Volkswagen's Troubled Touareg

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The Touareg is, surprisingly, a true off-roader, with an impressive set of four-by-four virtues. VW adopted the Land Rover formula, matching luxury with true-blue off-road capabilities including 4XMotion permanent four-wheel drive, low-range gearing, and an optional, adjustable air suspension—all hallmarks of the most sophisticated trail-bound vehicles.

These capabilities have earned the Touareg gratifying praise. It was Car and Driver's Best Luxury SUV in 2003; Motor Trend's SUV of the year in 2004; and even earned Four Wheeler magazine's coveted four-wheeler of the year award in 2005. Indeed, since 2003, the Touareg has wracked up a series of impressive wins in the treacherous Dakar Rally, coming in first and second several times in its class.

But all that rock-climbing, race-winning technology adds heft and has a significant impact on fuel consumption. Even for the V6, VW's EPA estimates range from 16 to 20 miles per gallon in theory and, in practice, averaged out to about 15.8 miles per gallon in my tests. Figures for the V8 dive from there; the diesel model barely scratches 22 miles per gallon at the top end.

In government crash tests, however, the Touareg earns stellar marks. In tests conducted by the National Highway Traffic Safety Administration the vehicle earned top ratings of five stars in all four front and side impact tests. Six airbags are standard, including side curtain protection for rear passengers.

Buy It or Bag It?

To summarize, the Touareg is powerful, luxurious, and capable both on and off-road. But is it worth buying? Probably not. In my opinion, competition is simply too tough these days to justify spending this much on a Volkswagen.

Though less capable for off-road (despite the fact that the Swedes know a thing or two about ice), I think Ford Motor's (F) Volvo XC90 provides a much better value for the money, without the all-out snobbery of some other true-luxury vehicles. That model starts at just $36,135 with a less powerful V6 and offers an optional third row of seating, unlike the VW. DaimlerChrysler's (DCX) Mercedes-Benz M-Class and the Nissan (NSANY) Infiniti's FX35 also present interesting alternatives.

But the Touareg's real challenge comes, as do all the best contests, from right within its own family. The Audi Q7, which was developed as an offshoot of the original joint venture between VW and Porsche (that also coproduced the Touareg and Cayenne) provides a much better value with more refined levels of luxury.

A more powerful V6 Q7 starts at just $1,000 more than the Touareg. That model is, in my opinion, more attractive on the outside and better equipped inside. It's poised to cannibalize sales of VW's SUV. In fact the Q7, which was new for 2007, last year already sold nearly as many units as the Touareg.

Though capable and luxurious, the Touareg is the right SUV in the wrong place, at the wrong time, and, sadly, from the wrong brand.

Click here to see more of the 2007 VW Touareg.

Matt Vella is a reporter for BusinessWeek.com in New York.