On a recent chilly July evening in San Francisco, a few hours after a 2011 Volkswagen Jetta sedan was lifted via crane to the third floor of the St. Regis Hotel, Volkswagen AG chairman Martin Winterkorn was standing amidst a throng of reporters and executives from Germany and the U.S., strangely and angrily gesticulating toward the car, which sat revolving on a turntable.
Volkswagen's design chief Walter de'Silva was addressing the group, explaining how the car's proportions, voluminous backseat and headlamps were all designed specifically for the American consumer. This was no typically European VW sedan, frustratingly too small for U.S. rumps and waistlines, but a car imagined entirely for cup-holder-loving Yankees. Off to the side, Winterkorn continued to grimace and flail, trying to attract the attention of one of the dozens of staff on hand to handle something that bothered him. Turns out the often acerbic Wintekorn was demanding that someone stop the car from spinning on the turntable while DaSilva spoke, to make sure the car stopped on a full profile view for the audience.
The scene could be a metaphor for Volkswagen's track record in the U.S. over the last three decades. The company's German management lays carefully hatched battle-plans and launches new models and nameplates all meant to take the company back to the heady days of the best-selling Beetle and iconic Microbus. German managers insist the plans are correct, and that the products are perfect. But then, when it comes time to execute the plan and meet the big sales targets, reality doesn't measure up. As it turns out, the U.S. marketplace and international currency values, like that spinning turntable, don't always follow the German playbook.One Million Sales
The new 2011 Jetta is critical to Winterorn's sales targets for the U.S., which can be generously described as audacious. For two years, VW executives have been repeating their goal of selling one million vehicles in North America, including Canada and Mexico, by 2018, including 800,000 Volkswagens and 200,000 Audis. Why audacious? VW sold just 175,000 in those markets in the first half of this year. The auto industry, according to forecasts by the leading forecasting firms, could climb to as much as 15 million annual sales by 2015, up from the 11.5 million rate we have today, but well short of the 17 million range we saw in 2004.
Besides the herculean performance it will take to reach the target, Volkswagen of America has also had a hiccup in its management. CEO Stefan Jacoby, who had been a key player in developing the sales goal and convincing his German bosses to spend $1 billion on a new assembly plant in Tennessee, quit in June to take the top job at Volvo Cars in Sweden.
Chief operating officer Mark Barnes says the sales target set by Germany is not unreasonable. "If you look at the portfolio of product we have coming, especially the Jetta and the new mid-sized sedan, you are talking about upwards of 300,000 sales from just those two products," says Barnes.
If there is a flaw in Volkswagen rhetoric, it is that it most often stresses its sales and profit goals in the U.S. first, and its quality targets second. VW has long been held back by three big barriers: Its cars have been more expensive than rivals, key products like the Passat midsize sedan have been smaller than rivals, and VW quality and reliability scores have been well below the Asian brands the company wants to take market share from in the U.S. "We know our quality has to improve for people to choose Volkswagen, and it is improving," says Barnes.
Former Volkswagen of America marketing chief Steve Wilhite, who has held chief marketing posts at Nissan and Apple Computer, and run Hyundai Motor Sales, says the sales target is ambitious but achievable if VW can re-order its priorities. "They need to stop thinking about being the biggest and focus on being the best. Being the biggest didn't work out too well for GM and it's not working out so well for Toyota either," says Wilhite. He notes that when a company focuses on quality first, sales usually follow. It rarely works the other way around.A Jetta For The Masses
The big question for Volkswagen watchers is: can VW turn out the kind of mass-appeal vehicles required to reach 800,000 in annual sales? That kind of sales volume would actually top Nissan in the U.S. The new Jetta, built in Mexico, is part of the evidence of how VW is trying to Americanize. The trunk is voluminous. The back-seat legroom is as generous as some luxury sedans. And the car has been priced to start at just under $16,000, two thousand dollars less than the outgoing model. The result is that the new Jetta seems like a significant upgrade over the current Toyota Corolla. But its real competition is the Honda Civic, the best seller in the category. The Jetta will also have to go up against a redesigned and upgraded Ford Focus in 2011, as well as the 2011 Chevy Cruze. Both Ford and Chevy are intent on grabbing bigger pieces of the small car market and will have more money to spend on advertising than VW.
The Jetta has long been VW's best-selling model in the U.S. In Europe, however, it's the hatchback Golf that tops the sales charts. This is why, until now, VW always designed the hatchback first and then grafted the Jetta's sedan body onto the same platform. This changes with the new car, which now has its own new platform.
The historic prioritization of Europe over America, as well as the friction between VW's German and U.S. management, also extended to the Jetta name until a few years ago. After originally trying to get the U.S. to accept the name "Bora" for the U.S. market in the 1980s, and selling the car as the Bora throughout Europe, the company finally relented and now only calls the car by that name in Mexico where the local dealers say the name is important. The battle over naming a car "Golf" in the U.S. resulted in the car being called "Rabbit" back in the 1980s, a name that has been picked up again over the last three years. VW is now going back to selling it as the Golf. VW has long tried to dictate global monikers that relate to names of winds, which is why its lineup includes vehicles names Touareg, Passat, and Tiguan.
The naming issues have so bedeviled the company that awareness of models outside of its New Beetle, Jetta and Passat -- Tiguan, Routan, Touareg, etc. -- is practically nil, according to the company's own research. Since tapping new ad agency Deutsch last Fall, VW has been running an ad campaign focused on including several models in each ad to try and remedy the problem. The effort, themed "Punch Dub" is a play on the game that developed around the original Beetle. If you don't remember "Punch Buggy" or "Slug Bug" from your childhood, it's simple enough: Every time you spot a Beetle, you sock your compatriot in the arm.
