Volkswagen Drives Off a Cliff -- Again

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Wolfgang Bernhard, chairman of Volkswagen's global brand group, stood before dealers in Dallas recently and apologized for the brand's quality.

It was a huge admission from the brash former Chrysler executive charged with turning around an automotive brand that has-once again-run itself into the ground.

Near death in the early 1990s, when German parent Volkswagen AG almost yanked the brand from the U.S., it rebounded later in the decade in an amazing comeback driven by cool messaging, a new ad agency, slick co-branded deals and the return of the iconic Beetle.

But the automaker's annual U.S. sales have fallen every year for the past four. The brand has been ranked near the bottom of the industry barrel for initial vehicle quality for each of the past seven years by J.D. Power and Associates.

In addition, makeovers of core products were delayed as precious R&D dollars were diverted to a misguided strategy to introduce pricey models like the Phaeton and Touareg.

The move upmarket sent sales down. VW and sibling Audi lost $417 million in the U.S. in the first quarter, 40% more than the same period a year ago. Sales slid from 302,686 vehicles in 2003 to 256,111 last year, according to Automotive News, and the automaker last week announced its sales through July plunged 22% to 118,257 units vs. a year ago,

Simply put, VW lost its cool.

The brand's "funky image probably isn't as strong as it was when the New Beetle came out" in 1998, said Jeremy Anwyl, president of auto site Edmunds.com. "It's tough to keep that image going if the products aren't consistent." Its popularity with young people has been hurt by Toyota's successful launch of Scion and Mazda's product-led comeback, he added.

MORE LAUNCH MONEY

It's now up to leadership to turn the U.S. business around. Len Hunt, exec VP of Volkswagen of America, is starting by upping Volkswagen's estimated $340 million media budget. Mr. Hunt, who assumed his role in March of 2004 after moving the needle on Audi, said he managed to persuade German management to give him a bigger outlay this year for launches, though he wouldn't disclose figures.

"It's tough when a company is in the red to go over there and say `I need more money,"' he said. Overseeing that money will be Kerri Martin, who arrived in April to the new position of director-marketing development after a successful run as marketing communications manager of BMW's Mini USA.

Some fault VW ads from Havas' Arnold Worldwide, Boston, once credited with some of the most celebrated and beloved campaigns for any brand. "Arnold got a little bit off track," said Mike Sullivan, a VW dealer with two showrooms in southern California. But, he added, "VW gets a little bit of the blame since Arnold gets direction from VW." The agency declined to comment.

`PRETTY SAFE'

Mr. Hunt conceded that the automaker is partly to blame for any drop in creativity, but didn't issue a rousing vote of confidence for the agency, saying it's "pretty safe" on the account.

It will be a neat trick, however, for the agency to accomplish Mr. Hunt's goal of dialing up VW's affordability message, something hard to do with the just-under $67,000 Phaeton. The company is, however, largely holding pricing for other models; the base model of the sixth-generation Passat sedan is $23,900.

It's not as if VW hasn't risen from its sick bed before. Mr. Sullivan, the dealer, believes there are big differences between this drought and the last, when, he said, "We had 15 bad years in a row and ad budgets fell." This time, "The products that are coming ... are dramatically better."

The redone Jetta, VW's best-selling model, was launched in March, and the new Passat, VW's second-best-seller, went on sale July 25. A redone GLI sedan comes this fall. Later this year, a freshened Beetle arrives with a campaign themed "Force of good," since so many owners are teachers, nurses and other caring professionals. A redone Golf and GTI are due in early 2006.

Moreover, observers are betting the new managers won't think small. "Volkswagen of America has three secret weapons," said Jim Sanfilippo, exec VP of auto consultant AMCI. "Wolfgang Bernhard, Len Hunt and Kerri Martin."

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