Volkswagen dealer: 'We've got to get in the game'

It may have taken 18 straight months of falling sales, but it seems that Volkswagen AG finally got the message in 2014 that its U.S. operation needed more focus to hit its goal of selling 800,000 VW vehicles by 2018.

Michael Horn was named CEO of Volkswagen Group of America and head of the VW brand here last January, putting a seasoned VW executive with deep ties to Wolfsburg at the helm. Since then, the company has committed to producing a new midsize crossover in Chattanooga, launched a redesigned Golf that is raking in awards and retooled its product strategy to reduce its product life cycles from seven to five years while cutting prices and boosting vehicle content.

Those changes should be welcomed by dealers, who have struggled with mounting red ink, says Alan Brown, the new chairman of the Volkswagen National Dealer Advisory Council.

Brown, 42, is general manager of Hendrick Volkswagen Lewisville and along with his partners is investing $21 million in a new dealership, Hendrick Volkswagen Frisco, both in suburban Dallas. He spoke with Staff Reporter Ryan Beene about how VW dealers fared last year and what's on the horizon.

Q. How was 2014 for VW dealers?

A. The network struggled. The blessing of 2014 was that Volkswagen of America, with [CEO] Michael Horn and [COO Mark] McNabb and [Sales Vice President Mark] Barnes -- they were able to get our future redirected so that 2016 and 2017 will put us back on track. Obviously, the current business model of 2014 was hard on a good percentage of the dealer body, and that's part of where I plan to make an impact in 2015.

Why was 2014 so difficult?

We had Toyota, Nissan and Honda come back with a vengeance. We had our 2014 models, which had issues with content and pricing. The immediate change for 2015 was pushing down the price and increasing the content, so we know for sure that 2015 will be better than 2014 because we'll actually be more competitive in those key model segments such as Jetta, Passat and Tiguan.

What's happening in 2016 that will get VW back on track?

We're redesigning the product to be even better on price point and technology. We're getting away from the longer seven- and eight-year cycles.

We're really working to make more decisions in North America rather than having to travel to Germany every time a decision needs to be made about content or redesigns. We're getting more product built in America or Mexico so that the cost factor stays in line.

What makes you confident that those plans will succeed?

I'm confident because Mr. Horn has the support and respect of his colleagues in Wolfsburg. There is no question that he has an understanding of how to navigate and get the problem-solving aspect of the issues here for the United States communicated, processed and approved in Wolfsburg. He has done a phenomenal job accomplishing that.

It appears that the management team in Wolfsburg trusts him, believes in him and fully supports him.

What do you want to accomplish in 2015?

Let me tell you how simple my agenda is, and I've shared this with the leadership team. I want to focus on getting the voice of the dealer from the regional councils. I really want to know what our brothers and sisters in New York are struggling with versus California versus Texas. Getting the true voice of what's happening with individual dealers by region is crucial. I will be putting a lot of emphasis on regional councils gathering the real information from their constituents to identify for each region how much money on the hood of the car is needed to increase volume in those dealerships.

What will that do for dealers?

I want volume to increase. That helps the throughput at those stores, which equals profitability for every dealer making the correct effort at the end of 2015.

Our management team of Horn, Barnes and McNabb worked diligently in 2014, but they juggled several major issues, and I won't say they were fully distracted, but they're human. There's only so much time in the day. Now that we've got all of this heavy lifting in 2014 and our future is so bright in 2016 and 2017, 2015 can be a year of focus and simplicity for them where we can just drill down on how do we sell more 2015 models in North America and get our dealers back to profitability. 

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.