The « greatest living product guy », this is how Bob Lutz, another automotive product legend, describes Ferdinand Piëch. He remains a great automotive magnate as well. He may not be active anymore, but he is certainly not a passive shareholder anyway. Using his genius, guts, vision, and certainly fueled by revenge after his short time at Porsche, he has built a leading carmaker out of Volkswagen AG (VAG). Against all odds and much to the dismay of the 1990’s analysts, his hunger for brands and his toughness permitted to create a carmaker operating worldwide, covering all the existing segments of the automotive market, from the low prices to the top luxury models. Amongst all successes, North American is a known weakness in the VAG strategy and the group’s pedigree. Improving Volkswagen of America (VWoA) will imply changes in the culture and the processes, in the US of course, but mostly in Germany.
Growth and success usually find their roots in strong temper. And they come with a few setbacks. The charismatic Piëch is known to be omnipotent and he kept all decisions in Germany so he could control the good implementation of strategies and product development. This is the main reason why he was able to drive VAG so close to Toyota, fighting for Number One. But as time goes by, centralization of decisions becomes a source of mismanagement. Every strategy has its vulnerability, the little cracks that weaken the structure. First of all, despite the improvements made by the 4motion team in the mid 2000s, costs remain too high. During the crisis, VAG grabbed market shares in Europe by launching new models when competitors froze their entire product plan. The group also used very aggressive sales strategies. Secondly, VAG multiplied models in all different kinds of segments and brands within the European mainstream market. Such expansion strategy favors customer loyalty and increases cannibalization risks in the meantime. The group must now work on the costs structure and the product portfolio. It comes at the time when VAG is closer than ever to achieve the ultimate goal of becoming the largest carmaker worldwide. Could it be that VAG’s growth plateaued and needs to get his breath back? It’s possible. And it’s even possible that Piëch and Winterkorn disagreement could very much find its roots in the solutions to improve the costs structure and portfolio issues.
Product decisions centralized in Europe
It’s undeniable that Piëch is the reason why VAG made such a growth in less than 20 years. Although his resignation didn’t take place in the best conditions, he will always be respected for his achievements and vision. He remains influential, but since his departure, cultural changes have already occurred as the board members recovered their freedom of speech and Winterkorn is now the only person officially in charge of driving the turnaround. Executives are now talking about the necessary changes, those that couldn’t occur under Piëch reign. The latest rumors were talking about separating the group into four holdings, each made of three brands, operating separately. Some models will not be replaced, starting with the Eos and its retractable hard-top. And finally, the product development won’t be centralized in Germany anymore. Every major region should be able to design the products it requires. The best examples of failure for that are the latest Brazilian Gol and the American Passat. The Gol lost the first place in sales last year. The model held the best seller title 26 times in the past 27 years.
The case of the American Passat is different. It was a good product at first sight. The size was in line with the local requirements and the design cues are fitting the VW visual identity, bringing strength and confidence to the overall look of the car. But it was wrongfully developed. The brand dropped an overpriced European version for a market-priced underdog. Technically speaking the Passat lost some equipment such as the electric parking brake, and traded its high quality interior for average materials. In the meantime the competition leveled up. The Ford Fusion is closer than ever to its European cousin, the Mondeo. The Camry became less dull and brought some sportiness, while the Accord added screens for a technological perception. The Passat clearly lacked proper competitive and market intelligence. This is particularly odd knowing VAG’s appetite for information. But as most influential companies, the group’s self confidence might bring a level of certitude that doesn’t fit with interest for externalized and objective market intelligence. A character that is not exclusive to VAG as the automotive industry is fueled by a paranoid culture and bad habits consisting in sourcing complacent information.
Inappropriate product portfolio
The product issue is not just the Passat. The absence from the mid-size SUV segments is a major mistake. The decision has finally been made, but it comes 10 years too late. The CrossBlue concept was introduced for the first time at the 2013 NAIAS. This was a promising step for VWoA. The midsize SUV segment is one of the most important in North America representing over 9% of the entire light vehicles’ market. It shows the lack of products from VWoA. Light trucks could also be major assets to the company. The launch of the Amarok in 2010 brought some interest. But the model was not meant to be introduced in North America. At the time of the market introduction, the US light trucks were hit by the crisis. GM, Ford and Dodge were about to exit the mid-size truck segment. Since 2012, GM is the only one to have returned the mid-size pick-up truck market.
