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Volkswagen US sales: down and out or just a taking a break?

In an article published this week by Automotive News, Volkswagen’s sales slowdown in the United States this year is quite heavily overstated. And their graph showing 2013 sales plummeting even below the 2009 mark is vastly exaggerated, as VW sales are down slightly this year, -4% in a market that’s up 8%, after sales have doubled from 2009 through 2012. I can imagine, if Volkswagen wasn’t aiming for a bold 800.000 US sales by 2018, up from 230.500 in 2007 when the goal was set and still up from 438.000 in 2012, nobody would have taken a second look at sales flattening after three years of impressive growth. Still, the temporary flattening of sales shouldn’t come as a surprise when taking in consideration the reasons behind the sales surge.

Why Volkswagen sales have surged in the USA

Volkswagen have realized  that they would never make it to 800.000 sales trying to be a (semi-)premium brand, with prices of their core models 10-15% above comparable US and Japanese models, for vehicles that were developed for the European market instead of the US market. Also, currency fluctuations between Dollar and Euro have made it difficult to make a profit on European-built cars, unless you can charge a premium, like BMW, Mercedes-Benz and Porsche. To deal with these issues, they have expanded their manufacturing capacity in Mexico opened a new production facility in the United States to build cars that are better suited to the North American market.

For example, when the new generation Jetta was introduced in 2010, prices were lowered to directly compete with segment leaders Toyota Corolla and Honda Civic. As a result, sales surged from 108.427 in 2009 to 177.360 in 2011.

Volkswagen-Passat-USAThe same thing goes for the new generation Passat in 2011, which started production in Chattanooga, Tennessee with a different model from the European version, specifically tailored for the US market and with a price tag of $ 7.000 below the outgoing model. That has resulted in sales rising almost tenfold in two years time, from 12.497 in 2010 to 117.023 in 2012.

In 2013 however, no model changes have been planned, while carry-over vehicles like Golf and Tiguan won’t see prices cut until they are redesigned as well.

What more is to come from VW in the coming years?

Automotive News explains the declines are due to an aging product line-up and a product mix that is lacking in the industry’s fastest growing segments, like SUVs.

For the next couple of years, Volkswagen is tackling exactly these issues, which should help sales continue their rise towards its 2018 goal.

Top selling Jetta and Passat receiving updates in 2014 and 2015 respectively, with more efficient turbocharged, gasoline engines and a new generation fuel sipping TDI diesel engines. Despite both models late sales surge, there’s still room to grow, with Passat a distant tenth place in the competitive midsize sedan segment and Jetta still half of Civic and Corolla. Also, new generations of Golf and GTI will be introduced in 2014, and production will move from Europe to Mexico, alongside cousin Beetle.

Volkswagen-CrossBlue-SUVCompact SUV Tiguan has been unable to compete properly in the US market, because it is too European: it puts power and driving dynamics before family-hauling capabilities, which are more important to customers in the United States. Its next generation, due in 2015 or 2016 will be larger, with more cargo space and it will also be priced more competitive, following VWs new pricing strategy.

But the biggest contributor to VWs sales rise in the coming years should be a completely new SUV, specifically for the North American market: In 2015 or 2016 VW is planning to introduce a US- or Mexico built three-row, seven-passenger SUV named CrossBlue.

Automotive News may have been a bit premature in writing off VWs goal for 2018, which they already (and understandably) doubted when it was set in 2007. But Volkswagen has proven it is committed to the goal and to the US market, and it will continue to roll out its strategy, introducing vehicles that are better suited to North American consumers and pricing them more competitively.

What may still threaten Volkswagen’s goal for 2018

Two possible problems may still hurt VW in its quest for 800.000 sales in the United States. One is the challenge to keep impatient dealers happy and the other is raising the standard on quality.

Volkswagen-ad-clearance-saleFor years, Volkswagen dealers have had to be satisfied with slimmer profits than other brands, and by 2012 they had made up some ground on the competition, helped by factory bonuses which increase when sales targets are met or exceeded. But as sales started to decline in 2013 instead of rising another 10% as projected, dealers fell short of their targets and missed out on bonus payments. Some dealers resorted to selling cars at or even below cost in order to reach the bonus threshold, but this only caused profits for all dealers to shrivel like children’s brains in front of a TV. As most of them started to complain, Volkswagen management were quick to respond that the sales targets may have been a stretch, and adjusted the annual target for dealers. Also, doubling sales within three years have made it necessary for some dealers to invest in store upgrades or even moving into larger facilities. With sales slowing this year, they are having a hard time to account for the risen real estate costs or the increased inventories. Happy dealers mean happy (and many) customers, so VW must make sure dealers stay happy and keep their faith in the bold goals set by the brand.

volkswagen-golf-recallAnother issue that Volkswagen needs to deal with as quickly as possible, is reliability. For years, the brand has been unable to rise from the bottom part of quality surveys. In Europe and China, VW may be considered a reliable brand (although it’s falling behind there as well), but in the United States it still suffers from an image of shoddy reliability that started with the original Beetle, but quality of later models never justified the price premium VW charged. And fast growth may come at the price of reliability, as Toyota has experienced a few years ago when it was growing too fast for quality control to keep up. Volkswagen has already had to recall millions of vehicles in Europe and China for problems with the DSG automatic gearbox and the small turbocharged TSI gasoline engines. Quality is crucial for American car buyers, as Alfa Romeo, Citroën, Peugeot and Renault have experienced a few decades ago. VW is riding a fine line between success and failure with their reliability, and crossing the line could quickly throw it back even below the 2009 low of just 214.000 sales.

Calling Volkswagen US sales a roller coaster ride is right on the mark, and I expect it to pick up speed again from the second quarter of 2014, if VW is able to step up its reliability and manages to keep its impatient dealers to remain believers in the goal for 2018.