Here is the article from the Wall Street Journal:
As VW Tries to Sell Pricier Cars, Everyman Image Holds It Back
The New Golf Is Full of Extras, But They Come at a Cost;
'Multilink' Axles Anyone?
Mr. Dobiasch Wants a BMW
By NEAL E. BOUDETTE
Staff Reporter of THE WALL STREET JOURNAL
May 13, 2004; Page A1
Suzanne Kay has owned five VW Golfs since the mid-1980s. After checking out the latest version, she won't be buying a sixth.
One of the world's best-selling cars, which now costs more than $24,000 fully equipped, isn't worth the money, says Ms. Kay. The 39-year-old customer-relations employee at a bank in Brussels says she might switch to the Mini, made by BMW AG, or maybe the tiny Smart roadster from DaimlerChryslerAG's Mercedes division. "The new Golf is really an expensive small car now," she says.
Ms. Kay's potential defection says a lot about what's plaguing Volkswagen AG, the world's fourth-largest car maker and the latest to stumble into the emergency room. The Golf, VW's profit workhorse, used to be an easy choice for drivers wanting an everyday runaround. As part of a push to turn itself into a maker of high-priced, premium cars, VW loaded the new Golf with expensive extras, assuming loyal customers would trade up. But the Golf's September launch, a critical moment for the company, has been a major disappointment.
VW, based in Wolfsburg, Germany, produced 18% fewer Golfs during last year's fourth quarter than planned. Sales in the first quarter, amid criticism from the automotive press, were "significantly less" than expected, the company said. VW's first-quarter net income plunged 87%. In April, VW shut down production for four days, a rare situation for any new model.
The Golf's troubles are a warning for the auto industry. As car makers try to combat ruinous price competition, some are adding fancy features to popular models to justify raising prices. But as VW's experience shows, it's not easy to persuade buyers to pay extra for what they've long considered affordable brands. In fact, one of VW's greatest assets -- its appealing everyman image -- is now one of the problems holding it back.
VW says it's not backing off its strategy to produce premium and luxury vehicles. Hans Dieter Poetsch, VW's chief financial officer, says in an interview that the Golf's slow start was caused by overall weakness in the European car market and says the company is "comfortable" with the Golf's price premium of about 8% over competing models.
"The market is willing to pay more for the additional quality" of a Golf, Mr. Poetsch says.
The new Golf was supposed to carry VW through a rough patch. Other parts of its business, including high-end, luxury cars, are struggling. VW is losing money in the U.S. and once-hefty profits in China are declining amid tougher competition. VW's net income fell 58% last year to $1.34 billion compared with $3.12 billion the previous year.
Volkswagen was one of the auto industry's hottest players in the booming late 1990s when it recaptured the affection of affluent young Americans weaned on the company's legendary Beetle and VW Bus. It marketed cars including the Passat and Jetta to wealthy urbanites through catchy advertising such as its "Drivers Wanted" campaign.
Because of VW's reputation for reliability and styling, it could charge up to 15% more than the competition, causing rivals to grumble about the "VW premium." Meanwhile, VW cut costs by re-using parts for many different models. It uses the guts of a Golf to build cars sold under the Audi, Skoda and Seat labels.
Volkswagen's latest Golf model.
Emboldened by its success, VW decided to move the company away from its "people's car" roots and develop boutique brands, including Bentley, Bugatti and Lamborghini. At the same time, it hoped to squeeze more profit out of its VW models by boosting their technological sophistication and price. VW assumed consumers would continue to pay a premium for the satisfaction of owning a Volkswagen.
Bentley sales were up sharply in the first quarter and a new minivan is selling well. But not much else has gone right. Most of the company's most expensive luxury models, including VW's Phaeton, a $70,000 luxury sedan, have sold so badly that VW wrote off $719 million in development expenses in the fourth quarter.
VW also overestimated how far it could stretch prices for everyday cars. Manfred Dobiasch, a printing systems technician from Hamburg who owns a 1998 Golf, says he's willing to pay more than $24,000 for a new car, just not a Golf. At that price, he'd rather have the car he's always wanted: A BMW 3 Series, which starts at $28,000. "That would be the dream," says Mr. Dobiasch.
Undaunted, Bernd Pischetsrieder, VW's chief executive, is pushing another upscale VW model, code-named C1. Amid the company's stumbles, he's facing resistance from labor representatives on VW's supervisory board, the equivalent of a U.S. board of directors. (Under German law, half of a company's board seats must be filled by employee representatives.)
Last year, Klaus Volkert, the supervisory board's senior employee representative, told Mr. Pischetsrieder that the luxury drive was distracting VW from its bread-and-butter business, people familiar with the matter say. In early 2004, Mr. Volkert and other labor representatives went back to Mr. Pischetsrieder and said they opposed proceeding with the C1 in VW's current financial situation and said they would vote against the project if it was brought up for approval, people familiar with the conversation say.
The labor representatives worry developing another pricey car will leave VW with too little money to keep its mainstream vehicles competitive. In view of the Phaeton's disastrous sales, "we are not as optimistic as we were before" about the C1's prospects, says one board member who participated in the discussions. The millions that would be needed to produce the C1 could be used to beef up the VW brand with new models. "We live off of mass market cars. Our cars must be affordable, for normal people."
The company expects to proceed with the C-1, although no decision has been made, a VW spokesman says. A spokeswoman for Mr. Volkert says he wouldn't discuss the specifics of conversations with Mr. Pischetsrieder. She said Mr. Volkert thinks Volkswagen needs to make both luxury and affordable cars. Through a spokesman, Mr. Pischetsrieder declined to be interviewed.
