It’s nice when one’s predictions appear to be correct. In May of last year, I wrote about “A rare niche in the US car market” that’s ready for VW to exploit. Adrian Hallmark, head of the VW brand in America, is clearly aware of the unrealised potential in his charge and had agreed with product chief Wolfgang Bernhard to expand the US range, adjust pricing and so better compete with Japanese rivals. Unfortunately for Hallmark, Bernhard is out (a victim of corporate politics) so he must pitch his ideas all over again to Volkswagen AG's new chief, Martin Winterkorn. Unfortunately for Hallmark, while his ideas for the brand have merit, he is almost as deluded as the rest of the firm’s management in believing that VW can and should be a luxury brand.
At the time of our last post on this topic, Volkswagen AG had announced it was to pull its luxury Phaeton model from the US after poor sales. SwelledHead remarked on VW’s bizarre approach to brand strategy; it makes no sense to move the VW nameplate upmarket because (a) sister brand Audi already occupies this position, and (b) there are no other European carmakers selling to the US middle market (only premium European brands).
Sales of the VW brand in the US have been stagnant for many years. Hallmark’s plan, as reported in Automotive News, is to:
- Change pricing and reposition the Rabbit, Jetta, New Beetle, Passat and Eos.
- Add a subcompact (supermini) below $15,000.
- Add a Passat coupe priced higher than the sedan.
- Field a truck lineup consisting of a repriced Touareg SUV, the smaller Tiguan crossover and a Chrysler group minivan.
SwelledHead believes this is smart, though our reasoning turns out to be a little different to Hallmark’s.
Our reasoning is that, VW aside, there is no “affordable” European carmaker in the US; all the transatlantic brands – BMW, SAAB, Mercedes and the soon-to-return Alfa Romeo – are pitched upmarket. Hallmark’s strategy makes sense because it removes pricing conflicts between VW and premium European rivals allowing the VW brand to make a huge sector of the huge US car market all of its own.
There’s more than enough evidence that a twin brand strategy works for the US. Japanese makes have successfully marketed their products this way for years (Honda/Acura, Toyota/Lexus, Nissan/Infiniti) and it follows that the same could work for VW/Audi.
There are some hurdles to overcome. Automotive News reports Hallmark as saying he wants to replace either the Jetta or Passat in 2010, but for now he has to settle for dropping inappropriate specifications. Already the most expensive Jettas and the cheapest Passats have been deleted. That means selling fewer Passats, but Hallmark believes he will make more money on the improved product mix. And importing a subcompact, like Europe’s Polo, would be too costly due to the Dollar/Euro exchange rate – a problem GM’s Saturn brand is experiencing as it introduces its own version of Europe’s Astra.
Where Hallmark goes wrong, is doggedly keeping to the notion that VW can be a luxury brand. By losing the basic models he believes the Passat can perform as an entry luxury product and that this would support a return of the Phaeton.
One can understand this way of thinking, but really, what’s the point? Trying to turn VW a luxury brand means competing in a crowded sector that’s getting ever more so. It’s doubly daft while the distinction of being the only mass market European brand in the US is there for the taking.
Indeed, other makers are aware and the opportunity may not last long. Renault has indicated that it will need to be present in the North American market by 2010 as part of its strategy of achieving half of its car sales outside of Western Europe in the long term. Its alliance with Nissan will no doubt aid this objective, giving the brand a ready network of dealers and service centres. Chief executive, Carlos Ghosn, has expressed his desire to extend his American interests and with the proposed GM deal off the table, his attention is now likely to be turning to troubled Chrysler. SwelledHead sees potential for the Peugeot brand, though it lacks a distribution arrangement (but does have some relations with Ford), and a successful return for Alfa Romeo could even pave the way for Fiat.
By following Japan’s example of developing or modifying models to appeal to US consumer tastes, and presenting them via two differentiated brands, VW AG could build upon its existing presence, US history and heritage and take a share of the larger mass market instead of attempting to compete against established premium brands.
Even if a move upmarket could be effected, there is a serious danger of cannibalising sales from Audi. VW should stay true to its “people’s car” roots and focus on a distinctly European sense of value. Remember the “Lemon” ad for the VW Beetle? It appeared in 1959, but is oft quoted in marketing text books as heralding a new era in advertising culture. Its honest style won credibility with buyers and was the antecedent of the brand’s image of bringing reliability and affordable quality to the mass market.
To read more about the confusion of VW’s US strategy, check out this post on The Truth About Cars.
