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Gm Vs. Vw: Gentlemen, Gun Your Engines


International Business: EUROPE

GM VS. VW: GENTLEMEN, GUN YOUR ENGINES

GM is taking a run at VW's new Golf with a retooled Astra

Now that Volkswagen and General Motors Corp. have ended their legal battle over former purchasing guru Jose Ignacio Lopez de ArriortPound a, the auto giants are gearing up for an old-fashioned street fight. Later this year, both carmakers will square off with spiffy, all-new versions of their top-selling models, the VW Golf and GM's Astra. Even though the cars' official debuts aren't until the Frankfurt Auto Show in September, both sides are jockeying for position, leaking information and photos to car-buff magazines.

The stakes are enormous. The small-car class is Europe's biggest, representing 4 million cars annually--or a third of the new car market. The two companies have raced to take market share from each other for years (chart), though VW has consistently come out on top. This time, GM has poured $1.7 billion into its new Astra, in a bid to recover from an 11% plunge in sales of the current model. For its part, VW has spent an estimated $1.8 billion on the remake of its six-year-old Golf.

The Golf's success is crucial to VW's overall financial health. Since the car accounts for 32% of VW's European sales, it will largely determine whether VW's fledgling turnaround zooms ahead or shifts into reverse. VW's 1996 net income of $406 million was double 1995's level but just a 0.7% return on sales of $60 billion. If the Golf sputters, it would also raise doubts about Chief Executive Ferdinand Piech's strategy to consolidate all models in the VW, Audi, Seat, and Skoda brands onto just four platforms, which will slash production costs. "It's absolutely critical that [the Golf] is a success," says John Lawson, auto analyst with Salomon Brothers Inc. in London.

Other carmakers besides GM have taken repeated runs at the Golf, with marginal success. The Renault Megane is the latest to mount an assault. The popularity of the Megane Scenic, a minivan-like version of the car, helped push sales up 59% last year, to 380,000. Now, Renault is scrambling to add capacity before VW and GM launch van versions of the Astra and Golf starting in 1998.

SNAFUS. For now, VW still seems to have the upper hand. Its new Golf will hit the market first, in September, because engineering snafus have delayed the Astra. Originally scheduled for September, production of the Astra won't begin until January, 1998, GM executives say. The holdup was caused by handling and other problems, which insiders say will take two more months to iron out. GM executives "are miserable," says an industry consultant.

The delayed start, plus added incentives to move the old model, will be a drag on GM's European earnings this year. Higher marketing costs already caused slightly lower earnings at Opel, GM's German subsidiary, in 1996, says Opel CEO David J. Herman.

Meanwhile, the company is trying to overcome its low-quality image. Last year the Astra ranked near the bottom of a customer satisfaction study in Britain. It tied for 65th place, along with its smaller sister, the Corsa, among 72 models evaluated by J.D. Power & Associates Inc. GM needs a hit to reverse last year's Astra sales slide. "It's really like betting the ranch," says Herman.

In addition to ferreting out defects, GM's engineers are focused on improving fuel economy. That, they hope, will appeal to Europeans' growing ecology-mindedness. By efficiency measures such as cutting assembly time by up to 30%, they expect to add features and still hold the new Astra's price close to the current $14,198 starting sticker.

That could give the Astra a slight edge with budget-conscious buyers. The new Golf is expected to be slightly more expensive than the current version's $14,222 starting price. It'll be longer and wider and sport goodies such as antilock brakes as standard.

WIGGLE ROOM. But VW's marketers will have wiggle room to lower prices. VW also expects a big jump in efficiency, partly from farming out subassembly work to nimble suppliers. Moreover, the Golf's huge volumes mean parts could be up to 20% cheaper than those on the current Golf. VW plans to use the Golf platform as a base for new models, such as a minivan due in 1999, and to add Golf production in markets such as Brazil. By the turn of the century, VW could be building more than 1.5 million Golf-based cars a year, up from 800,000.

There are some doubts about the Golf. Critics warn that its higher-end versions may be too expensive, since some current models sell for $30,000 or more. Other competitors are edging into the top end of the segment and will likely grab some customers. A sister model, the $18,922 Audi A3, which is built on the same platform as the Golf, raced off to a fast start last year with sales of 34,000. And Mercedes-Benz will steer into the small car class this year with its new $20,000 A-Class. Mercedes expects that the car, which will be introduced at the Geneva auto show in March, will sell 200,000 a year.

Still, Europe's best-selling car has outpaced its rivals for 14 consecutive years. Despite its determined efforts, heavyweight GM doesn't seem fit enough to catch up this time, either.By David Woodruff in BonnReturn to top


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