It is no secret that Volkswagen Group is on a quest to become the largest automaker in the world by 2018, and such ambitions require strategic planning, as well as investment in the brand and product. Although Volkswagen AG has successfully established excellent brand recognition and passion for its cars around the globe, the one market that has eluded VW thus far is the United States. Nevertheless, Volkswagen of America has been called upon to do its part, but with a new North American manufacturing plant in Chattanooga, Tennessee, the U.S. subsidiary has no time to waste, and no excuses, either.
According to VW brand development director Ulrich Hackenberg, “We need 800,000 volume to become number one globally. That's why we're opening a U.S. factory." Essentially, Volkswagen AG wants its U.S. operations to sell 800,000 units annually by 2018, which does not include sales from other affiliates, including Audi, Lamborghini, Bentley, and newly-acquired Porsche, as part of its plan to establish itself as the world’s leading automaker. To put things into perspective, back in 1970, when VW was the largest importer in America, the brand sold 569,696 vehicles. In 2012, Volkswagen pushed 438,133 units, and although that was its best calendar year sales performance since 1973, VW will still need growth of over 45% if it is to achieve its 2018 target. Having invested approximately one billion dollars into a new U.S. manufacturing facility to build its Passat mid-size sedan, however, one can understand how Volkswagen AG would have such high expectations.
Once the lines began running at Volkswagen’s Chattanooga assembly plant back in April 2011, optimism was abounding as the Passat made its introduction as the first model to roll of the assembly line, and by the middle of 2012, VW was eager to jump on the opportunity to hire more workers and increase the plant’s volume capacity from 150,000 to 170,000 units. Volkswagen’s strategy appeared to be working as planned, and once 2012 came to an end, the brand realized 117,023 sales during the plant’s first full year of production. This led Volkswagen to release a statement saying, “The team members at VW Chattanooga have successfully met the needed market introduction volume, matching higher than estimated sales demand and filling the sales pipeline.”
But while sales started off briskly for the new sedan, data reveals that dealer inventory for the Passat has steadily been outpacing sales growth and this production-demand imbalance has necessitated a pull-back in manufacturing output. As of May 13th, 2013, the plant cut its daily production down from two 10-hour shifts, using three teams daily from Monday through Saturday, to two teams running two 10-hour shifts from Monday through Thursday. Coinciding with this bad news was an announced reduction in headcount that will result in the layoffs of 500 contract workers by the end of June 2013. However, with an average days’ supply number reaching 93 at the end of last month, the brand cannot afford to continue overwhelming its dealers with more units before action is taken that will allow inventory to reach more manageable levels.
The mid-size sedan segment is one of the most competitive in the industry, and with so many quality product offerings in the marketplace, brands find themselves fighting to gain ground that no one wishes to cede. Thus, upon comparison of the Passat with the leading importers’ contenders, namely the Camry, Accord, and Altima, we begin to realize which players are capitalizing most on what sales there are to be had.
From a used car value perspective, Volkswagen’s high inventory and days’ supply issue for the Passat may pose less than desirable consequences for the company going forward, as the model’s abundant inventory will likely need to be converted into sales through the use of higher incentives. In fact, incentives for the Passat have grown by an average of 22% year-to-date, which compares to a 20% decline in spending for the mid-size segment as a whole. While April’s incentive average of $2,378 per Passat sold essentially matches the segment average of $2,374, used value retention will abnormally erode should incentives continue to grow anywhere near current rates.
After the successful opening of the new Volkswagen plant in Tennessee, as well as clever advertising that significantly raised awareness of the Passat, the company appeared to be in a fantastic position to reach unprecedented levels of sales success. However, it appears that the brand may now be facing headwinds that could slow the growth of the automaker as it moves closer to its 2018 timeline.
Certainly, a production pullback won’t help VW achieve its lofty sales goals, but from a used value retention standpoint, it has the potential to bring inventory back in line with demand without needing to substantially raise incentives spending beyond current levels. Only time will tell if the challenges VW currently faces are just speed bumps or something worse, but it may just be that after a few detours, Volkswagen will finally reach its desired destination.