When you're done, check out Volkswagen: What's Going On With Chattanooga's Newest Resident? - Part 2

Volkswagen Drive sign

The Holy Roman Empire of car companies, Volkswagen AG, is a resident of the U.S. again after more than two decades away subduing other lands. For at least ten of those years, the question has been especially pointed: "When is VW going to build a plant in the U.S... again?" While other makers above and below the VW meridian were moving to America and benefiting from immersion in the American market, VW watchers and enthusiasts were left wondering why a company that kept talking like it really wanted to be here kept acting like, well, it wasn't really sure how much it wanted to be here.

No more. Chattanooga is the X that marks the spot, and the 2012 Passat is the New Midsize Sedan. Now more than ever VW has what it takes to win the hearts and minds of American customers, and a new generation will get to know what a domestically-built Volkswagen means. Having addressed the issue of "When," however, it turns out there are so many other questions to be answered.


THE NUMBERS

"Volkswagen" is a layered term; there's Volkswagen the Group and Volkswagen the brand, both headquartered in Germany. Then there's VW of America, the U.S. division of the brand, headquartered in Herndon, Virginia.

VW Group operates 62 factories, employs 400,000 and sells cars in 153 markets.
Unsurprisingly, if we want to take an overview of VW Group numbers, there are a lot of them. The conglomerate oversees nine or ten brands, depending on who you speak to and at what time of day: Audi, Bentley, Bugatti, Commercial Vehicles, Lamborghini, Scania, Seat, Skoda and Volkswagen. The tenth brand is Porsche, the Stuttgart marquee not included on official communiqués such as the annual report, but reps from VW Germany usually include it in conversation even though the deal hasn't closed yet due to a certainty that "it will happen. We will own Porsche."

Sticking with those nine brands, globally the VW Group operates 62 factories (not including Chattanooga) – seven of those having been inaugurated in the last five years – and has more than 400,000 employees (including Chinese joint ventures) working to sell cars in 153 markets. It moved 7.203 million cars last year (up by almost a million cars versus 2009), and is the market leader in Europe (it controls 35.1 percent of the German market), China, South America (#1 in Brazil and Mexico) and South Africa. Its 2010 sales were 13.7-percent better than the year previous, good enough to for it to swipe 11.4 percent of the global passenger car market. In 2010 its operating profit was €7.1 billion.

VW Group sales in the U.S. last year were 360,186. It wants 800,000 by 2018.
In the U.S., last year's Group sales were 360,186, with 256,830 of those sales contributed by VW (and 101,629 provided by Audi). The Group employs 4,000 people in America, has 31 corporate, subsidiary and dealer support locations, and "30,000 dealer team members" at 800 dealerships in 50 states.

The story that's getting everyone's attention, though, is not current sales, but the group's sales targets: by 2018 it wants 800,000 sales in the U.S. How will that happen? It's called "Strategy 2018," and according to the Volkswagen Sustainability Report 2010, "Our growth strategy is based on attractive vehicles that appeal to customers in all parts of the world and meet the individual regional requirements and cost targets."

What's that mean? Not much – is there a car company that doesn't want those things? But dig a little deeper, and it's quickly clear that while VW might have used high-concept banalities as gift wrap, the substance within belies some very serious efforts to reach some very serious goals.


STRATEGY 2018 and VOLUME VEE DUBS

These are the two key words for everything that follows: Strategy 2018.

We only know that because Carsten Krebs, director of corporate communications for VWoA, told us, "To understand anything happening in the Group at the moment, you have to look at the Strategy 2018."

STRATEGY 2018:
1. Be #1 in quality and customer satisfaction.
2. Be the best employer.
3. Sell 10M+ cars/year.
4. Generate pretax return on sale of 8+%.
Few beyond those whose job it is to chart the minutiae of corporate machinations remember that phrase, even though it's been around since 2007. What most people remember, and how VW's aims are most often related, is the sales goal: Volkswagen wants to be number one in sales by 2018, selling more than ten million cars a year.

"It's much easier to understand, but we don't like it to be only about the sales figure," counters Krebs, "because our strategy is much broader."

