A Pitch to the Rich

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The VW boss also needs to take a grinding wheel to costs, which are among the highest in the industry because of expensive labor in Germany, where it runs 10 plants. VW has moved production to eastern Germany — to qualify for government aid and take advantage of lower wages — and to lower-cost countries like Slovakia. Pischetsrieder, known as a gearhead with a good grasp of finance and marketing, hopes to save $3.4 billion over the next five years. Some of the savings will come from sharing more components, like engines, transmissions and ventilation systems, across VW's models and brands. To instill a sense of entrepreneurship and accountability, he has also set profit targets and production goals for project managers.

On the sales side, VW needs to win back Americans' trust, particularly if it wants to sell those higher-margin luxury cars. VW's late-'90s American renaissance came after nearly two decades of slack sales that led it to consider pulling out of North America. The New Beetle, launched in 1998, saved the decade. Baby boomers with fond (and sometimes pot-hazed) memories of Microbuses and Bugs gravitated to the car, or at least to the dealership, where they saw Jettas and Passats that appealed to their more practical side. Teenage boys and young men turned the Golf GTI into a hit on the "tuner" scene glamorized in the film The Fast and the Furious. The New Beetle and Jetta found an adoring audience in young, college-educated women. VW went from selling just 49,000 cars in the U.S. in 1993 to 352,000 in 2000.

The automaker is now facing the dark side of owning a brand that consumers are passionate about. At the website myvwlemon.com, owners gripe about faulty brake lights, knobs that fall off and clutches that blow after just 60,000 miles. VW says many of these problems are minor and that its cars perform solidly over the long haul. Also, the Internet hosts gripe sites about almost all car brands. The problem, says Jamie Vondruska, who runs vwvortex.com, is that "VW owners are so attached to their cars, they take it personally when things go wrong." Blame it on all those clever ads that reinforced the notion that VW owners are a breed apart.

VW's reputation for durability hasn't suffered as much in Europe. Its cars stack up well against rivals from GM's European subsidiary Opel and France's Renault and Peugeot, and far better than Italy's Fiat. Compare that with the U.S., where the benchmarks for quality are Japan's Toyota and Honda, famous for their manufacturing standards. But that's changing too. The Golf V and its variants are facing a tougher European marketplace. The Golf will take on a redesigned Opel Astra, which will launch early next year, and faces formidable foes in the Peugeot 307, Renault Megane and Mazda's upcoming Mazda3. The Golf is already losing sales to its VW brethren, such as the Audi A3 and models from Skoda and Seat.

Moreover, Japanese and Korean automakers are cutting into VW's core segment: compacts. In a European market that is down 1.5% this year, Honda's sales are up 7.4%, almost entirely thanks to its new Jazz subcompact. Hyundai, with sales up 10.8%, boasts a European market share of 1.7%, on a par with VW's Skoda. And Toyota's Yaris, packed with features and options for less than $17,000 in most markets, is a bargain compared with VW's $18,000 Golf. The euro's strength against the yen is also bolstering Asian automakers' profit margins, putting pressure on higher-cost manufacturers.

Then there's China, a market once dominated by VW that is attracting newly intense competition. VW's market share in the world's fastest-growing car market has fallen from 60% to under 40% in only two years, as more than 100 local and foreign automakers have entered what amounts to a demolition derby. After industry sales grew 56% last year to about 1.1 million vehicles, they rose another 82% for the first half of 2003, according to the industry publication Automotive News. VW and a partner recently broke ground on a new engine plant in Shanghai, amid plans to expand capacity from 800,000 to 1.6 million vehicles annually at a cost of $7 billion over five years. Other manufacturers are also adding capacity.

All this intensifying global competition makes the U.S. market key for VW. But as the Big Three learned the hard way, you can't build luxury-car sales if the reliability of your basic fleet is perceived to be poor. Among the Big Three, only GM's Cadillac, with a fleet of radically redesigned vehicles, including a new crossover, remains one of the top sellers in the luxury segment. Moreover, luxury-car buyers have come to expect an elite level of service at dealerships, something VW isn't known for. In 1998 only 81 of 600 authorized VW dealers sold the brand exclusively. The vast majority sold other nameplates and were caught short-handed when VW's sales surged, unable to handle the additional repair and maintenance requests. VW's suppliers weren't able to deliver parts fast enough, especially in the wake of several recalls. "In Arizona we had 160 cars down at once, and we couldn't get the parts, so we had to ask people to wait," says Jens Neumann, a VW board member in charge of North American strategy.