How VW Can Get Hot Again

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Another element of VW's strategy involves heading downmarket, reversing a silly foray into the luxury segment with its $68,000-plus Phaeton sedan, which flopped. The company has slashed sticker prices on the Jetta (lowered $1,400, to $16,500) and Rabbit ($1,000, to $15,000), hoping to recover profits with higher volume. And future models won't contain as many standard features, according to Hallmark. The idea is to produce cars that can compete more effectively in the midmarket. Designing cars for the local competitive landscape is precisely what the Japanese have done for decades, of course. But, Hallmark says, "it's a huge change in perspective" at VW headquarters in Wolfsburg, Germany.

For the plan to work, VW must figure out how to act nimbly. It has a long history of drifting from profitable years to lean ones. Instead of following up hits from the '90s like the New Beetle and Passat, the Germans were either late or missed virtually every automotive trend: hybrids, crossovers, small SUVs. VW got so out of touch with U.S. consumers that in 2005 the company sent a group of employees, dubbed the Moonraker team, to the U.S. to spend a year figuring out what Americans wanted in a car. The answer: models designed specifically for this market.

If VW really wants a comeback in America, however, it will have to reshuffle priorities. The U.S. sales team has been fighting for more Rabbits, which are selling well. But VW can't reproduce enough Rabbits to meet demand; it supplies other markets first. VW often exports new models to North America only after taking care of Europe, where it enjoys a market-leading position that it wants to protect. The Rabbit, for one, launched in Europe as the Golf two years before it came to America; the next edition will arrive first on the Continent too. "They're trying to change," says Cheetham, "but VW's mentality regarding North America has always been that of an opportunistic exporter."

What no one in Wolfsburg wants to admit is that VW may have a broken business model in the U.S. Unlike BMW or Mercedes-Benz, VW can't charge the rich prices necessary to offset the cost of exporting from Germany. And unlike its German rivals, VW doesn't make cars in the U.S.--its one American plant shut in 1988--a problem given the dollar's slump versus the euro.

Each of Volkswagen's big shareholders has a hand on the steering wheel too--making VW notoriously unwieldy. Representatives of government, trade unions and Porsche, which owns a stake in VW, follow their own interests, so decisions can take eons by American standards. The state of Lower Saxony, for instance, holds a stake in the company, and Saxon politicians routinely pressure VW to maintain jobs and generous benefits in the hinterland. VW's unions, also powerful, recently agreed to extend the workweek--to 35 hours for factory workers, up from 28.8 hours. In return VW promised to keep production of the next-generation Golf in Germany. "Such deals rob VW of the flexibility you need in this business," says Ferdinand Dudenhöffer, a German auto-industry expert.