What were those major issues that management juggled?
It was a lot of the things we've talked about -- how do we become more competitive in our segments, how do we do that immediately from 2014 to 2015? What do we need to do to our 2016 and 2017 models to be ahead of the curve and not just trying to play catch-up behind Toyota, Honda and Nissan? How do we get more of a voice in North America so we don't have to travel to Wolfsburg every time we need something? All of those things that we discussed are what Horn worked on diligently.
Why are VW dealers struggling with profitability?
It's based on throughput. The dealer body has come a long way since 2010 with facility investment -- buildings, fixtures, furniture, land and taking on more vehicle capacity on the ground. For the most part the dealer body has done a phenomenal job creating a much better experience for the client, but the byproduct of that is higher expenses, more employees to manage more real estate. Our expenses have risen to give the customer a better experience and the volume has tapered off, which creates red ink or a negative financial balance.
Are there any factory programs or financial assistance to alleviate some of that pressure that you would like to see implemented until the volume starts to grow?
The dealer council and Volkswagen of America for 2015 are focused on dealer profitability. Period. There are no other distractions. There's nothing else that's more important to Horn, McNabb and Barnes than seeing all of our dealer body get back on track and get some wins under our belt.
We need to get some enthusiastic feeling back into the dealerships that have been struggling. What we don't want to do is go into 2016 and 2017 with new product and still have a fairly large number of dealers struggling. We want to have the dealer body back on track so we go into '16 with our swagger and our confidence back, so that the business plan in these stores is aggressive and dealers believe, because we know that when dealers believe, they're unstoppable. They can overcome anything. But when a dealer gets behind the eight ball and it's not fun anymore and you're printing red ink, there's a much different feeling in that store and we want to make sure that that scenario isn't parlayed into 2016.
Are dealers making money on new-car sales?
Obviously the new-car margins have dropped. When we were trying to get rid of 2014 models that maybe didn't have as much content or were priced higher than the competition, there's only one thing for a dealer to do -- that product will eventually sell but you need to price it lower and lower, and if you don't have margin then you're obviously not getting what you want to per car.
The other thing is Volkswagen has done a heckuva job. Warranty work has fallen off significantly in our dealer network because we are building a much better car, and that's where service express and trying to go up against Pep Boys and the aftermarket companies is crucial. We don't have the warranty work that we had four, five or six years ago that when we were going through a tough time selling cars, we were able to fall back on that and pick up some profitability.
How much has warranty work fallen off?
I would say in a lot of stores warranty work over the past three years has fallen off 50 to 60 percent.
How much of that have dealers been able to replace with repair work or customer-pay maintenance?
I think every dealer is working hard to try to keep their customers engaged with their stores and their service process by extending discounts and other loyalty programs. I think the dealer body has worked very hard at that, but as warranty work was falling off we went away from servicing cars at 5,000 miles to servicing cars at 10,000 miles, so you didn't see the customer as frequently. These were all things that needed to happen because the industry was changing. We all laughed at BMW 12 to 15 years ago when they went to 10,000-mile service intervals, but they were way ahead of the curve.
If the customer is coming in half the time to service the car and warranty work is way off and new-car sales start to dip, you take 20 or 30 percent away in gross profits on new cars, you take 20 to 40 percent away in warranty work and throughput of servicing the car every 10,000 miles versus 5,000 miles. Most dealers are working on a 3 to 5 percent profit margin in a store anyway, so it doesn't take much of a hit in those areas before you go from making $100,000 a month to losing $75,000.
The next big product, the new midsize crossover based on the CrossBlue concept, is expected to start production in Chattanooga in late 2016. Do dealers have enough new product coming between now and then to be competitive?
Here's the most fun thing to look at that really is a great piece of hope. None of us want to use hope as a strategy, but I have so much confidence that 2015 is going to be so much better than 2014 because when you look at the content story of Jetta, Passat and Tiguan, there's a tremendous difference in the number of models getting backup cameras, alloy wheels, S-model cars that are getting Bluetooth and cruise control that are going to put us back in line.
We lost so many deals to Honda and Toyota because they were $1,500 cheaper, and they had a backup camera. It's the smallest points of defection that McNabb, Horn and Barnes really took a hard look at. This really started toward the end of 2013 in evaluating where these defection points were. The good news is all of this is easy to follow and you can quantify it. When you look at the defection points, we have filled the gap and in some cases exceeded the gap needed in these defection moments in price and content.
What do you know about the redesigned Tiguan that's coming in 2016?
I know that it's going to be a neat car. I know that they're trying to get it produced this side of the pond. I know that having a diesel engine is super important and also having two models -- one with two rows and one with a third row is very important. I know that we cannot make the mistake of this car coming out and it not being directly priced against Honda and Toyota. It has to go directly up against CR-V and RAV4 in content and price. If that doesn't happen, we will miss the mark, and it's the sweetest spot in the U.S. market. We've got to get in the game, and Germany knows that we need to get in the game.
Has the factory committed to those attributes -- local production, a long-wheelbase model and having a diesel?
I will say that has been Mr. Horn's total focus. He knows that without those key elements, we'll never be in the game, and we've got to get in the game to get back to our goal of by 2018 selling 800,000 units. That is his total focus.
You're obviously a big supporter of VW's management team. Is that sentiment widely shared among VW dealers?
Horn has a commanding presence I haven't seen in a long time. He's like a regular guy next door, but at the end of the day he's getting things done because he's well-connected and well-respected in Wolfsburg, and that's what we need.
We've had some nice guys run the company in the past, but I think we've struggled as of late to have someone that truly had the voice of Wolfsburg and when they went up there to make a presentation that it really got fully accepted and not divided in two and cut in half.
We were very bold when we announced our goal of selling 800,000 by 2018. If you really look at everything that Volkswagen has accomplished with Porsche, Audi and the Volkswagen brand globally, they've pretty much accomplished everything that they set out to do, but they have not accomplished getting toward the 2018 goal in the United States. That has been a renewed focus. They will not stop until they get the North American market back on that train.
What else do VW dealers want in the product portfolio?
There's a ton of talk of having something smaller than the Tiguan in the subcompact SUV market. We know we've got to get a third-row SUV, and that's coming to Chattanooga. I also think an all-wheel-drive Sportwagen to go head-to-head with Subaru is needed.
The GTI is a real fighter. We have the Golf R, which is a halo car. You have the electric Golf. You have the Golf redesigned and priced to the market making a hatch cool again. You get this new redesigned Sportwagen here again, you get all-wheel drive. You get a Tiguan actually doing 100,000 to 150,000 units per year competing against Honda and Toyota, and you start to add these things up and you get to 650,000 to 700,000 units really fast.
Has the factory told dealers it expects to sell 100,000 to 150,000 units of the next-generation Tiguan a year?
Common sense tells you this. The Honda CR-V and Toyota RAV4 sold more than 600,000 units combined in 2014, and we're currently at less than 30,000 with our current Tiguan because of content and price. It's not because of quality; we have a perceived cost of ownership that is hurting us. As they reprice and recontent that car and give it a diesel option and maybe a third row that gives us even more exclusivity, we could go quickly to 100,000 or 150,000. Look at what Passat did. We went from selling nothing to a whole bunch overnight, so I think you're going to see the same quick uptick once we get our ducks in a row.