VW delays revamp of Phaeton flagship in profit push, report says

FRANKFURT (Bloomberg) -- Volkswagen is delaying the introduction of the new Phaeton as the automaker seeks to improve returns on the slow-selling, upscale sedan by lowering production and material costs, people familiar with the matter said.

Even though a new version of one of VW's least successful models is ready for production, the automaker is again reworking the Phaeton, which costs more than three times the mid-size Passat sedan, said the people, who asked to not be identified because the discussions are private.

VW did not on its plans for the model.

The 89,650-euro ($101,000) Phaeton, a pet project of engineering-obsessed former Chairman Ferdinand Piech, is an anomaly in VW's lineup of pragmatic sedans, hatchbacks and SUVs. The car is manually assembled in a special factory in Dresden by technicians wearing white uniforms and sometimes white gloves. The model features hand-selected wood veneers in the interior and seats adjustable in 18 different ways.

"There is always the element of the Phaeton being the answer to a question no one ever asked," said Tim Urquhart, a London-based analyst at market researcher IHS Automotive. "Who wants a VW limousine?"

Piech, who stepped down in April after a power struggle with CEO Martin Winterkorn, ordered development of the Phaeton to challenge VW engineers and take on the Mercedes-Benz S class. He demanded a car that could drive comfortably at speeds as high as 300 kilometers per hour (186 mph). The vehicle, which also competes with the A8 from Volkswagen's Audi unit, started production in 2002 and has been largely unchanged since.

Low volume

While Mercedes sold more than 100,000 S-class cars last year, VW made about 4,000 Phaetons, a drop of 30 percent. That's the lowest volume for an existing VW production vehicle, including the Eos convertible, which is being cut. The Phaeton amounts to less than a rounding error for a brand that made 6.16 million vehicles in 2014, but is important as a flagship.

Reworking the model would send a signal that Volkswagen is moving on from the Piech era to focus more on profitability. The namesake VW brand generated operating profit equivalent to 2.7 percent of sales in the first half, compared with a 5 percent margin at rival PSA/Peugeot-Citroen.

Herbert Diess, who previously headed purchasing and development at BMW, has been in charge of the VW brand since July. He is tasked with lifting margins at the automaker's biggest unit to more than 6 percent by 2018. His ability to turn around projects like the Phaeton will be a key test for one of the candidates to eventually succeed Winterkorn as CEO.

In the past, tinkering with the Phaeton has ended careers at Volkswagen. The decision by Wolfgang Bernhard to pull the car from the U.S. market in 2006 because of weak demand contributed to the ouster of the executive, who ran the VW brand at the time and now heads Daimler's trucks division.

With Piech gone and no longer around to defend the Phaeton, it is surprising VW is sticking with model, said IHS's Urquhart. "And given the current drive to save costs at VW, it is even more lucky to survive."