NEWS ANALYSIS

VW's rise to global No. 1 remains elusive as U.S. sales disappoint

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FRANKFURT (Bloomberg) -- Two years after Volkswagen Group began its latest push to become a major contender in the U.S. car market, Detroit's automakers are hitting back hard, hampering VW's bid to be the world's best-selling carmaker.

A recent report by Consumer Reports lauded General Motors Co.'s Chevrolet Impala as the best sedan on the market. Ford Motor Co.'s Fusion is winning share from Toyota Motor Corp.'s Camry, the top-selling car in the United States.

Meanwhile, the VW Passat, which was made bigger and cheaper to appeal to mainstream American drivers, never cracked the Top 20 models in the United States.

While Volkswagen has risen to become the world's third-largest automaker thanks to well-timed expansions in China and Brazil, the United States has remained something of a riddle for Europe's biggest carmaker. Finding a solution to make VW more than just a niche player is key to achieving its goal of becoming the world's biggest automaker by 2018.

"We understand Europe, we understand China and we understand Brazil," VW Chairman Ferdinand Piech told Bloomberg this month. "But we only understand the United States to a certain degree so far."

The lack of progress in the world's second-biggest auto market is a source of frustration for VW, which was the top-selling foreign automaker in the United States until Toyota surpassed it in 1975.

Flagging growth

Piech's comment marks a bit of a departure from the company's usual confidence about meeting the 2018 goal to be the global leader in sales -- with a volume of more than 10 million units -- and profits.

"Our pursuit of innovation and perfection and our responsible approach will help to make us the world's leading automaker by 2018 -- both economically and ecologically," CEO Martin Winterkorn said in a letter to shareholders in the company's 2012 annual report.

With VW being outspent on advertising by more than two-to-one and slow to plug gaps in its lineup, the automaker is at risk of missing its 2018 U.S. sales target of 800,000 vehicles by 33 percent, IHS Automotive estimates.

VW's U.S. ad spending of $691 million is dwarfed by GM's $1.83 billion, Toyota's $1.76 billion and Ford's $1.62 billion, according to data from market researcher Nielsen.

The VW and Audi brands combined probably will continue to lose market share in October, according to four analysts in a survey by Bloomberg News.

The redesigned Passat helped to almost double the brand's U.S. sales, but growth is flagging. Through September, VW brand deliveries declined 3 percent as fewer Americans bought Golf hatchbacks and Jetta sedans, even as industrywide demand rose 8 percent.

October estimates

Combined deliveries of the VW and Audi brands probably rose 3 percent in October, the average of three analysts' estimates.

Industrywide sales last month, which will be released on Friday, are projected to climb 7 percent, the average of nine estimates. Even if this month's VW sales exceed estimates, the 2018 goal is going to be hard to reach.

"VW has never really taken the U.S. customer seriously," said Arndt Ellinghorst, head of auto research at International Strategy and Investment Group in London. "They tend to over-engineer their cars and hope that Americans will one day appreciate them."

Rival SUVs

The company also needs to plug gaps in its lineup. Plans to flank the Passat with a big, affordable, U.S.-style SUV haven't been finalized almost 10 months after the Crossblue prototype was shown at the Detroit auto show. Based on typical development times of three years, the model may not reach showrooms before 2016, five years after the Passat.

The lack of a competitor to the Ford Explorer and Toyota Highlander leaves VW in the SUV segment with just the compact Tiguan and the $43,995 Touareg, which costs 11 percent more than the luxury Lexus RX. That shuts it out of a big chunk of the U.S. market.

VW's sales are forecast to rise to 535,000 cars in 2018, according to IHS Automotive. While that's a 22 percent gain from last year, the target -- set in 2007 -- is for 800,000 autos.

"They're just not 25 percent better than Honda, Nissan, Toyota, Ford and Chevy," said Kevin Tynan, auto analyst for Bloomberg Industries. "They don't have enough equity built up to just be OK."

Intense competition

That's especially the case as U.S. carmakers roll out upgraded passenger cars, pushing into VW's traditional area of strength. Deliveries may have risen 16 percent for Ford and 8 percent for GM in October, the averages of nine estimates.

Chrysler sales probably climbed 14 percent, the average of seven estimates. Analysts project that Toyota, Honda Motor Co. and Nissan Motor Co. also will grow faster than the total market in October. Sales probably increased 13 percent for Toyota, 12 percent for Honda and 17 percent for Nissan, each an average of six estimates.

"The intensity of competition has increased, especially with the recovery from the recession," Jonathan Browning, head of VW's U.S. operations, said in a telephone interview. "We're building a deep presence in the United States for the long term. You can't switch this on overnight."

To counter competitors, Volkswagen needs to overcome its past, when the company had a reputation for questionable quality. Even now, VWs rank average or worse on J.D. Power's dependability ratings.

George Westerman hasn't forgotten engine troubles experienced with a Beetle in the 1960s. The 80-year-old from suburban Chicago has turned his back on the brand ever since. That has meant generations of lost sales. "I can say that without question I'm a car guy and have influence in my family," said Westerman, who bought a Honda Civic, which competes with the VW Jetta, in August.

Including children and grandchildren, his family owns eight Hondas. That kind of experience is reflected in the national statistics: After Toyota surpassed Volkswagen in U.S. sales in 1975, it is now the No. 3 seller of light vehicles in the market, trailing only GM and Ford. Last year, Volkswagen's U.S. sales were more than doubled by Honda and tripled by Toyota.

U.S. commitment

Volkswagen remains committed to gaining ground in the United States.

CEO Winterkorn and other top executives flew to New York earlier this month to spend a day test-driving the company's vehicles alongside the competition on U.S. roads. That's part of learning to play the game in the hype-heavy market, and it may yet pay off. A majority of auto executives expect VW to gain market share in the United States over the next five years, according to a survey of auto executives by Booz & Co.

VW's emphasis on fuel economy and engineering may also not be hitting the mark. American consumers are more interested in communication technology like Ford's voice-activated Sync system, said Vince Sheehy, president of Sheehy Auto Stores, which operates 17 dealerships in Virginia and Maryland, including one Volkswagen store.

"They need to find more ways to appeal to that next group of customers," Sheehy said. "The product is great and very true to German engineering. They just need a way to appeal to a few more of those conquest customers."

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