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Volkswagen puts its faith in Tennessee

Crossover, r&d center come with pledge to heed American tastes

VW is investing $900 million in its Chattanooga factory. The r&d center will be at the site.

WOLFSBURG, Germany -- Volkswagen will soon assign 200 people in Chattanooga to take on a task that has flummoxed its headquarters here for decades: figuring out what American consumers want and finding a way to give it to them.

In conjunction with its announcement last week that it would invest $900 million to expand its Tennessee factory to accommodate a mid-sized cross-over tailored to the U.S. market, VW also mapped out plans for a new vehicle r&d center at its Chattanooga site, deviating from a tradition of central planning from Wolfsburg.

Winterkorn: "Listening"

The r&d center, due to begin operating later this year, is the first major initiative to be greenlighted by Volkswagen's recently formed North America Committee, a high-level subset of Volkswagen AG's supervisory board that includes CEO Martin Winterkorn and board members in charge of finance, sales and marketing, procurement and production. The panel's work so far is the clearest sign yet that Volkswagen headquarters has institutionalized market planning for North America as a top priority.

It's also a tacit acknowledgment that six decades after arriving in the U.S. market, the German automaker still needs help deciphering the tastes of the American car buyer.

"Some 200 highly qualified engineers will be working" at the new r&d center, focusing on the needs of the North American market, Winterkorn said during a press conference announcing the Chattanooga expansion last week. "By doing so, we are strengthening our development skills and expertise in the market. That means we're listening even closer to the voice of the American market and the wishes of American drivers."

Volkswagen plans a crossover for the United States based on the CrossBlue concept.

Those drivers have been like an alien species for VW. Despite VW's dominant brand position in Europe and China, VW-brand vehicles have never managed to crack the top tier in the United States, even as newcomers from Japan and South Korea have surged.

Through the first six months of 2014, the Jetta and Passat sedans -- which account for two-thirds of VW-brand sales -- ranked seventh and ninth in the United States, respectively, in the compact and mid-sized segments. In the red-hot market for crossovers and SUVs, VW is a nonfactor, fielding two slow-selling, premium-priced entrants in the Touareg and Tiguan.

Alan Brown, general manager at Lewisville Volkswagen in suburban Dallas, thinks he knows why: Many VWs just don't have what consumers want -- features such as backup cameras, smart key fobs and USB ports to charge their cellphones.

Brown said he has seen gung-ho VW shoppers walk out the door because the vehicles lack Pandora streaming Internet radio, a feature that has long been available with basic brands such as Honda, Toyota and Hyundai.

VW dealers "are always saying: 'How can our Audi and Porsche lines be so cutting edge and we be so far behind the curve?'" Brown says.

Horn: Adding manpower

Michael Horn, CEO of Volkswagen Group of America since January, says the new center in Chattanooga will address those shortcomings by adding manpower in two key areas: competitive analysis of the U.S. market and product planning.

VW engineers there will get a more in-depth, firsthand look at competitor vehicles by doing teardowns and analysis of component sourcing and cost. Currently, Volkswagen's U.S. analysis team looks at the competition from a marketing level: Who is offering what features on what vehicles, and what are they charging, Horn says.

The extra engineering manpower will also give Volkswagen more capacity to study new vehicle possibilities and derivatives of current vehicles that could boost U.S. sales volume. Product proposals will still be subject to the same review process in Germany. But crucially, Horn says, the new capabilities will help Volkswagen of America develop stronger business cases to justify investment from Wolfsburg in the vehicles they want.

Horn and his U.S. team will need the help if they are to break VW-brand's current free fall -- a 15-month streak of declining U.S. sales -- and get back on pace to meet the parent company's stated target of 800,000 U.S. sales a year by 2018, a goal Winterkorn reaffirmed last week.

For Volkswagen, a successful effort would help fill what remains a big hole in its global presence. Honda and Toyota took similar paths to prominence in the U.S. market, starting with factories and later shifting more product development and engineering duties from Japan, to the point that top-selling U.S. models like the Honda Accord and Toyota Camry are now largely conceived by American designers, engineers and product planners.

"If you can succeed in the U.S., you're truly a globally competitive company," said Brett Smith, co-director of the manufacturing, engineering and technology group at the Michigan-based Center for Automotive Research. "From that perspective, it's important for Volkswagen to succeed here."

Growth in Chattanooga
Volkswagen last week announced a major expansion of its Chattanooga plant, which opened in 2011 with an annual capacity of 150,000 vehicles and employs about 2,500 people assembling the VW Passat.
• New investment: $900 million to add a second assembly line
• New factory jobs: 2,000
• Planned capacity: 250,000 units per year
• Vehicle: 7-seat mid-sized crossover based on CrossBlue concept
• Production start: Late 2016
• State and local incentives: About $274 million
• New operation: North American vehicle r&d and planning center employing 200

But VW has tried and failed at this before. And Smith says that no matter what changes VW makes, its late start will make it difficult to break the grip of larger rivals with loyal followings.

Winterkorn and Horn signaled that there would be more initiatives emerging from the North America Committee. The group has met three times this year to develop a clearer U.S. market strategy, drawing on proposals from U.S. officials after 45 VW executives from the United States and Germany worked together in February to identify about a dozen priority areas. Among them: the need for greater engineering and market analysis capability, greenhouse gas and drivetrain strategy, the dealer network, product cadence and pricing strategy, Horn said.

In June, the committee approved the U.S. r&d and planning center and gave the go-ahead to study new vehicle derivatives to bolster the brand's U.S. lineup, Horn said. Other proposals are being developed now to be presented at later meetings, he said, declining to elaborate.

"We are now very systematically driving through this board committee," he said.

Brown, the VW dealer, says he's encouraged by what he hears so far.

"We were the brand that still had cassette players when everyone else was four years into CD players," Brown said. "We've often felt that we're a day late and a dollar short. But I think we've made great strides, and I think Mr. Horn is going to do great things at a rapid pace."

Gabe Nelson contributed to this report.

You can reach Ryan Beene at

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