The incomplete North American product portfolio partially answers the brand’s 0.4% market share loss each year for the past three years. The brand’s volume is comparable to that of Subaru, a much smaller brand with shorter product range than VWoA. Volkswagen was down to 366,969 light vehicles sold in 2014, and the improvement is not expected until the new mid-size SUV will ramp-up in Chattanooga. The plant is somehow facing overcapacity as the Passat is underachieving and other vehicles are long to come. The new SUV should be inspired by the CrossBlue Coupé. Once again, this choice is questionable as the US market expects an optional 7-seat capacity for this kind of vehicle. A role that could be answered by the next generation Tiguan, told to be larger and available with third row seats. All this product strategy remains unclear as the Tiguan is produced in Europe for the US distribution, making it slightly more expensive than the competition.
There are two more wrongdoings with VWoA product portfolio. First, enhancing the diesel engines in the communication with the press and to the public is not the best choice. Diesel has its interests as North American drivers like torque and automatic gearboxes and recent diesels are perfect match for such behavior. Also, diesel engines are more numerous than ever before, in cars and light trucks. But it’s not sufficient to push the market as it still remains as low as 1% of the total passenger car sales. Also, Diesel’s image is not the best, a paradoxical situation knowing that diesel made its best increase with luxury brands (Audi, BMW, Mercedes-Benz). But Diesel fuel is more expensive at the pump, and the cars come with a premium that doesn’t make any sense economically speaking (also considering that maintenance costs are higher than gasoline engines).
The second mistake is the reliability. Volkswagen remained below market average in the latest JD Power study. The brand suffers from a long time reputation on quality and needs to clear it off with delivering more reliable products. Americans listen to JD Power, they read Consumer Reports and then make up their mind. Volkswagen models constitute a real benchmark in terms of perceived quality, but it’s not sufficient to build the image. The duplication of the successful European strategy on this matter is not efficient in the US. The Piñata, the Darth Vader or the running dog commercials are certainly excellent ones. But the message has to be in line with the vehicles available in the showroom.
Cultural changes are mandatory
North America has been a layover for the high potentials manager for years. This is probably one of the most obvious mistakes of all. The same situation exists in Europe as Seat is a stopover for rising managers. People at Seat are just passing by, and those who were acting for the brand were stuck by Wolfsburg made decisions. VWoA needs more stability, it requires people with local market sensitivity and long term stays to secure the good realization of plans. And for the sake of diversity, it is a good thing to have employees from different cultures, different citizenship, as long as they cope with the US market. The US offices, in Virginia and in Detroit require less centralized decisions and more autonomy towards Germany. This is essential to adapt VWoA to its environment. Driving the product plan and designing products from the place they’re going to be delivered is a key success factor.
Second point of improvement is the product perception, on a larger scale. Piëch is a product genius, but culturally speaking, he was too strict when deciding. On a product perspective, this results into clinical models. Volkswagens are loaded with technology. The models such as the R32 or the CC V6 can be high performing, well equipped and efficient. But they are lacking personality, emotion. I’m not talking here about the esthetics, but the feeling when you drive a Volkswagen. They are very neutral, maybe too scientific. And this remark goes for many of the VAG products. As an example, this is probably Piëch’s history with all wheel drive that results in the very few number of rear wheel drive cars within the group. Aside from Porsches and a Bentley, everything is front or all wheel drive, even with longitudinal mounted engines. The heritage from the paternal figure is strong. Now he is gone, VAG should make cars with attitude.
To summarize, improving Volkswagen of America in the middle of the group’s turnaround is not going to be a walk in the park. The main steps are to design products locally, to improve the product portfolio, including changes with some of the most recent decisions, to stabilize HR by releasing the US office from the turnover of the European high potentials visits, and to infuse more emotion and personality in the models. VAG needs to start emancipating itself from Piëch’s beliefs and explore different philosophies. I’m not saying VAG has to revamp itself and get rid of its history. This would be a major mistake. I mean VAG needs to move on now and emphasize on diversity of thoughts. Not only it could improve North America, it could also level up the company on a global perspective to help it achieve its goal of becoming the largest carmaker in the world.