VW charts its long journey back

U.S. strategy sees a 10-year road to relevance

FRANKFURT -- Herbert Diess' first comprehensive global strategy for the Volkswagen brand pegs the U.S. as a critical market and production base to drive the automaker's profitability in the next decade but recognizes that a full recovery there will be a long-term project at best.

Diess, the global CEO for the VW brand who arrived at Volkswagen from BMW last year, outlined his vision last week for reviving its U.S. operations through a combination of more America-friendly products, better utilization of its plant in Chattanooga and a commitment to electric vehicles as a successor to the diesels that had been critical to its previous growth ambitions.

And Diess says those diesel vehicles -- which accounted for about 20 percent of Volkswagen's U.S. sales before the emissions scandal -- won't be part of the VW brand's U.S. future. (See related story, Page 10.)

"We want to write a comeback story," Diess told reporters in Wolfsburg, Germany, insisting that the brand had to move from being a niche carmaker in the world's second largest auto market to a volume player if it wants to strengthen its profitability.

"The U.S. is not just a very large market but a highly profitable one as well," he said. "Nowhere is more money earned than in the U.S., and that will most likely still remain the case in 2025."

Diess' remarks represent an effort to reassure VW's 652 U.S. dealers that Volkswagen is committed to the market for the long haul, with a plan to seek sustainable returns from the U.S. long after the crisis subsides.

The bad news for them is that none of this entails any short-term fixes. Diess said it would take perseverance to prevail in the U.S. market, anticipating that even with fresh products on the way to U.S. dealerships this year and next, his plan would need 10 years to achieve its goal of making VW a relevant choice to a broad number of American car buyers.

Goals scaled back

Volkswagen was supposed to have been much farther along by now. Under growth plans hatched back in 2007 by its boss at the time, Martin Winterkorn, the marque was to deliver 800,000 cars annually to U.S. customers by 2018, in part by pushing its lineup of "clean diesels."

That goal had begun to fade even before the September 2015 diesel emissions scandal plunged the company into its biggest ever crisis, but not before many U.S. dealers made heavy investments in VW franchises and buildings.

Fred Emich, general manager of Emich Volkswagen in Denver, says the fact that Diess and VW are increasingly talking about the importance of North America to the company's overall success breeds confidence in the brand's future after a tumultuous year.

"Going through all of this, there was some uncertainly about whether VW would say "Screw it, we're not going to be a part of the U.S. market,'" Emich said. "Any investment in North America or talk of a strategy is huge. We've always been second or third or fourth fiddle to all these other markets."

VW Group of America CEO Hinrich Woebcken said VW's near-term product cadence will underpin the turnaround effort before additional vehicles arrive in the future. The Atlas midsize crossover and a redesigned Tiguan compact crossover arrive by mid-2017, ahead of a freshened Golf lineup next fall and a revamped Jetta compact sedan in 2018.

Woebcken, speaking to reporters at the Los Angeles Auto Show days before Diess' presentation, declined to discuss volume targets in detail but said he "absolutely" agreed with U.S. dealers who have said the vehicles arriving next year alone could support an eventual rebound to more than 400,000 U.S. sales a year.

In addition, Woebcken said VW would intensify its work to improve total cost of ownership, reliability and other purchase considerations to sustain interest in the brand.

"Remaining a niche player is not an option," Woebcken said.

According to Diess' strategy, dubbed Transform 2025+, the U.S. plan would initially focus on large sedans and utility vehicles such as the upcoming Atlas, which will be built alongside the Passat sedan at VW's Chattanooga plant. By the end of 2020, Diess hopes to have that plant fully utilized, putting the brand in the position to return to the black in the U.S. for good starting the following year.

Under the motto "Electrify America," VW then would launch the second phase of its plan with the market debut of its purpose-built electric cars at the start of the next decade. Here Diess believes VW's dominance in China, which is expected to be the biggest market for electric vehicles worldwide, will allow it to realize the economies of scale needed to make EVs profitable from the start.

Diess said the brand would invest considerably in expanding the charging network in the U.S., eventually producing electric cars based on the new MEB architecture in North America as well starting in 2021. From 2025, VW aims to sell 1 million battery electric vehicles across the world annually.

Attitude change

VW officials acknowledge that a turnaround in U.S. fortunes will require a change of attitudes as well. Previous VW brand executives complained of Wolfsburg's inability to understand what kind of vehicles U.S. customers want. VW's German engineers, they said, felt they could "proselytize" Americans by offering European models and convincing them of their merits.

That legacy lingers over a VW product mix that is skewed toward cars and utility vehicles that often don't fit Americans' size, content and price expectations.

Frank Schwope, auto equity analyst at German bank NordLB, argued that having sunk billions of dollars into a "bottomless pit" over the past two decades, VW managers should stop stubbornly viewing the U.S. as a challenge to be overcome and instead should fold up the tent and focus their efforts on more profitable growth markets in Asia. While the costs of compensating dealers could be hefty, the Chattanooga plant could be repurposed to build Audi or Porsche cars, he suggested.

"In view of the new U.S. administration and the potential for increasing trade barriers," Schwope said, "pulling the Volkswagen brand out of the U.S.A. could be an option worth considering."