Texas Volkswagen Review

Houston, Texas, April 2007

If you thought the Detroit formerly-big-three carmakers had some problems, wait till you check out Volkswagen!

Volkswagen, like GM and Ford in the United States, is a standard bearer for the German nation, where one in seven jobs is automotive related.

VW as a whole is profitable, and isn't in danger of disappearing like Chrysler and possibly Ford. But the company's American subsidiary, which held a 7% market share in 1970, is struggling to restore profitability and position in the hyper-competitive US market.

I remember the Volks heritage, back when the only product was the 1960's Beetle.

We called it the "bug." There were lots at my high school, using the intellectual/counterculture image to push out the Corvairs and Falcons.

My brother had one, and my best friend. I couldn't wait to get a VW microbus and travel the west.

I drove thousands of miles in my '67 microbus. That VW van, (no it wasn't yellow with paisleys), was the single worst vehicle I have ever owned. It was; underpowered, unstable, had no heat, and lacked a modern alternator driven electrical system.

The dealership experience was beyond terrible. Game over for this ex-customer.

Ralph Nader lampooned the unstable rear engine Chevy Corvair in "Unsafe At Any Speed", his 1965 attack on the auto industry. By implication, the Beetle, which was the design inspiration for GM's supposed import fighter, was also unstable.

Nader didn't know the half of it. The above mentioned best friend had a new 1967 Beetle. He let his very immature girlfriend drive. A possum crossed the road ahead. She slammed on the brakes, jerked the wheel hard, flipped the Beetle, and skidded upside down, crushing the hapless possum with the now flattened roof.

How management in Germany could have imagined a jump to lightspeed, taking the brand totally upscale to market $100,000 cars from that historical base, is unfathomable.

Luxury products Phaeton and Touareg, and ambitious upscale acquisitions like Lamborghini, Bugatti, and Bentley, distracted the company from its roots and core business (Jetta and Passat).

Volkswagen, like the Detroit three, cannot build small cars at a profit. Like Henry Ford II, management sought a premium price for relatively mundane products, taking a path from which I expect neither Ford or VW will recover.

2006 US sales rebounded to 235k units, after a sales slide in '03 through '05. March 2007 sales were 17,355 units. This represents a decrease of 16.3% from March 2006 sales of 20,730 vehicles. For the first quarter of 2007, sales were off about 6% from the same period in 2006.

Volkswagen Corporate Culture

The political culture in Wolfsburg is likely to confuse Texans considering a European car.

New CEO Martin Winterkorn sits atop a complex corporate environment where decision making and especially implementation are notoriously difficult.

For starters, German law dictates companies with more than 2000 workers must allow half the seats on the board to represent workers.

Clashing interests of major shareholders fill out the management nightmare. Struggle between the two biggest shareholders, Porsche (31%) and the German State of Lower Saxony (19%), makes life in Wolfsburg fun.

Add a bribery scandal and the picture is almost complete. The company manages a stable of brands that range from premium Bentley, Audi, and Lamborghini to proletarian SEAT, Skoda and VW.

So management is fragmented, to be polite, but what about the folks who build Volkswagens?

Union Blues at Volkswagen

Volkswagens unionized manufacturing plants in Germany are the recovery scenario's weakest link. Germany is the world's most expensive place to build automobiles. More than half the company's workforce are IG Metall unionists. They are paid even more than assemblers building BMW and Mercedes-Benz.

When I first read about their 26-hour workweek, I thought it was a typo. In my fifteen years as an American trucker, I routinely worked longer shifts than that.

With low productivity, the high labor content in these cars is unacceptable in a time when Asian peasants are surging into cities, eager to compete for a job paying $2 a day. Koreans have proven they can build competitive cars, China is next. Cutting costs, Volkswagen has slashed over 20,000 jobs, and asked its workers to work longer hours.

VW isn't selling enough product to justify the large expensive workforce, but layoffs are forbidden under the current union contract until 2011. So the company has offered severance packages up to $300K to 85,000 workers.

Who pays for this? Volkswagen buyers, of course.

A Hard Rains Gonna Fall

The next three years are likely to be tough on the auto industry world wide.

For European brands, especially the price-compromised VW, the effect of a falling US dollar against euro currency the will be serious.

An industry shakeout could see more assets join Chrysler on the chopping block. The recent increase in Porsche's stake is intended to fend off takeover suitors for VW.

VW Quality

First the good news. Volkswagens are recognized for having good interiors.

No Volkswagen is recommended at Consumer Reports (CR).

In the J.D. Power and Associates 2006 Customer Retention Study, VWs ranked 27th out of 37 makes. Only 35.5% of those surveyed returned to purchase another vehicle.

The product is perennially near the bottom of J.D. Power's rankings for reliability and service.

A classic recall fumble occurred in 2003, when 500,000 ignition coils began to fail, stranding owners everywhere.

Since there weren't enough coils to go around, the company only replaced the ones that had already failed, by definition these customers had already been towed in.

Customers who just had an intermittent miss faced stonewalling from swamped dealers.

While other manufacturers have stonewalled on product glitches, this was most of the installed customer base.

Nobody was happy, and in the car business, unhappy customers exit stage left.

In 2004 over 400,000 owners of VW and Audi products were warned of oil sludge risks to their engines. See link at bottom for the oil sludge story.

The problems continue in 2007, as Volkswagen recalled nearly 800,000 cars for defective brake lights.

Product Pipeline: Back to the Future

Volkswagen currently sells the Rabbit, New Beetle, New Beetle convertible, GTI, Jetta, GLI, Passat, Passat wagon, Eos, Touareg and (barely) Phaeton.

The 2007 Eos, a hardtop convertible, produced in a new facility in Portugal, has attracted some customers.

The rumor is that Volkswagen’s new boss Martin Winterkorn is sending some of the key new vehicles, Tiguan (compact SUV), Passat Coupe, Scirocco, and next-generation Golf/Rabbit, back for re-engineering.

VW was built on clever advertising, and has rolled out a slate of big budget ads to support the US comeback effort.

Volkswagen has canceled one TV advertisement called “Jumper,” after criticism from suicide prevention organizations.

The ad depicts a despondent man ready to jump from a four story rooftop. He is unhappy about the lack of affordable housing, global warming, and reality TV.

Exasperated cops with bullhorns have failed to talk him down.

Then a New Beetle driver stops in the street below, shouts up that VW is now offering three models under $17,000.

The man says: "I'm coming down."

Then Jetta, Rabbit, and Beetle slide into formation.

After the gaffe with the unwieldy $60k Touareg in the luxury SUV segment, is VW returning to its roots?