In fact, there are four pillars to Strategy 2018 and the sales target is the third pillar – and in some cases it comes in dead last. Whenever you speak to someone or read about Strategy 2018, the sales goal is never mentioned first or second. As taken from the company's Experience D[r]iversity magazine based on its annual report, Strategy 2018 is laid out as "(1) To be the number one in terms of quality and customer satisfaction, (2) to be the best employer, (3) to sell over ten million cars a year (4) and to generate a pretax return on sale of over eight percent for the Group. It's not just about size, but about becoming the most forward looking automotive group in the world."

During a roundtable with VW execs, when Group Board Member for Sales Christian Klingler was asked "Can you get to 800,000 [U.S. sales] with the current vehicle lineup?", he answered, "What we're looking for is to become one of the best manufacturers here in the United States, as a consequence we're looking on the quality side, on the customer satisfaction side, getting the best people and so forth. What needs to come will come."

To hear them tell it, this isn't just moving metal, this is the U.S. Army meets Field of Dreams: by working to be the best company it can be, if they build the cars, we, the customers, will come.

Klingler capped the holistic spin by saying, "At the end of the day, we're not selling cars, customers are buying them."

All righty then.

Because of price, the former Passat reached only 8% of the segment. The new Passat could reach 80%.
But what kinds of Volkswagens are customers buying? Some would say they're the kinds of Volkswagens that brand fans aren't used to, such as the 2011 Jetta, excoriated for being "dumbed down" if it didn't wear a GLI badge. And this could help explain why – ease of understanding aside – the number-one-with-a-bullet sales aspiration gets such play.

If VW wants to sell that many cars in the U.S., it could never do it with its familiar approach to market segments. Said Tony Cervone, EVP of group communications at VWoA, "The VW lineup needs more breadth, more product in a wider range, but it needs to still maintain what's a VW." Previously, though, "we were premium to the competition, we were excluding much of the customer base."

"We're not decontenting our cars."
Jonathan Browning, CEO of VWoA, speaking of the 2012 Passat and 2011 Jetta, said, "At the moment, because of the price positioning of our former [Passat] model, we could only reach eight percent of the segment. With the new product... we have the possibility to reach 80 percent of the market. The price point was significant new news – we were very clear we are extending a lower price to bring more people in."

Klingler made the point that "We're not decontenting our cars," but that's a bit disingenuous; the premium cars we're used to will now also be engineered to a non-premium – and higher selling – price point, where soft touch turns into rock hard and discs turn into drums. But the sedan still has a dashboard and four brakes, so Klingler is technically correct.

Martin Winterkorn speaks about 2012 VW Passat

Yet, as an example of how contrary this kind of thinking is to those who have understood the VW brand as all-premium all the time, a journo during the roundtable asked if quality of Chattanooga vehicles would be up to snuff – the unspoken question being whether VW would look closely after the quality of these less expensive vehicles. Klingler's answer was "It's a Volkswagen," and anything made in Tennessee has to meet Group standards.

The same journo followed that up with a question about "low-priced cars," at which point a slightly testy Klingler interrupted to say, "There is no low-priced car – we're just competitive in the segment. And why should it be different?"

We've doubled volume [of the Jetta], transaction prices are better than the previous model, we had 90% better sales last month, and owner loyalty is up.
Back to those drums, though, this is when the VW faithful start beating them, but perhaps to no avail: sales are the currency of this conversation, and based on that all VW has to do is point to the figures.

Said Browing of the new Jetta, "The median price has gone up – we're selling more units above $19,000 than ever before, but it hasn't shifted the center of gravity [in the segment]. Look at the median price of the Jetta versus the Honda and Toyota – there's a $3,000 premium at the Jetta's median price."

Added Cervone, "We've doubled volume, transaction prices are better than the previous model, we had 90% better sales last month, and owner loyalty is up." March and April of this year were record-setting months for Jetta sales.

