VW in US

Just prior to the opening of the annual Detroit Auto Show on Monday, German carmaker Volkswagen announced it plans for ramping up its presence in the United States, aiming to win over American consumers and sell twice the number of cars it does now in three to four years' time.

"We will sell 400,000 to 450,000 vehicles in 2012/13," said Stefan Jacoby, head of Volkswagen of America, on Sunday, adding that the company's US business could become profitable by 2013.

Volkswagen, Europe's largest carmaker, has had a hard time finding its footing in the all-important US market. Its presence in China and Brazil is strong and sales in Germany have been helped by a government program last year that encouraged drivers to trade in old gas guzzlers for more for efficient cars. In Europe, VW has 21 percent of the market.

But VW market share in the US, including its Audi brand, is only three percent.

Part of the reason for that, according to analysts, has to do with the generally dismal state of the car industry in the wake of global recession. Although, VW's small market share actually gave it a bit of a foot up since it was not as hard hit by the collapse of American auto sales as some of its rivals were.

American preferences

VW's lackluster performance can also be traced back to its product line, which was not ideally suited to Americans' taste in cars.

"Volkswagen was neither a premium brand like Mercedes, nor a mass-market brand," said Marc Tonn, a senior analyst at M.M. Warburg. "The company was kind of stuck in the middle."

The Wolfsburg-based concern focused on smaller or mid-size cars with highly advanced technological features when Americans were more interested in buying larger vehicles, such as SUVs or pick-up trucks.

"I think the focus will now be on maintaining German quality, but going a little in the direction of US size," Tonn added.

Nevertheless, VW will not likely be turning out tank-like vehicles any time soon. Jacoby said he expects the market for compact and mid-sized sedans to increase faster than other segments, especially if oil prices convince more Americans to downsize from their Chevy Tahoes and Ford Explorers.

"With higher oil prices, the US consumer is perhaps going to look a little more closely at smaller cars," said Christian Breitsprecher, an auto analyst at Sol Oppenheim.

From the niche to the masses

Volkswagen, which ranks behind brands like Hyundai, Honda, Mercedes and BMW in the US, wants to emerge from its position as a niche carmaker to a mass-market product, one that can compete with extremely popular makes, such as Toyota's Camry.

While the Beetle quickly became a cult classic in the US and enjoyed great popularity in the 1960s and early 1970s, VW was never able to imitate its success with subsequent makes, such as its Rabbit. The company closed its last US plant in 1988 in Pennsylvania amid sluggish sales.

"The Rabbit was a flop and VW never really was able to get back in the mass market after that," said Breitsprecher, who added that Volkswagen cars remained niche products. "I mean, who bought a Jetta? Mostly college kids who couldn't afford BMWs."

Becoming a mass-market car in the US is essential to VW's ambitious expansion plans for the coming years, which include surpassing main rival Toyota, the world's largest automaker by sales volume.

New investments

Volkswagen is building a new plant in Chattanooga, Tennessee, investing up to $1 billion (694 million euros) in a facility that, according to US head Jacoby, "will enable the turnaround of VW's US operations" and should create around 2,000 jobs. Increasing production and purchasing in the dollar zone is crucial to VW's return to profitability as it would lower the company's exposure to a dollar that is weak compared to the euro.

The carmaker is also spending $125 million on two new dealerships in New York City, which will begin sales in 2010. They are part of the company's strategy to increase its presence and visibility in the US.

Jacoby said he thinks the worst of the automobile sector's woes to be behind them, with American car sales likely to be 11 million to 11.5 million in 2010. Because of a stabilization of the labor and real-estate markets, "we are a little bit more optimistic now than we were a few months ago," he said on Sunday.

He added that he expects the US car sales to stabilize at around 15 million over the medium term, and VW's longer-term US plans include selling 800,000 vehicles a year by 2018.

"The US is a critical component of VW's long-term strategy," said analyst Tonn. "Despite all the euphoria about emerging markets these days, if you want to be a global player you have to do well in America."

Author: Kyle James
Editor: Kate Bowen