VW Out To Pass Toyota And GM In Global Sales

On November 23, TV talk-show diva Oprah Winfrey gave keys away to each of her 275 audience members, good for a free 2012 Volkswagen New Beetle. Why would the German automaker give away a couple of hundred cars almost a year before they will be ready at a cost of an estimated six to seven million dollars? The company is just that anxious to pass Toyota as the top automaker in the world, and it is booking sales ahead.

Volkswagen, which has enjoyed iconic status in American culture since the 1960s, has been up and down in the U.S., as well as other major markets. But it is doing everything it possibly can to remain up and eliminate the downs. Besides making a splash on Oprah, it plans to spend $71 billion over the next five years to fill its showrooms across the globe with new vehicles it is convinced will be good enough to surpass Toyota in total annual sales volume.

The sales targets are ambitious, if not audacious. Volkswagen Group AG, based in Wolfsburg, Germany, which includes Audi, Spanish automaker Seat, Eastern European auto maker Skoda, Bentley, Lamborghini, Bugatti and Porsche, in addition to Volkswagen brand and commercial vehicles, aims to produce 10 million vehicles a year by 2018. Part of that goal is to sell one million vehicles in North America by the same year. Last year, VW produced 6.29 million, third behind Toyota and General Motors. But in the U.S., sales were just 213,000. It is on track to sell about 250,000 cars here this year.

VW's ambitious sales goals were already going to be a challenge given the difficulty of managing the eight brands it had in its stable. But last year, the company added Porsche AG, making it nine. That drama began with Porsche angling to buy VW. But when the scheme to finance the deal fell apart with the global downturn in the markets in 2008, VW turned the tables and acquired Porsche. That German industrial opera played out for almost two years, and the result is that management will again be challenged to integrate another new company into its operations.

It's a big strategy for Volkswagen, but is it a smart one? 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.

VW aims to pass Toyota Motor Corp., as the world's top-selling automaker by 2018. Toyota sold 7.81 million vehicles globally in 2009, down 13 percent from 2008.

"This new delivery record is an important milestone for the implementation of our Strategy 2018," says VW Group CEO Martin Winterkorn, referring to the group's plan to sell more than 10 million cars by that year.

Standing between VW and Toyota, though, is a resurgent General Motors, which sold 7.48 million vehicles globally in 2009, down 11 percent from 2009. Ford ranked a distant fourth last year, with 4.75 million vehicles sold around the world, an 11 percent drop from 2008.

In the U.S., Volkswagen is trying to put years of financial losses behind it by readying an assembly plant in Tennessee that will build at least two kinds of vehicles. That will insulate the company somewhat from the losses it incurs because of currency valuations.

But there is more. Volkswagen is on a sweeping campaign to make its cars better priced, better sized and designed to appeal more to the masses than just the niche audience that likes its German engines, or perhaps the diesel-powered cars VW has long sold.

The new redesigned 2011 Volkswagen Jetta, for example, historically the company's top-selling car, has been made larger, with a bigger backseat and a lower starting price then its predecessor. The mid-sized sedan VW will build in Tennessee starting in 2011, probably to be called the Passat, is being designed to be priced competitively with the Honda Accord and Toyota Camry. The current Passat costs thousands more.

"Volkswagen is facing a classic dilemma," says independent marketing consultant Dennis Keene. "Its faithful audience that likes what it is isn't large enough to be profitable, but it will risk losing those customers if it becomes too bland and conformist in order to chase the masses."

The New Beetle that was given away to Oprah Winfrey's audience might not provide the same boost that the original New Beetle did when it launched in 1999. In 1994, when the New Beetle was shown at the Detroit Auto Show as "Concept 1," Volkswagen of America was on the verge of pulling up stakes in the U.S. because of terrible sales and huge financial losses. But the publicity surrounding the idea of a "New Beetle," helped drive showroom traffic and sales of Golfs, Jettas and Passats. Sales went from fewer than 50,000 in 1993 to 355,479 in 2000.

But the second edition of New Beetle is bound to pack less punch. The car has been restyled to be less soft and bulbous, the chief criticism of the one VW stopped making in its Puebla, Mexico, plant in 2009. The more chiseled and slightly more muscular lines of the car may attract more male buyers to the car (the old one drew more than 70 percent women), but will it sell more than 50,000 a year?

Volkswagen is not just counting on a surge in the U.S. to achieve its global sales target. It also has a lot of ground to make up in Asia. In India, consumers now buy about 2 million cars a year; Southeast Asians about 1 million. VW is lucky to sell 20,000 cars a year in each region. To catch up with Honda and Toyota in these markets, VW has teamed up with Suzuki Motors, which has a stronger presence in these markets, as well as a better knack for making small cars profitably. VW bought a stake in Suzuki last year to access the company's small car technology. In China, VW will add or freshen 20 models by late 2011. The goal is to double VW's Chinese retail network to 1,600 dealers in five years and sell 2 million cars.

Why the urgency to sell big? In the auto industry, profits are realized when a company can spread the cost of technology across the greatest number of unit sales. This is why Toyota, the industry leader in this practice, was booking in excess of $10 billion of profit a year until recently.

VW's big eyes for sales and status is also cultural. The company was formed in the aftermath of World War Two. The original Beetle was designed by Ferdinand Porsche, at Adolph Hitler's behest, to be affordable to the average working German, and catch the country up with the U.S. The engineering of the Beetle served as the underpinnings of the German "Jeep" and many other military vehicles. After the war, the auto company formed to sell Beetles, Volkswagen AG, climbed gradually to be a force in the European and ultimately the global auto industry. The German State of Lower Saxony still owns a major stake in VW, a legacy to its post-war founding. VW's former CEO and current supervisory board chairman Ferdinand Piech, is the grandson of Ferdinand Porsche. A billionaire, Piech, 73, has long been super-competitive and would like to achieve world sales leadership in his lifetime.

Most analysts agree that Toyota's recent problems with falling profits and vehicle recalls began a few years ago when it decided to overtake GM in global sales. That could have been a lesson for Volkswagen to chase quality and profitability instead of sales. But the German automaker, as Oprah Winfrey viewers found out, is out to dominate the global auto industry even if it has to give the cars away.