Volkswagen roller coaster is in a down cycle

WASHINGTON -- For three straight years, Volkswagen turned skeptics into believers, filling U.S. showrooms with vehicles that struck a chord in a way that no VW had since the original Beetle.

Now some of those believers are skeptics again.

After doubling U.S. sales from 2009 to 2012, the VW brand is sliding. Sales have declined for seven straight months, including a dramatic 18 percent drop in October, and are down 4 percent for the year in a market up 8 percent.

Behind the decline is a product cadence that has left aging VW models competing against fresher rivals, and a product mix that has limited VW's success in some of the industry's fastest-growing segments.

This reversal has cast doubt on the VW brand's goal of selling 800,000 vehicles a year in the United States by 2018 -- a milestone Volkswagen AG CEO Martin Winterkorn is counting on to help his company overtake Toyota as the largest automaker by then.

It has also put U.S. executives in the tough position of having to pacify their restless dealers, who worry that the German automaker won't follow through on its goal of turning VW into a top-tier U.S. brand.

VW became the first import brand to grab any significant share of the U.S. market with its iconic Beetle, introduced here in 1949. But after peaking at 569,183 cars in 1970, the brand has never managed to reclaim that level.

"Volkswagen, in their history in the United States, has been this roller coaster ride," says Wade Walker, president of Walker Motors, a VW-Mazda store in Montpelier, Vt. The brand's dealers, he added, "don't want history to repeat itself."

Jonathan Browning, CEO of Volkswagen Group of America, has described this year's downturn as an expected consequence of the VW brand's product cadence, saying the sales pace will pick up again when new models arrive.

In an interview last week, he said VW's investment in an assembly plant in Chattanooga, an engine plant in Silao, Mexico, and an expansion of an assembly plant in Puebla, Mexico, all show the company's commitment to its U.S. goals.

"All of these things are building those solid foundations that will drive growth in a sustainable way for the long term," Browning said. "People can entertain themselves day in, day out, creating forecasts and second-guessing forecasts, but I think the important thing is to look at the evidence."

Dealers aren't completely convinced. They see other worrying signs, such as the fact that the Jetta, Passat and Tiguan compact crossover -- their three core models -- are selling worse than they did last year despite rising incentives.

Profits for the average VW store have also declined, says Jimmy Ellis, a VW dealer from Atlanta and chairman of the brand's national dealer council. Dealers who invested in their stores to capitalize on VW's resurgence are now seething.

"You're having a great time at a party," Ellis said, describing the change in mood since last year. "Everybody is celebrating. The punch bowl is full. The glasses are full. Everything is great. And all of a sudden, somebody comes in and they take the punch bowl away. The party's over."

VW dealers have long complained about profits that trail those of other brands. By 2012, average margins had risen to 2.2 percent, still short of what a typical Toyota or Honda dealership earns but an increase nonetheless.

That number is now back down to 1.7 or 1.8 percent, Ellis says, "depending how you slice the numbers." Volkswagen of America tried to mend ties, tweaking dealer bonus programs to make them more lucrative and scheduling small meetings around the country to let dealers talk to top executives. But the frustration remains.

"The dealers feel like they aren't being listened to," says Walker, the Vermont dealer, who is VW dealers' representative to the National Automobile Dealers Association.

This summer, when VW dealers filled out a twice-a-year satisfaction survey from NADA, they reported feeling significantly worse about the current and future value of their franchises, and the appeal of VW products.

The brand received an overall score "near the bottom of the industry," according to a summary of the survey results circulated by NADA and obtained by Automotive News.

"As negative as the previous two surveys had been for Volkswagen," the summary says, "it was somewhat surprising to see how much further their scores fell this time."

VW has won praise for its most recent products, such as the Jetta, Passat and redesigned Beetle, but analysts say it is suffering for its reliance on small cars. The growth in the United States this year has come in large part from sales of pickups, which VW does not sell, and SUVs, a segment in which VW is an also-ran.

VW's entry in the fast-growing compact crossover segment, the Tiguan, has struggled, dealers and analysts say, because it puts power and driving dynamics ahead of family-hauling capabilities. For the same price -- about $26,000 for a base model with an automatic transmission -- a buyer can get more spacious models, such as the Toyota RAV4, which provides better fuel economy with only a small downgrade in horsepower.

"That's a segment that's growing by leaps and bounds," said Alec Gutierrez, a senior analyst at Kelley Blue Book. "There's a lot of strong product there, and the Tiguan's price point right now just doesn't justify what you're getting."

Meanwhile, competition has grown far fiercer in the compact and mid-sized sedan segments, where American brands are now strong rivals. Japanese automakers have recovered from the 2011 earthquake and tsunami and gained from a weakened yen.

Browning said he sees it as "remarkable" that Passat sales are nearly flat from last year, considering the modest growth of the mid-sized segment and stiff competition from the redesigned Honda Accord and Ford Fusion. He said VW expects flat sales through 2014, or modest growth from the redesigned Golf, with faster-paced growth after that as the next wave of products arrives.

"Last year was a year when we really grabbed the opportunity," he said. "You have to take the opportunities when you can, and look to hold the gains in the other times. And that's what we're working through."

VW is scheduled to come out with refreshed versions of the Jetta and Passat in 2014 and 2015, and plans to overhaul its lineup of SUVs and crossovers in 2015 and 2016. That will likely include a successor to the Tiguan and a mid-sized model similar to the CrossBlue concept shown at the Detroit auto show this year. Neither model has gotten the green light from headquarters in Germany.

Ellis said he expects a slog for U.S. dealers until the new crossovers arrive.

"We're in hand-to-hand combat in the marketplace with basically the Jetta and the Passat, in a world of crossovers. That's our challenge," he said. "If you're not really in the crossover business -- and today, I have to say as a VW dealer, it doesn't feel like we are -- then you're going into a prizefight with your right arm broken." c