Ten years ago, in 2003, a non-premium brand from Germany began selling its flagship sedan in the United States with aspirations to compete on the level of its premium German counterparts in the luxury market. However, after a few lackluster sales years, the experiment had failed and the product ceased to exist in the American market. That brand was Volkswagen and the car was the Phaeton. Undeterred, the Wolfsburg, Germany-based automaker has announced plans to re-launch the sedan in its latest attempt to become the world’s largest carmaker.
During the Phaeton’s first foray into the U.S. market, Volkswagen touted its upscale sedan as an elite value prospect, competing with the likes of the Mercedes-Benz S-class, the BMW 7-series, and its VW Group siblings, the Audi A8 and Bentley GT Coupe. Touting an MSRP starting at only $64,600 and topping out at $94,600 for the 2004 model year, before options, VW was convinced that it had the ultimate luxury sedan offering in the market. Buyers had their choice of a 335-hp, 4.2-liter V8 shared with the Audi A6 and A8, or a 420-hp, 6.0-liter W12 engine, a technological marvel of engineering whose design has also been employed in various Audi and Bentley models. In addition, the sedan was longer than the S-class and long-wheelbase 7-series, received praise for its exceptional interior, and had the latest technologies and amenities of its time. Yet even with its long list of positives, it still faced an uphill battle to win the hearts of American buyers.
Volkswagen had aspirations to sell 5,000 units of its first-generation sedan annually. Unfortunately, it was only able to muster up 1,939 sales in its best year, 2004, which was also the model’s first full year on sale. From November 2003 to June 2007, it averaged just over 76 delivers per month, about 340 units below its average monthly sales target, and over the last 12 months before its departure, less than 6 Phaetons rolled off dealer lots per month. By late 2004, rumors had already begun to circulate on the internet that VW was planning to discontinue selling its sedan within the next few years due to slumping sales.
In contrast to how the Phaeton performed in the U.S. however, the sedan captured the attention of buyers in foreign markets, particularly Asia, with much success coming in South Korea. The German automaker officially began operations of its Volkswagen Korea subsidiary in 2005 and coinciding with the opening of its Korean headquarters, it introduced its flagship model to the small nation of 50 million people. Phaeton sales got off to a tremendous start in South Korea and the country immediately became the largest foreign market for the upscale sedan despite the brand only having three independent dealers through which it sold cars at the time VW Korea was launched. In recent years, Korea has been surpassed by China as the Phaeton’s biggest sales market outside of Germany, yet is still going strong in second place. Such incredible growth has established Korea as a global benchmark for overseas operations in the eyes of Volkswagen AG and has placed pressure on subsidiaries in other foreign markets to keep pace or risk being reprimanded.
Putting things into perspective, South Korea is a growing auto market with a population roughly 1/6th that of the United States, and it only realized an industry-wide sales total of just over 1.5 million vehicles in 2012 versus America’s 14.5 million units. Despite Korea’s market being significantly smaller, VW Korea achieved a total of 2,615 Phaeton sales in its first four years compared to the 3,354 deliveries that Volkswagen of America attained in the 44 months the car was sold in the U.S. market. The high level of success that VW has been able to achieve in other markets has contributed greatly to the carmaker’s growing criticism of its U.S. operations and its failure to achieve the same results that seemingly every other Volkswagen subsidiary has realized.
While it is possible the second-generation Phaeton will arrive in the form of a completely new car when it hits U.S. dealers, the negative brand equity that will likely come from sharing the Phaeton nameplate will inevitably link the new sedan to its predecessor’s failure and may mitigate its chances of success during its second go-round. Also, bringing the high-end sedan to U.S. shores will push the VW brand up-market in contrast to its efforts to market itself as an affordable brand through its more reasonably-priced Jetta and Passat offerings. VW thus risks compromising the brand image as to which it has begun to market itself, potentially falling back into its bad habits of inconsistent corporate strategy.
Volkswagen of America has seen its sales drop by 1% year-over-year through the first half of 2013, in spite of the industry growing by 7.5%, and the brand’s market share has dropped by -0.2 percentage points to 2.7%. As a result, VW’s 2018 sales goal of 800,000 units is now in jeopardy as it has fallen behind its targeted pace and has even caused the automaker to already reduce its 2013 sales objective from 486,000 deliveries to 440,000, a drop of 9.5%. Realizing that it has lost the momentum it enjoyed over the past few years, Volkswagen is looking to generate positive buzz and its recent announcement of the upcoming Phaeton model signifies its intentions to do just that.
Earlier this month, Bloomberg quoted VW CEO Martin Winterkorn saying, “A brand as large as Volkswagen needs a halo project in the upscale segment. We've seen what happens to brands that don't have that kind of project.” The brand is banking on the theory that a flagship car such as the Phaeton can achieve a “halo effect,” thereby raising the prestige and desirability of all other models sharing the Volkswagen badge. Such strategy has been successfully implemented by other nameplates in the premium market, including sister-brand, Audi, with its R8 supercar, which gives VW reason to believe it can achieve the desired effect, once again. South Korea is the poster child of the “halo” concept, where the cachet of the first generation Phaeton has trickled down to the extent where the Passat has been nicknamed the “baby Phaeton.” The difference between these prime examples and the U.S. however, is that while the “halo effect” performed as desired the first time around for other cars or markets, the Phaeton failed tremendously during its first attempt in America.
At the end of the day, the first-generation Volkswagen Phaeton had a heap of accolades upon which to hang its hat. However, after its spectacular failure, conjecture surfaced inferring that although virtually every aspect of the upscale sedan signified luxury, the Phaeton offered one thing that consumers did not ardently desire, a Volkswagen badge. The automaker is eager to not allow its U.S. subsidiary hold it back from achieving its global sales targets and is pulling out all the stops, but debate exists over whether it should continue trying to apply what works in other foreign markets to the United States. When the second-generation Phaeton returns to America in the next few years, it could potentially take the country by storm and become a huge winner for VW, however, until it reaches such status, the sentiment of rising odds against the flagship sedan will remain.