Jonathan Browning, CEO of Volkswagen Group of America, has been on the job only two years, but the German automaker's U.S. sales have made tremendous progress, climbing 23 percent last year to 443,840 vehicles.
VW Group, seeking to expand in North America, opened a plant in Chattanooga last year to build the mid-sized Passat, and in April, announced plans for a factory in Mexico for its premium brand, Audi. That plant is expected to start production in 2016.
This year, the group expects U.S. sales to top 500,000 units, in part from double-digit gains by the VW brand, said Browning, 52, a native of England who joined VW in 2010 after holding executive posts at General Motors and Ford Motor Co.
But there is more work to do. VW Group of America, which includes the VW, Audi and Bentley brands, is only about halfway to its goal of selling 1 million vehicles annually in the United States by 2018.
Browning is charged with shepherding VW Group of America and its dealers through this massive growth. He met in Detroit with the Automotive News staff to discuss the group's strategy in North America, as well as its challenges.
Q: After a strong start this year, what challenges might VW and the industry face in the second half?
A: The first four months have run ahead of expectations. We increased our forecast for the industry from 13.7 million to 13.9 million. That's on the low end of the forecast range, but we still believe it's a good planning base for the balance of the year.
We do see some areas of uncertainty around macroeconomic factors, like the contagion effect of any further euro zone crisis, the impact on consumer confidence this may trigger and discussions around the debt ceiling and long-term public deficits [in the United States]. Obviously, we're entering an election period. We'll see how that plays out and what impact that might have on consumer confidence.
So we are being relatively cautious. At the same time, we're positive about the overall economic progress that's being made and will be made. We continue to believe in a moderate but sustained recovery.
What is your 2012 forecast for the VW brand?
We set a growth goal for the group of over 500,000 units in the United States. Within that, we said the VW brand should achieve double-digit sales growth. We set out a plan to have a strong start to the year. Obviously, we had the benefit of the Passat still being very much in its ramp-up phase. Beetle similarly. Jetta is still early in its life cycle. There are a number of factors allowing us to drive growth in the early part of the year.
I don't expect growth to maintain that pace through the full year and beyond into 2013, but while we've got momentum, we're certainly looking to keep that going.
How will you maintain the VW brand's momentum when Passat sales decrease?
That's where I think it's wrong to just focus on year-over-year comparisons. As we'll see this month, for some of the Japanese manufacturers who were very much constrained last year, there'll be the opportunity for big growth this year.
The important thing for us is putting layers of growth enablers in place in the marketplace. We were very much dependent on the Jetta historically, and we've sustained Jetta business in the marketplace. Through April, we're about on par with Jetta sales a year ago when it was early in the launch phase. We've added Passat on top. Often, when you launch one product, you see others tail off. What we've been able to do with VW so far is sustain the underlying business -- Jetta specifically -- and added Passat on top of that. That is a very significant step forward.
You've changed prices, which has helped sales. Have you also changed most North Americans' perception of Volkswagen?
I think we've been able to update some of that perception. Update in two respects: One, in trying to update people on the current product offering, as in what's available now. And secondly, in terms of accessibility, the value it represents. Take the Passat, for example. From generation to generation, its average transaction price is only $200 lower but the price range has grown significantly. Those people who felt it was out of reach before, now increasingly believe it's accessible. At the same time, VW offers a step up in the marketplace -- 13.6 percent of Passats sold for above $30,000. It's extending it in both ways.
Might you try this approach on another model? How about the Tiguan?
Various enablers would have to come together to make that work. You have to have a sourcing footprint that makes it sustainable. You need a product strategy that makes it attractive and profitable. And you have to put that whole package together. At some point in the future, could you envision that happening on other entries within the car line? Absolutely. But no announcements today in terms of what we might or might not do with Tiguan.
You've created a uniquely American product with the Passat. Will other vehicles follow?
If you think about it strategically, why do we believe we can do that? One of the big topics in our organization is this modular tool kit structure, the MQB, which is being rolled out now. That modular tool kit is a fundamental enabler in solving the conundrum of getting economies of scale but also the ability to tailor to local market preferences.
Our estimation is it will deliver 20 percent reduction in unit costs, 20 percent reduction in the one-off costs of capital expenditure and r&d and about 30 percent saving in terms of development times.
The VW brand has a goal of 800,000 annual U.S. sales by 2018. Might you need a third North American plant to hit that target?
It depends on how you put different scenarios together. You could see a whole variety of different setups, but I really don't want to speculate on what they might be. It's very important for us, in Chattanooga, to stay focused on the task at hand, which is getting Passat up at the run rates we need to be at and getting the new team on board. This whole growth strategy is a long-term plan. If you spend too much time focusing on the end of it, you're not paying enough attention to the individual steps that are necessary to get there.
You've talked about a three-row SUV for the United States. What's the latest on that model and why is it important for this market?
Our focus is on our core vehicles and centered very much on the compact and mid-sized segments. We have a compact sedan and a compact SUV. We then have a mid-sized sedan. We don't really have a competitor in the mid-sized SUV/crossover segment. And that's one of the big segments in the marketplace. It's a very logical piece of the jigsaw puzzle for the VW brand. We have the Tiguan and the Touareg. But we don't have a seven-seat vehicle priced in the heartland of the mid-sized SUV. That's clearly an opportunity for us.
What do you think happened with the Routan minivan?
It's a perfectly capable product. It's perfectly acceptable when you line it up next to its competitors. But in terms of the scale of business we were able to generate with the Routan, I think it shows the importance of being able to establish awareness, familiarity in a segment, and especially, a segment where there were some very dominant players. And we struggled to get on the shopping list. It has fulfilled a role in the portfolio, but it has certainly been a small role in the portfolio.
Dealer profitability is at 2.5 percent and about 90 percent of dealers are profitable. How does VW boost that profitability?
You can put it into two categories. Clearly, as you grow the business, your opportunity to thin fixed costs and enhance margins through volume increases. Driving the volume through a controlled cost base is a big piece of it. The fact that we went from 400 units on average [per dealer] in 2010 to 500 in 2011 was a big lever in terms of retail profitability.
At the same time, we're spending a lot of time looking at the cost of doing business between dealers and ourselves. How do we manage the business? Where are the costs? And how do we continue to improve the cost efficiency of doing business between us?
How is VW working with its dealers to better manage costs?
One example is the distribution system. If you have a distribution system that's predictable -- that gets the right vehicle to the right dealer at the right time -- that allows the product to pass through the network a lot more quickly. That capability we need to continue to improve as we go through this growth phase.
Another example is aftersales. If you think about scaling up the typical service operation, you have to calculate in terms of certain factors: workshop capacity, labor hours and labor cost. One thing we're putting a lot of effort in -- in parallel to increasing core service capacity -- is also increasing adoption of express services.
These are a quicker fit, a service-while-you-wait solution. That allows you to get more throughput, without using up the core, most expensive capacity of a dealership by using the regular process. It's these sort of things we're trying to deliver jointly with our dealers to achieve maximum efficiency. You don't have to just scale up everything according to the factor of volume growth.