As Toyota sputters, Volkswagen steers for top

Paul A. Eisenstein

It may be one of the world’s most unlikely theme parks, yet each year close to 2 million people pore through Autostadt, the German “auto city” that celebrates the achievement of Europe’s largest automaker, Volkswagen AG.

Until it opened nearly a decade ago, Wolfsburg, less than a two hours' drive  from Berlin, wasn’t much of a tourist destination, unless you liked gritty company towns. But these days, many folks are watching what Volkswagen is up to, especially the competition.

With nine brands, soon to become 10 with the planned 2011 takeover of Porsche, VW has set an aggressive goal of surpassing the unexpectedly troubled global leader, Toyota Motor Co. To get there, the “People’s Car” company will need to address the one big obstacle in its path: the U.S. market.

But with a new American factory set to open in 2011, and a planned successor to the Beetle that is being kept tightly under wraps and generating buzz, Volkwagen has a shot at that ambitious target.

It wasn’t always that way. Barely four years after the defeat of Nazi Germany, the first two Volkswagen Beetles reached the States. Within a decade, Volkswagen was the largest import brand in America. The little Beetle and the van that shared its platform became a symbol of the country’s counterculture in the 1960s, with sales surging to more than 400,000 units annually.

In the '70s, VW opened the first foreign-owned assembly line and began work on a second “transplant.” But the Beetle’s replacement — the small, fuel-efficient Rabbit — ran into a variety of problems. The automaker scuttled the second plant and then closed the first in Westmoreland, Pa. Despite its best efforts, sales steadily declined and by the early 1990s, VW gave serious thought to pulling out of the States entirely.

Fact file: Volkswagen brands The following automotive brands are wholly owned by Volkswagen AG: Volkswagen Skoda Audi Bentley Seat Lamborghini Bugatti Scania Volkswagen Commercial Vehicles Source: Company Web site

Then-CEO Ferdinand Piech, grandson of Volkswagen founder Ferdinand Porsche, decided to hang on, launching an array of new products backed by a series of quirky marketing campaigns. It seemed to work for a while. By the dawn of the new millennium, Volkswagen of America was setting new sales records.

But quality snags caught up to the company. Then exchange rates turned upside down, putting a severe burden on products like the Golf, the renamed and updated version of the Rabbit. European-made Volkswagens cost $3,000 to $4,000 more than American-made versions due to the lopsided exchange rate, said a frustrated Stefan Jacoby, chief executive of Volkswagen of America.

In years past, the German maker might have simply used that as an excuse to ignore the needs of the American market.

Not this time.

Despite the collapse of sales in the U.S., “The American market is crucial for us and Volkswagen is ready to make a difference in the market,” said Joachim Heizmann, the board member for Volkswagen overseeing production.

With Wolfsburg’s blessing, Jacoby has laid out an aggressive, some would say impossible, plan not only to stabilize U.S. sales but to more than double them, to 800,000, by 2018. To achieve that admittedly difficult target, he has convinced top management to sidestep the exchange rate issue by setting up a new American factory, this time in Chattanooga, Tenn., which will open in 2011.

The plant will produce, among other things, a new midsize sedan designed specifically for the American market. And VW is readying another model that it hopes will connect with U.S. consumers, an all-new version of the Beetle which will replace the current, slow-selling model.

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