Jetta and Passat spearhead the sales push, but that doesn't mean the rest of the line-up will hop in the segment-penetration pool. When asked if VW planned to engineer offerings for the sweets spots of other U.S. segments, Browning answered, "What we're looking to do for our key car lines is make sure we're competing strongly in the core of their segments. With the Jetta and Passat being our two volume leaders, that gives us the pillars on which to build our business going forward. I don't think you necessarily roll that across all the vehicle lines – we're looking to selectively penetrate more deeply into certain segments in the U.S. market... As we grow the business it's very important that we go deeper, not just broader, into certain segments."

The intended takeway: there's still a VW for brand mavens, and at least when it comes to the Jetta and Passat, now there's one for almost everyone else, too.


COMING BACK TO THE U.S.

When we spoke to Krebs about the genesis of Strategy 2018, it was uncanny to hear him use the same kinds of terms that we heard from Jaguar's Global Brand Director Adrian Hallmark only a couple of months ago. Hallmark spoke of Jaguar having been a British brand that exported cars, but was now moving to be an international carmaker building vehicles tailored to specific markets.

Krebs said, "We used to create one car for the world. Now we need not one car for the world, we need plenty of cars for each market." He dates the change in the company attitude to about ten years ago, when VW began plotting factories around the world (it has built seven in the past five years). "From a more export-driven company we moved to a company that produces cars in their markets, and we make cars that have the flavor of the people in the market."

Volkswagen Chattanooga factory overhead

That seemed to be a guiding principle for the rest of the world and not for the U.S.; while VW was fortifying other outposts, its U.S. dominion suffered in all kinds of ways. Said Klingler, "The problem for a time was our focus on other regions – we haven't had the same focus on the U.S. over the past 15 years. We want to become very much more relevant to U.S. customers."

During those 15 years, the U.S. seemed to get cars that were what the Germans thought we should have, as opposed to what we wanted.

"The customer is right to say 'I can't buy your car because I can't put my cup in it.'"
Rainer Michel is the VP of product marketing and strategy-based in the States, he works with Germany to determine feature specs. "We cannot just ignore North America, and this is about respect for the North American market. Even with a thing like cupholders, the customer is right to say 'I can't buy your car because I can't put my cup in.'"

With the U.S. eclipsed as the world's number one market and still wobbling back up to its economic knees, the timing of VW's return could be seen as regrettable, but the market remains crucial.

Klingler's take was utterly professional: "America is for us an absolute target market. The U.S. market is competitive, very crowded, and we need to be present in the biggest markets."

Rainer Michel started off with the professional aspects, saying, "If we wanted to continue to grow this, we had to take care of the U.S. market – ten or eleven million cars is nothing anyone can ignore."

Worker assembling 2012 Volkswagen Passat

Eventually that turned personal: "When I'm in Germany I see importers and I think 'What are you doing just selling and making money here? If you want to make a difference you have to be a company in the area." He added, "The leadership, they take this personally – if we want to be a big player, we have to prove we can succeed around the world. The proof of what Dr. Winterkorn wants to do is in North America."

There is no need to fool ourselves, though – it is the profit motive and a euro worth almost $1.50 at the time of writing that underpins the enterprise. The company hasn't posted a profit in this market since 2002, making this an enormous investment in hope of gravy that it admits is still a couple of years away. "We believe in about 2013," said Klingler, "it will be possible to arrive at a profitable business case in the United States."

"You don't build a plant then walk away in two years," said Cervone. "The facility helps because 85 percent of the content is locally sourced. That gives us huge exchange rate protection, you can put content in the car that it deserves and you can protect pricing."

2012 Volkswagen Passat

That mention of content is expected to make the plant pay off for U.S. buyers as well. Said Michel, "Production can be localized and at the right volume. From this we can create our own car line features that we can add to other lines, and then have cars for volume, SUVs, emotional cars and halo cars."

The cotter pin supporting the weight of the endeavor: the Passat. Said Klingler, "With the new engine plant in [Silao, Guanajuato] Mexico and with Puebla we have a big North American exposure. All is depending on the success of the Passat." And he appears to be optimistic, "We want to continue the success story we interrupted for a time."