Volkswagens Fifth-Generation Golf is Underperforming in Europe

Profits Down for Europes Largest Automaker Causing Its Stock to Drop

Whats Europes worst performing automaker? Well, when talking financial performance it is Italys Fiat Group, not a tough one for any self respecting newshound to guess. But you might find it a little more difficult to name the manufacturer in the second least enviable position.

Volkswagen, the brand that at one time seemed as if it could do no wrong, is suffering staggering losses after a bungled roll-out of its new-generation VW Golf, a product critical to the automakers success.

After years of brand accumulation, that now sees VW AG holding its namesake Volkswagen division, Audi, Lamborghini, Bentley and Bugatti, as well as European nameplates Skoda and Seat, analysts are speculating that the automaker may have spread itself too thin.

To add insult to injury, ex-CEO Ferdinand Piëch wasnt satisfied merely controlling the largest group of premium brands in the automotive sector, but instead found it necessary to develop the "peoples car," Volkswagen, into a rival to compete head-on with the likes of BMW, Lexus, Mercedes-Benz and ironically, its own Audi nameplate.

The new full-size Phaeton luxury sedan is as good as anything in its class, but disappointing sales in Europe with only 2,574 Phaetons sold in its first seven months, have caused analysts to agree that it will be difficult for VW to reach its chances 2004 sales target of 15,000 sold Phaetons. The belief is, if priced closer to the $55,000 Lexus LS 430, it might actually fair quite well. But buyers are proving hardly prepared to pay near and beyond $65,000 for a VW, let alone $94,600 for the top-line W12 version.

While turning VW into a BMW competitor might seem like the equivalent of teaching a penguin to fly, VW Groups new CEO, Bernd Pischetsrieder is left selling what many analysts consider the impossible.

All the while important research and development money has been siphoned from the development of the brands core volume products, and improving its lackluster reliability ratings.

How lackluster is it? According to respected J. D. Powers and Associates, Volkswagen sits at position 33 out of 37 automakers in their 2003 Vehicle Dependability Study (VDS), only beating Suzuki, Daewoo (that doesnt even exist in North America anymore), Land Rover and Kia.

To make matters worse, the brands most important new product has stumbled during takeoff. The fifth generation Golf hasnt caught on as well as expected in its home market since its August 2003 introduction, reportedly due to styling that looks too similar to but not quite as sporty as its predecessor, a high price compared to its competitors, and quality glitches. Normally the introduction of a new high-volume core product would increase sales, since August sales have only rebounded by 0.2 percent in 2003, to $112 billion. Analysts expect 2004 will improve VWs popularity, with others stating that 2005 is a more likely comeback year.

Exacerbating the current problem, fears that the Golf V will continue to under-perform on the sales charts have caused Volkswagen to become Germanys poorest performing blue-chip stock to this point in 2004, having lost more than 10 percent. Being that the previous Golf was responsible for approximately half of the VW divisions profits, its success is paramount.

Speaking of halving profits, a strong euro and weak demand for its cars and new SUV almost chopped profits in half during 2003. Volkswagens pre-special items (such as the VW Phaeton and Bentley) operating profit dropped 47.7 percent to 2.491 billion euros ($3.18 billion) last year, but thats not the whole of it. After factoring in soured investment write-offs, profits were down a total of 62.6 percent below last years figures. Still, VWs profits were better than most analysts had expected.

Making matters even worse is BMW, who unlike Volkswagen entering the premium class will no doubt succeed as it enters Golf territory with its much anticipated 1-Series. The new model, expected to be priced close to a similarly featured Volkswagen Golf, will offer rear-wheel drive performance, stronger expected reliability (BMW stands at a much better 13 out of 37 automakers in the same J. D. Powers and Associates 2003 VDS) and greater desirability due to the roundel badge on the hood and rear trunklid.

Additional competition from Ford will arrive around the same time, with the next-generation Focus. GMs European division will be giving the Golf a run for its money with a new Astra, while Mazdas new 3 could steel significant sales from the Golfs traditional sport import buyer on both sides of the Atlantic.

Pischetsrieder is now under intense pressure to kibosh the costly, underperforming Phaeton, money that at the very least should have been invested to improve the already poor selling new-generation Audi A8. Audi sells far fewer flagship models (2,311 in U.S. during 2003) than any of its direct rivals, excepting Infiniti (Q45) and Volkswagen (Phaeton) of course. In comparison Mercedes-Benz sold 15,981 S-Class models in 2003, Lexus delivered 15,583 LS 430s, while BMW sold 14,410 7-Series models.

No doubt the Phaeton will continue for at least the duration of its life expectancy (4 to 5 years), but analysts are predicting the model will be phased out before 2009 and never return, allowing Volkswagen to refocus its energies toward less expensive core products.