Global Economics

Volkswagen Rediscovers America


Volkswagen Chief Executive Officer Martin Winterkorn was losing patience with the staff at VW's new factory in Chattanooga. It was January, and Winterkorn had just presented a U.S. version of the Passat sedan at the Detroit Auto Show. As the plant prepared for its official opening on May 24, workers were struggling with the Passat's paint finishes, while the chrome accents in the air vents, door openings, and gear shifts didn't all shine with the same brilliance.

Winterkorn wanted to examine the chrome finishes, and the parts were hung on a wall for his inspection. Not right, said Winterkorn: He wanted them arrayed side by side in a Plexiglas case. "I have to look at the parts from above, just the way customers will in the car," explained the VW chief.

Winterkorn and Volkswagen have a lot riding on the $1 billion factory, which will assemble up to 150,000 Passats a year. The U.S. Passat sports more legroom, bigger control buttons, and more robust air conditioning than its European counterpart, and at around $20,000 it's about $8,000 cheaper, thanks to simplified designs, lower U.S. wages, and local content.

The plant opening marks the start of a renewed push by the German carmaker to shed its also-ran status in the U.S. and eventually overtake Toyota to become the world's biggest automaker. "You have to be successful in the U.S. if you want to be the No. 1 in the industry," says Winterkorn from VW headquarters in Wolfsburg, Germany. "Trends are set in America, not just for consumer behavior but also for communication technology, computers, and software." A U.S. factory can capitalize on those trends faster. Making VW cars in the U.S. also shows commitment to the market. Toyota Motor (TM) has 13 factories in the U.S. Even Mercedes-Benz has one.

Volkswagen dominates Europe, and it moved early into China and Latin America. It controls 11 percent of all car sales globally with brands including Audi, Skoda, Bentley, and Lamborghini. Porsche will be added to that list after VW completes its acquisition of the luxury sports car maker. Yet VW's U.S. share is a meager 3 percent, which presents a different sort of challenge to the Germans. Trying to beat out the competition "in a highly embattled market like the U.S. is somewhat unusual for VW," says Stefan Bratzel, director of the Center of Automotive Management at the University of Applied Sciences in Bergisch-Gladbach, Germany.

VW closed its only U.S. assembly plant, in Westmoreland, Pa., in 1988, after the cost of importing parts from Europe made it uncompetitive. (To avoid exchange rate headaches, the Chattanooga plant will be mostly supplied by local companies and German transplants.) Since then, VW has held on in the U.S. by appealing to drivers enamored of German technology and design yet unable to afford a BMW or a Mercedes. Winterkorn, who has led VW since 2007, aims to increase U.S. sales to 1 million vehicles a year by 2018, up from 360,000 now. The company's 2011 Super Bowl commercial for the U.S.-made Passat, featuring a child dressed as Star Wars character Darth Vader, has garnered more than 38 million hits on YouTube (GOOG). It marked the start of a big marketing push for the Passat.

VW's strategy relies partly on cutting entry-level prices for the Jetta compact sedan and the Passat to better compete with Japanese and Korean cars. Such bargain pricing can backfire, says Jeremy Anwyl, CEO of Edmunds.com, a website that tracks auto sales and marketing. "The formula that worked for Hyundai seems a little bit less characteristic for Volkswagen," he says. The carmaker won't become a heavy discounter and will maintain its premium image, says Jonathan Browning, VW's U.S. chief.

The resurgence of Detroit makes Winterkorn's task tougher. General Motors (GM), Ford Motor (F), and Fiat-backed Chrysler are stepping up to Asian competition with models such as the Chevrolet Cruze, the Ford Fiesta, and the Chrysler 200, all reinventions of the classic car, as opposed to gas-guzzling trucks and SUVs.

VW offers fewer models in the U.S. than Toyota, and it ranked 31st out of 33 brands in the 2010 initial quality study by J.D. Power and Associates (MHP). Terry Jinn, 40, of Brooklyn, N.Y., chose a Kia Optima over the new Jetta after test-driving both. Although he liked the Jetta's looks, its performance left him cold. The Kia "seemed like a luxury car for the price, while the Jetta seemed like a cheap rental," says Jinn, who works in information technology.

Winterkorn is responding to demands from U.S. dealers for more torque to appeal to Americans' fondness for racing away from traffic lights. He visits Tampa six to seven times a year to test-drive VW and rival models in Florida's heat and humidity—conditions that don't exist in Germany.

VW has also taken pains with its U.S. factory workers. New hires get up to three months of training, including a stint at a university-like campus. That compares with two weeks of training in Germany, where recruits are often well-grounded in the industry. U.S. suppliers are being put through their paces, too. "I've done Ford, Chrysler, GM, and the quality expectation is something we've never seen before," says Jeff Fuller of Chattanooga Seating Systems. "Products are our business card for customers," says Winterkorn. "They've got to be perfect."

The bottom line: Volkswagen has spent $1 billion on a Tennessee factory to boost its market share in the U.S. and eventually win the top spot in global sales.

Cremer is a reporter for Bloomberg News.
Higgins is a reporter for Bloomberg News in Detroit.

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