided currency exchange between the euro and the greenback, which has hovered between $1.30 and $1.40 for the last few years. Volkswagen of America has lost $2 billion in the last two years alone. "The currency exchange is like trying to run a marathon when you start 10 miles behind the starting line," he says. Jacoby says the decision to build a plant in the U.S. has not been made.
But it's clear that he wants to make the case to Volkswagen's board in Germany. "You can reduce head count and slash marketing budgets, but you still can't reverse the losses unless you are building your high-volume models in the local market."
Volkswagen (VLKAY) Chairman Martin Winterkorn set a goal for VW's American unit to break even by 2009. Jacoby says that unless exchange rates substantially worsen, he can achieve black ink with new products and the job cuts.
Jacoby, 49, worked at Volkswagen of America for one year as a management trainee in the late 1980s, and was tasked, ironically, with helping to wind down the only U.S. manufacturing plant Volkswagen ever had, in Westmoreland, Pa. There, Volkswagen built Rabbits and small pickup trucks. He was also part of the group that decided that Volkswagen products for the U.S. would be designed and developed in Europe, and that unique American design elements would take a backseat to German design leadership.
New Models Tailored to a U.S. Market
Twenty years later, though, Jacoby says he believes the only way VW will come back to profitability is by developing unique, high-volume models for the U.S. The next Jetta design, for example, is being designed specifically for the U.S. market. The current model, he says, was built for the U.S. and Europe, and was too dependent on being built off the Golf/Rabbit engineering platform. Critics of the design say it lacks Volkswagen's brand identity and is too close to the blandness of most Asian passenger cars. Caset Gunther, the biggest Volkswagen dealer in the U.S., based in Coconut Creek, Fla., says, "VW's have to have a lot of emotion and fun in the design or they don't sell."
Jacoby takes over Volkswagen's American unit following a management upheaval in Germany that saw its chairman, Bernd Pischetsrieder, ousted in favor of former Audi chief Winterkorn. VW has also seen the reassertion of Supervisory Board Chairman Ferdinand Piech's will into the long-term strategy of the company and the recent moves of Porsche to buy a controlling stake in Volkswagen. Piech's family controls the voting stock of Porsche. And German press reports say that Porsche is preparing to buy 51% of VW.
Jacoby, who engineered successful turnarounds of Volkswagen's Japan and German operations, as well as of Mitsubishi Motors of Europe during a stint at the Japanese carmaker, is the first Volkswagen of America chief who has reported directly to the sitting Volkswagen chairman. Jacoby says the fact the he is "wired into Volkwagen's top management, engineering, and product development staffs" gives him the best chance of anyone who has run the company to put VW on the best competitive footing against rivals such as Toyota and Honda.
An accountant by training, Jacoby has personally tracked marketing wherever he has worked. And he considers fixing Volkswagen's image through smarter marketing in the U.S. to be a priority. His priority is to find a chief marketing officer in the next few months. "We need to put some of the funkiness back in the brand, because that is our strength." To that end, he says he is "fighting like crazy" to get a plan approved for a new version of the New Beetle. The car went on sale in 1999 and did much to boost Volkswagen's sagging fortunes then. But a decade later, the car still hasn't been retooled. "It is a big opportunity that we have let go by," says Jacoby.
New Directions in Advertising
Volkswagen's advertising, long part of the brand's legacy in the U.S., has been confused the last five years. Ad agency Crispin, Porter & Bogusky was handed the ad assignment in late 2005. And while the agency has created some memorable ad campaigns, such as one for the GTI featuring an engineer named Wolfgang and a dominatrix named Helga, the overall effort has wandered. The much-lauded ad agency has been seen to be on the hot seat. "I have a lot of homework to do about the advertising, but one thing I know is that an ad agency can't be expected to guide the brand if we don't know where we are going."
One place the new CEO knows he is going as of April, 2008, is Fairfax County, Va.—"out of the shadow of the Big Three," he says. The move to Virginia for Volkswagen, says Jacoby, is meant to spark a new beginning and a change of direction. He admits it's a "symbolic" move he feels will benefit VW's corporate culture, refit VW's organization, open it up to different talent, and move employees closer to the heart of VW's customer base in the mid-Atlantic region of the country.
Says Jacoby, "It's not the whole solution, but I feel strongly it is part of what we need to do to fix the company and the brand for the long term."