Despite the new emphasis and investments in the U.S., German management is calling shots in America more than ever. The new ad campaign, for example, is themed "Das Auto," which is German for "The Car." Though it was introduced to the U.S. car buying public in 2008, Deutsch's job is to re-introduce it so it makes sense, especially to a broader customer base that aren't the hardcore German car enthusiasts who have kept VW afloat the last two decades.Beholden To The Past
Volkswagen, more than most auto companies and perhaps more than other brands, are prisoners of its past. The original Volkswagen Beetle, as well as the off-shoot vehicles like the Microbus, Karmann Ghia and "Thing," created a cultural phenomenon in the 1960s and 70s anti-war youth movement. Advertising done for VW in the 1960s not only changed the way companies advertised cars, but it changed the way Madison Avenue thought about advertising as a whole. Many books and case studies have been written on VW advertising from the Beetle days. Even today, films and TV commercials often deploy a Beetle or Microbus for nostalgia rather than any of VW's current models. For this reason, Volkswagen and its agencies are always tempted to draw on the power of the brand's past when advertising the cars of the present. VW's last agency -- Crispin, Porter + Bogusky -- conjured a talking Beetle with a German accent to extol the virtues of today's vehicles.
Indeed, back in the mid-1990s when Volkswagen was barely hanging on in the U.S. market, selling fewer than 50,000 vehicles a year, it green-lighted the development of the New Beetle as a lightning rod to spark interest in the brand again. It worked, and the company mounted a comeback that began in 1997, as anticipation for the New Beetle built for the next three years until it hit the market. Total VW sales peaked at 356,000 in 2001 before gradually falling back. VW's high-water market was 570,000 in 1970 when it was the leading import car brand in the U.S.
VW will launch a new New Beetle at the end of next year, having discontinued selling the now familiar model. But the car carrying more importance is the mid-sized sedan, the successor to the Passat, which will be built in the new Tennessee plant. The Passat, which is meant to compete against the Toyota Camry and Honda Accord, sold a scant 11,000 last year. It is smaller than those vehicles, but sells for $28,000, which is about $8,000 more than a Camry. By building the car locally in the U.S., VW will be able to cut costs, so the starting sticker price will drop to around $20,000.
Plans call for selling 150,000 of the Passat successor each year. Increasing sales of a single model more by more than 10 times -- in the most competitive category in the marketplace -- will be a huge undertaking, especially since it will need to reach the goal by year two or three, or else the factory will be a huge profit drain. "VW is going to be under huge pressure to make that car sell, including discounting it to compete, as overall sales stay weak," says independent marketing consultant Dennis Keene. "Just because you build them doesn't mean you can sell them."A Need To Build Better Cars
Improving quality and reliability will be key to the success of the new Passat, the new Jetta, the new New Beetle, and the other 11 models models VW plans to be selling in the U.S. by 2015. These include the sub-compact Polo and a small SUV, smaller than the current Tiguan. In J.D. Power & Associates' 2009 Initial Quality Study, which ranks cars in the first three months of ownership, VW came in 15th out of 37 last year. The company's ranking improved from 24th in 2008, but then slipped back to 22nd place this year. Look at the list, and you find Volkswagen third from the bottom, which is not a good spot to be in when consumers are researching new cars for reliability. Moreover, though 78 percent of Americans know the VW brand, only 2 percent buy its cars.
Volkswagen simply hasn't had a culture that emphasized quality and reliability. The company's exterior designs are always well received. The engines perform well, like you'd expect German engines to perform. And its execution of interiors, from seats to steering wheels and dashboard materials, is the standard of the industry. But VW has long had problems with parts and systems such as window regulators, windshield wipers, electrical systems and the like. A decade ago, as VW was surging again, Germany actually believed its U.S. executives were up to no good because they were ordering three or four times as many window regulator assemblies for warranty repair than the warranty claims dictated. The problem was that the failure rate of the replacements was so great, they had to order many more than they needed in order to get enough good ones. The company is improved, but not all the way back yet from those days.
Volkswagen marketing chief Tim Ellis says that products like the Jetta and Passat are more tailored for U.S. tastes than any vehicles VW has ever built. But he also acknowledges that it can take consumers five years to notice when a company is doing things better. "Advertising is going to have to carry a lot of burden in engaging people and making them aware -- no question about it," says Ellis.Marching Orders
For VW executives, the pressure to perform comes in large part from German management's insistence on reminding the public at every turn that it's goal is to sell 800,000 VWs by 2018. If the company just made it to the original Beetle sales levels of 570,000, it would be seen as a huge success. Holding firm on such long range sales goals only sets the company up for likely failure.
"If we miss the goal, but still increase sales well passed the half-million mark, won't that be considered a success?" rhetorically asks Jill Bratina, vice president of North American communications at Volkswagen.
Not when every speech VW managers make repeats 800,000 goal for Volkswagen. Smart companies like Ford and Apple, for example, have taught rivals it is better to under-promise on sales and over-deliver. It is a difficult story Volkswagen is trying to write for itself as it plots its third surge in the U.S. in the last fifty years.
Culturally, German managers at VW need to not only pass Toyota in sales globally, also one of its stated goals, but to also surpass its own history in the U.S. Germany reluctantly approved the New Beetle program in the 1990s, believing it was wrong to go back to its past for a design. The car was a phenomenon in the U.S. for about four of the 11 years it was on sale in the U.S., but it was a flop in Europe. Managers in Wolfsburg bristled when an original Beetle was deployed in ads in 2008 and 2009, and even more so when the ads won awards from research firm IAG Nielsen for effectiveness in how well U.S. consumers recalled the ads.Most companies salivate for the kind of brand awareness and affection the public has for Volkswagen. For VW, though, the past can be a mixed blessing as it plots a bigger future than it has ever known.