It's hard to picture a brighter success, or a tougher tumble, than Volkswagen experienced with its manufacturing operations in the United States.
More than 1.1 million vehicles surged out of VW's Westmoreland, Pa., plant between 1978 and 1988. The plant enabled VW to pioneer both transplant manufacturing and new manufacturing processes, including intensive assembly line training that set quality precedents for automakers.
But mistakes and mistiming dogged VW.
The Corporation for Enterprise Development, a Washington economic think tank, concluded that taxpayers were left with more than $70 million in incentives and loans used to lure an operation whose promise never fully materialized.
Why the failure?
"It may have been the marketing. It may have been price. It may have just been the inability of the German and the U.S. organizations to integrate strategically for the market," says John O'Green, who came to Volkswagen of America Inc. through VW's credit arm in 1981 and finished as leader of business strategy and integration.
Carving a niche
The plant was built to produce the Rabbit, a car that initially earned praise for its mechanical systems and handling. High fuel economy and the availability of a diesel version gave the hatchback a powerful market niche during the energy crunch of the 1970s.
But VW didn't see the need to change its car styling to match a quick-moving American market. The automaker also didn't recognize that its small-car market niche would erode as fuel prices stabilized and competition increased. Meanwhile, a German board of management, overseen by a second-guessing board of stockholders, hamstrung U.S. progress.
"The German culture was too slow and too proud to adapt to the needs of other markets," Richard E. Dauch, who was general manufacturing manager for Volkswagen Manufacturing of America from 1976 to 1978, told Automotive News. Today Dauch, also a former General Motors executive, is CEO of American Axle & Manufacturing Holdings Inc.
Dauch was chosen by James McLernon to put operations in place in America for VW.
McLernon was a former Chevrolet manufacturing chief tapped by then-VW management board Chairman Toni Schmucker to see if U.S. production would be feasible. Schmucker hoped local production could free VW of global currency exchange problems while igniting a new volume market for the automaker.
Under McLernon, the American operations purchased the Westmoreland facility, an unfinished Chrysler Corp. plant 35 miles south of Pittsburgh, with a $40 million loan from the state of Pennsylvania and spent about $250 million to equip it for assembly.
VW also bought an American Motors stamping plant in South Charleston, W.Va., investing heavily to make the plant capable of exterior sheet metal finishes.
Workers at the Westmoreland plant attach electrodes to a VW Rabbit before it is lowered into a 55,000-gallon tub of primer.
The body shell of the first VW Rabbit produced in Westmoreland in 1978 is lifted to allow plant traffic below it pass.
A VW employee, above, welds body shell pieces.
"Within 18 months, from 1976 until April 10, 1978, we had production, excellent quality with no product recalls, over 1,000 a day within two months of launch, two-door, four-door, diesel, K-Jetronic (fuel injection), 10 different body colors, four different interiors," Dauch remembers.
Pulling in profits
"And in that period, every single goal set by the board of directors was met or exceeded," he said. "We launched on time and early. We were staying within budgets. We were actually making profits."
VWoA thought it saw a bright future for yet more vehicle assembly volume. To prepare for that future, it bought a former Chrysler missile plant in Sterling Heights, Mich., for an undisclosed sum.
But the market for VW vehicles had softened, and shutdowns caused by oversupply began at the Westmoreland plant as early as 1980. In addition, costs were high because engines and drivetrains were sourced from Germany.
Capacity was estimated at 240,000 vehicles annually. The closest the plant came to reaching that target was in 1980, when 200,000 Rabbits were built.
Employment at the plant had peaked briefly at 5,700, far from the 20,000 jobs Pennsylvania officials expected, and by 1984 only 1,500 were working at the plant.
"The Japanese were coming on like gangbusters in the early '80s," Dauch says. "They were having four- to six-year life cycles. You cannot compete if you have an eight- to 10-year life cycle, and the other guy's got a four-year life cycle."
VW sold the Sterling Heights plant back to Chrysler for $194 million in 1983. Chrysler made the acquisition based on the recommendation of Dauch, who left VW for Chrysler in 1980 after concluding that VW's leadership was unlikely to relax its grip on decisions made in the United States.
"In my new life, I recommended to my new chairman of the board, Lee Iacocca, to purchase the plant from Volkswagen. So we did that, and it became a brilliant assembly plant for Chrysler," Dauch says. Dauch was Chrysler's vice president of worldwide manufacturing.
When VW production at Westmoreland ended in 1988, the plant was sold to Sony Corp. VW sold the air conditioning plant in Texas to Valeo SA.
But the automaker didn't abandon North American manufacturing. It spent $1 billion in 1988 to construct a plant in Puebla, Mexico, to build Golfs and Jettas. That plant is still in operation.
O'Green says that while the U.S. operations had given it their best, in the end VW had to face facts.
"At some point all of the sunk costs and the continuing operating expenses of a production system couldn't be justified with the production volume and the sales," he says. "If I remember correctly, we were less than 1 percent of the total Volkswagen volume worldwide.
"To make regional manufacturing decisions for that kind of volume proved to be part of the faulty logic."