As VW pushed ahead with its luxury strategy, it counted on the Golf to keep the engines running. Launched in 1974, the Golf was a pioneer of small-car design. It so overwhelmed competitors that the industry dubbed the category the "Golf class." Germans who came of age in the 1990s, when the car hit its peak of popularity, are known as "Generation Golf."
Analysts who follow VW estimate the car generates almost half the company's profit. The third generation inspired VW's turnaround in the early 1990s and the fourth, launched in 1997, helped power a surge that gave VW the industry's No. 4 position after General Motors Corp., Toyota Motor Corp. and Ford Motor Co.
In 2000, that model's peak year, the VW produced 942,000 Golfs. Most manufacturers would be pleased with sales of 200,000 for one model. To date, VW has sold more than 22 million Golfs. That means the Golf has surpassed the Beetle.
When VW began developing the new Golf in 2000, it stuck to its traditional formula and designed the car's basic structure to be shared among other models, including the Audi A3. But the Audi brand, which competes with BMW and Mercedes-Benz, needed a sporty ride and luxury touches. VW figured it could satisfy the needs of the Audi A3 and also lend an upscale feel to the Golf.
As a result, a strategy designed to cut costs ended up making the Golf a pricier car to manufacture. For the rear axle, VW went with a complex "multilink" design more commonly found in a BMW or Mercedes that holds the road more effectively at high speeds.
To reduce weight and make the Golf peppier, VW engineers used pricey aluminum instead of steel for engine supports. They added an electric motor on the steering column to give more precise handling.
One thing VW didn't much change: The Golf's external styling. Designers rounded corners and tinkered with the headlights, but little else. "A Golf has to look like a Golf," Mr. Pischetsrieder told reporters last August.
In Germany, the Golf's arrival caused a sensation. The city of Wolfsburg, where VW has its headquarters, officially changed its name for one month to Golfsburg. Dozens of magazines splashed the Golf on their covers. Unveiling the car amid lasers and smoke at the Frankfurt auto show, Mr. Pischetsrieder said it "marks an evolutionary leap in design and technology." VW announced plans to build 135,000 Golfs in the fourth quarter and sell 600,000 in 2004. The car is currently available only in Europe. VW will start selling it in the U.S. in 2005. Golf sales in the U.S. are currently slumping as a result of the exchange rate and VW's meager incentives.
At the time of the launch, Mr. Pischetsrieder sniffed at the price war raging in the U.S. and vowed VW wouldn't be goaded into offering rebates. "Just to make market share and sell volume is not an objective we strive for," he told reporters at one event in "Golfsburg."
The new Golf was launched amid a much tougher market than its predecessors. In the 1990s, car makers were shielded from full competition by a complicated formula that limited the number of cars Japanese companies could sell in Western Europe. The rules capped Toyota at about 3% market share in most European Union countries.
The EU and Japan dropped the quotas in 1998. In the first quarter of this year, Toyota's share of the western European passenger car market hit 5.5%, according to the European Association of Automobile Manufacturers. Meanwhile, many drivers have shifted from buying hatchbacks like the Golf to other vehicles, such as compact minivans and roadsters. VW's reputation for quality has also slipped.
A bare-bones, two-door Golf can be bought for $18,515, the same as the preceding model. But the car's price jumps quickly when consumers add even the most basic extras. A four-door version costs an additional $1,200, double the extra price in the previous version. To buy a car with power windows and a midsize four-cylinder engine, among other features, the Golf's sticker price tops $24,000. Meanwhile, rivals have slightly lowered prices of their competing models.
Initial reviews by car magazines in Europe gave the Golf high marks, but by December it was clear the accolades weren't translating into sales. In the fourth quarter, VW produced 110,000 cars, 18% below its target.
In January, VW's archrival -- GM's Opel division -- began marketing its redesigned competitor to the Golf, the Astra. GM used a steel engine cradle, which is cheaper than aluminum. GM made the Astra's standard rear axle mimic the performance of the Golf's expensive multilink system by tinkering with the car's electronic controls.
Engineers for GM's Opel, who have studied disassembled versions of both cars, say in interviews the Astra costs "significantly less" to produce. An Astra with 1.6 liter gasoline engine starts at $20,675. That's $4,410 less than a comparably powered Golf.
A VW spokesman acknowledged the Golf's rear axle is a "sophisticated" component but declined to comment the cost of producing the car.
With Golf sales languishing only six months after its launch, VW resorted to a tactic it had long criticized -- sales incentives. In February, VW offered the Golf with free air conditioning, a $1,520 value, and quietly told dealers they could discount up to $1,200. To prevent unsold cars piling up, VW shut down Golf production for four days during Easter.
Mr. Poetsch, VW's finance chief, says the company offered free air conditioning to celebrate the Golf's 30th anniversary, not as a sales incentive. The factory shutdown, he says, stemmed from slow sales across the board in Europe, not the Golf in particular. On discounting at dealerships, a VW spokesman said VW doesn't set final prices and dealers are free to lower their margin to win sales.
When Thorsten Schumacher decided to trade in his Audi A4, the 30-year-old machinery technician test drove the new Golf and the new Astra. Although he initially leaned toward the Golf, he picked the Astra for its ride and snazzy design. "The Golf just looks like the old one," he says. In April, "auto motor und sport," Germany's most influential car magazine, also gave the Astra a higher rating than the Golf, citing its superior handling and price.
In Naumburg, a city 95 miles south of Berlin, six Golfs with free air conditioning are sitting unsold in the lot of Autohaus Possoegel, a VW/Audi dealer. Across town at Autohaus Burgenland, the Astras are fast disappearing. "The four out back are sold," says Johan Tanger, a salesman, jerking a thumb over his shoulder. A spokesman for Opel says the company is trying to increase production to meet demand.
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