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VW's 1M U.S. Sales Goal: It's Just Not Happening Without Cheaper, Better Cars

To reach its ambitious goal of selling a million cars (including 200,000 Audis) in a shrunken U.S. market by 2018, Volkswagen would have to offer buyers an awful lot of car for the money. Unfortunately for its big dreams, many other carmakers are now offering very competitive vehicles, and at prices much lower than VW's. And it's not yet clear that VW understands that.

VW has been convinced that its cars are often too expensive for the American market, and that to increase volume it has to make them more affordable. But to keep up, its cars also need to keep getting better. That's the stumbling block right now.

Intense competition: that's the new normal

VW's higher prices didn't matter as much when few other automakers were making credible small cars. But pricing matters hugely now as high gas prices push compacts and subcompacts to the center of the market. Just about every automaker is offering 40-mpg vehicles that double as good values.

VW's strategy is the kind the accountants love: it's taking features (and cost) out of the cars to hold the line on pricing. The new 2011 Jetta, for instance, was "decontented." The price is about the same ($14,995 base) but the car lacks such premium features as independent rear suspension and (on most models) rear disc brakes.

Hyundai nipping at VW's heels
Contrast that with smart moves from a carmaker that VW once considered an inconsequential competitor: Hyundai. In the last three years, Hyundai has anticipated trends rather than just following them, and made value the centerpiece of its strategy. The result was a steady increase in sales and market share, despite a horrible market. The company sold 401,000 cars in 2008, 435,000 in 2009 and 538,000 in 2010.

According to Sam Jaffe, an analyst with IDC Energy Insights:

VW's goal is extremely ambitious, and to do it in a low-growth market makes it doubly so. But it has been done before -- Hyundai went from being a very minor to a major player. The thing is, I'm not confident that VW has the cars or the infrastructure to reconstruct what Hyundai did.
So what did Hyundai do? It built the new Elantra, for one thing, which bristles with standard features. It also costs $14,830, thousands of dollars less than a comparably equipped Jetta.

VW says it's working on making its cars the "emotional" choice, but it has a way to go. In an interview at the New York International Auto Show, VW of America CEO Jonathan Browning told me:

The one million sales goal is our plan and our vision for the future. We're working on customer acceptance and the product portfolio. Our focus is very much on the underlying factors, and offering the most exciting, emotive choices.
Too bad it doesn't have those choices yet. VW has updated cars such as the Jetta, Passat and Beetle, but it hasn't radically reinvented them. By contrast, the all-new 40-mpg Hyundai Accent with a direct-injection engine is hitting the market at just $12,455. Now that's reinvention. For that matter, so is the Nissan Versa at $10,990, with standard air and stability control. Dramatically increasing market share is going to be tough for VW against cars like that.

The company that could
Volkswagen has good DNA for reinvention, for considering the American market with a clean sheet of paper, and some give on pricing and standard content. The company needs to realize that we're not a bigger Europe, and represent probably the most competitive market in the world now.

VW sold 257,000 cars to Americans in 2010, a 20 percent uptick from the previous year. But VW's big-reach goal would more than triple that volume. Unfortunately, VW has always had higher production costs than Japanese carmakers, and the gap is even wider when it comes to Korean vehicles. That's why VW makes the Jetta and Beetle in Mexico, not in Europe.
Jetta sells, Elantra sells better
Yes, Jetta sales look respectable so far. The 16,969 sold in March were 84 percent higher than a year ago. But consumers comparison shop. And sales of the Elantra, which lacks the "German engineering" prestige of the Jetta, were up even more, 134 percent, with 19,255 in the same month-over-month comparison.

In addition to the Jetta, two new cars will determine if VW can make the kind of gains it needs: the all-new made-in-Chattanooga mid-sized Passat and the new, more masculine Beetle, which debuted in New York.

Provided VW doesn't go overboard trying to broaden the Bug's appeal beyond its current female base, it should do well. The 31 highway mpg in the base car is decent, and the TDI diesel offers 40.

An anemic U.S. market = good news for VW. Maybe
Browning himself offers a caveat, however. While sales of economy cars will rise so long as gas hovers around $5 a gallon, it's also possible that the overall U.S. car market won't actually rebound to its pre-recession level of 15 or 16 million vehicles. A new Booz and Co. survey of auto executives seconds that analysis -- the executives predict cautious four to five percent annual growth, and U.S. volume of just 14.7 million by 2015.

The Passat, set to launch this fall, is underwhelming when it comes to the emotional appeal Browning says the company needs. Auto analyst James Bell wonders how it will fare against another incredibly good and creatively styled Hyundai, the Sonata, but he says the Passat offers a certain German solidity that will appeal to some buyers. The Passat will start at $20,590 and include many of the creature comforts denied to Jetta buyers. But then there's that pesky Sonata, also loaded, starting at $19,395.

Get on the microbus
Not all new VWs are bland. Browning pointed to the Bulli Concept, an update of the hugely popular Microbus, as one of those emotive vehicles that could hit the ball out of the park for VW. The Bulli was reportedly greenlighted for production last month. "It's a fascinating opportunity, because it builds on our heritage and applies new technologies and a new format to the U.S. market," he said.

I like the Bulli, too, because it's a big improvement over the company's bland minivan offerings. It has incredible emotional appeal, and not just to baby boomers who remember Woodstock. But the minivan has become a niche market, and the Bulli is never going to be a huge volume car for VW (and especially not in the battery electric form shown in New York).

Marketing matters here. Bell says that VW has an opportunity to sell the Bulli as a cool-looking alternative to the boxy but good Kia Soul or Nissan Cube. But if it's perceived as just a slightly more hip minivan, then it will hit the ground with a thud.

One way forward for VW would be bringing in one of the dramatic subcompact fuel sippers it sells in Europe, and offering it at an incredibly attractive price point. A $15,000, 44-mph mpg U.S. version of the Polo, for instance. But, darn, the really stellar VW fuel economy champs are diesels that the American consumer is still not willing to buy in large numbers. And then there's that $12,000 Accent to think about.

VW's Browning talks company strategy on video:


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Photo: Jim Motavalli
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