Adrian Hallmark, executive vice president, Volkswagen of America, says that VW wants to be a volume player in the U.S. market. But, he claims, "It's not about share, it's about achieving profit." Share is nice, but profit is money. He admits, however, that the likelihood of VW achieving one million annual sales in the U.S. is unlikely to occur anytime soon for a variety of reasons, including the facts that it isn't a big player in SUVs and it doesn't sell pickups. At just over 224,000 units per year, there is a long way to get to seven figures. And Hallmark candidly admits that they hope to achieve "300,000 to 350,000 units per year with what we know is coming in the next five years."
But here's an unlikely problem to have—or at least it seems somewhat unlikely that it is a problem. One of the general characteristics of German cars is that they're well engineered. Say "German engineering" and pretty much everyone has a notion of something that is as solid as a vault. A good thing, right? Not always. This engineering puts VW at something of a competitive disadvantage because the products as-engineered are often more expensive than vehicles in their competitive set. Hallmark cites the Jetta. The compact starts at $17,900. "Sixty-four percent of all the compact sedans are sold under that starting price." He goes on to point out that the weighted average price of a Jetta is $22,627, which is higher than the prices of 95% of the cars sold in that 2.2-million vehicle segment. The Jetta, he notes, is in the price range of a Toyota Camry or a Honda Accord (it can range up to $29,350), yet it is roughly a 25% smaller vehicle than either of those two. And the car doesn't have the luxury cues that would allow it to compete with the likes of the Acura TSX or Volvo S40, two other cars that are in the upper strata of the Jetta's price range. Part of the reason for this cost is found in the engineering.
Hallmark points out, for example, that the Jetta comes standard with six airbags. The driver and passenger front bags that everyone has. But then there are the front side thorax bags. And side curtain bags. Hallmark points out that this isn't simply a matter of decontenting the Jetta. The airbags, he explains, are engineered into the vehicles. So that's not a viable option.
GETTING AGGRESSIVE. Going forward, he says, they're going to "aggressively attack costs," including sourcing more components from "the dollar zone," thereby not having to be as concerned with exchange rates as they otherwise would be. He adds that they will work to make the vehicles VW manufactures more affordable by lowering part costs, development costs, and production costs.
However, it should be noted that the goal is not to turn, say, the Jetta into a "VW Corolla." Rather, they will work to make the Jetta—and other vehicles under the brand—more affordable yet distinctive, he insists, both visually and technically. What they're working toward are products that will better serve the American market. Hallmark says they've gotten the approval of the company's board (based, of course, in Germany, but with product wunderkind Wolfgang Bernhard [chairman of the VW board of management] in the pivotal position; his stint with Chrysler in Auburn Hills undoubtedly goes a long way in providing a perspective that has more than a passing view of the U.S. driver) to develop a vehicle that will have the U.S. as the lead market: This will not be a case where the car is developed for the German market and then backed into others, including the U.S. About this compact sedan (maybe it will be called the Jetta, or maybe something else—after all, the Golf has become the Rabbit), Hallmark says, "We define the length, the width, the wheelbase, the seat stiffness, the powertrains we're going to use, everything. It will be engineered in Germany and I'd guess manufactured in Mexico, but that's not decided yet." And there's another point he stresses about the development of this vehicle: "We don't want to make it a cheap, soulless pile of metal, rubber and plastic you can throw away with your washing machine. We still want to keep the heart and soul of VW—fun to drive, great styling, good interior, strong materials, well put together—and make it more affordable. We can do that not by compromising on what we do, but by being creative about how we do it. Suppliers we use, the way we engineer stuff, the way we share parts with ourselves, etc., etc.—there's plenty of opportunity to improve our productivity in the development and manufacture of cars."
In addition to which, there is the minivan project with Chrysler Group that was announced in January 2006. A VW minivan will be produced that's based on the next-generation Chrysler/Dodge minivan platform, but with distinctive VW cues. When the announcement of the alliance was made, Bernhard acknowledged, "In the VW product range, we are missing a van for families which meets the necessary requirements of our American customers. With this new vehicle, we are going to enter another important market segment with our own product." Which is another step in the right direction toward increased sales. Other products that will have an effect will be a replacement for the Beetle.
BRAND VALUE. Hallmark is emphatic about the importance of the value of a brand. He admits that one of the fundamental issues that VW is dealing with is currency fluctuations, exchange rates. If the dollar goes one way and the Euro another, depending on where a product is built, there are significant impacts on profitability. He cites the Jetta and the Rabbit. The former is built in Mexico and about three-quarters of the price cost is in dollars. The Rabbit is built in Wolfsburg, so there's 100% exposure as regards Euros. He says that if you make an assumption about exchange rates, then consider 10% shifts both up and down from that base rate, it is easy to see how having a balanced portfolio of sourcing is key. While this might argue for low-cost manufacturing, Hallmark maintains that "It's not as simple as the manufacturing footprint. It's a matter of the differentiation of the product, the brand premium, and your cost structure. Those are the three factors that drive your profitability."
Or, more to the point: "If you don't have product desirability, if you don't have brand strength, you can build them in China and still won't be successful."
QUALITY CONCERNS. But there is another nontrivial problem that Hallmark and his people are dealing with. VW has been distinctive in the U.S. market of late in a way that Hallmark says left them feeling "almost suicidal." It is in the arena of quality. For example, there is the 2006 J.D. Power and Associates Initial Quality Study (IQS). When the rankings are consulted, there's Volkswagen, tied with HUMMER at 171 problems per 100 vehicles, which puts them in a dead heat for third from last place. Another German brand is actually at the top of the list, with a score of 91: Porsche. (Hallmark was with Porsche Cars Great Britain from 1990 to 1999, where his last position was managing director.) Hallmark acknowledges, for example, that the Touareg is a vehicle that has proven to be, from the IQS point of view, somewhat problematic as after it was launched in 2003, the brand's score went north—which is the wrong direction. He says that they are working to reach the top 10 of IQS by 2009, which necessitates a clear focus on the fundamentals. "Cupholders and radios are important, but not as important as technical aspects," Hallmark says. Like dealing with some of the electrical problems that many U.S. owners had experienced. He explains that it's not that they're disinterested in working on the amenities, but it is a matter of first things first: "Our priority has clearly been to stop the silly, annoying, frustrating, and loyalty-sapping problems that our customers have endured." Hallmark adds: "We'd loved to be loved in every dimension, but we have to be loved for our technical competence, because we're a technical company."
But in all of this, Hallmark is definitive about one thing: "We are not compromising what we do. We need to be creative."