Planes, Trains and Expensive Automobiles

Volume 4 Letter 5

It may be hard to feel sorry for the world’s fourth largest car manufacturer, but perhaps some sympathy is in order. Volkswagen just announced that they will delay the launch of their new microbus until 2007 as they try to make the bus less expensive. The delay is yet another blow to VW’s strategy to move upscale into the higher priced luxury vehicles market.

The idea for the new microbus came after the successful launch of the new beetle. The microbus was redesigned for the US market as a Yuppie version of the original VW van complete with built in video screens, Internet access as well as a rear view video camera (quite a step up from the old hippy bus of the 70’s).

It appears that VW may have lost their way. In the last few years they’ve focused their efforts on launching the Phaeton luxury car and the Touareg SUV. Nice vehicles, but seeing the VW badge prominently displayed on a luxury vehicle can rub one the wrong way. VW has a strong position in making practical, economical cars that are fun to drive. Didn’t VW purchase Audi to exercise their luxury tendencies?

It seems that the managers at VW may have been smoking more than tires. Despite the efforts of the marketing department to dissuade him the Phaeton name was chosen and insisted upon by the former CEO [1]. He felt the Phaeton coachwork was some of the highest quality and most luxurious of the classic period. Then to build the Phaeton, VW has built one of the most expensive car factories in the world spending more than $200 million on a totally glass (acrylic) factory in Dresden to assemble it. The factory comes complete with hardwood floors. I’m sure the thoroughbred type cars VW is breeding appreciate such luxurious surroundings.

VW, demonstrating their marketing prowess, has rigorously segmented their market. To quote Car and Driver Magazine, the target segment is “Fiercely individual self-made people who aren’t label-conscious. They’re expected to be aged 50 to 55, 75-percent male, 85-percent married, 75-percent college graduates, with a $300,000 median household income”. When asked earlier in the same article why VW was developing the luxury brands Phaeton and Touareg, VW responded that over the last three years about 15% of their customers had left the VW brand for a luxury brand. One can only hope that the 15% of the VW customers who dumped their Golfs and Microbuses earn $300,000 per year and aren’t brand conscious.

During this foray into the luxury car segment, VW has clearly taken their eyes off of their main market. The new Golf is suffering in the market place and VW Beatle sales are flat as the car is in need of an update.

One must wonder whether all those loyal VW buyers who associate themselves with environmental friendliness and feel some nostalgia to their hippy roots don’t feel abandoned by VW. VW bugs and Vans were the trademark of the hippy protesters of the 60’s and 70’s. It’s hard to be the bastion of the counterculture and at the same time produce 12 cylinder gas sucking luxury vehicles. Is it possible that VW purchasers who don’t earn over $300,000 may have abandoned the VW brand for vehicles seen to be more economical and environmentally friendly?

Managing a brand outside of one’s core area of expertise is difficult, and VW wouldn’t need to drive very far down the highway to learn that lesson. BMW’s venture into Rover a few years ago was an economic disaster prompting BMW to quickly return to its luxury roots. Mercedes take over of Chrysler has been an equal disaster. As headaches go Mercedes has a big one trying to turn a profit at its Chrysler division. It turns out the two German car manufactures are great at managing luxury brands. Conversely, VW is great at managing a value brand (imagine that!). How many billions of dollars must be wasted to relearn this lesson?

What can we learn from this?

1. It’s tough to change peoples’ perceptions of an established brand.

2. Moving into unfamiliar markets with new products is a dangerous strategy

3. Know what you do well and stick to it.

4. Keep investing in your core products.

When we do eventually see a new minibus from VW I hope it’s launched into the value conscious segment of the market and not the luxury segment. A VW bus as a luxury vehicle? Picture it – geriatric hippies with $300,000 annual incomes, driving to the local health food store surfing the internet and flashing peace signs. It would be enough to blow the radiator in my VW bug (if it had one).

[1.], Virtual Tour of VW’s Transparent Factory, PP 15

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