VW: Despite inventory, controversy, 2022 was a good year

While 2022 was another good year for profitability for Volkswagen dealers, a controversial move by the German automaker to create a new brand — Scout Motors — with what many feel should be their products definitely left a mark on the brand's factory-dealer relations.

But it was more common issues — a lack of inventory and leasing troubles — that most kept 2022 from being a better year, incoming Volkswagen National Dealer Advisory Council Chairman Charlie Hall said.

Hall, 43, president of Hall Imports in Brookfield, Wis., said his store in suburban Milwaukee kept pace with 2021 in terms of profitability and could have beaten it had production issues waned as expected in the second half of the year.

Hall said he wants to focus on improving the partnership with Volkswagen Credit to make VW leases more competitive to help dealers maintain their profitable certified pre-owned programs. He also would like to see the automaker's German parent reverse course and sell its Scout brand vehicles through the VW dealer network. Hall spoke with Staff Reporter Larry P. Vellequette. Here are edited excerpts.

Q: What was 2022 like for VW dealers?

A: It was good. We weren't sure what to expect going into the year. We thought there was going to be a little more inventory in the back half of this year that has really not materialized. There's been a myriad of problems. It's not just chips; it's been headliners, it's been radios, it's been rear differentials. It's been a lot of things coming at us, but I think in terms of overall profitability, 2022 was very similar to 2021.

How was 2022 for your store?

Pretty similar to the rest of the country. We were about flat in terms of profitability, down just slightly in terms of volume, but we were able to balance it out in a couple other areas, so it was another good year.

Let's talk about the elephant in the room, Scout Motors, and VW dealers' reaction to it. Where do the dealers stand on the explanations they're getting right now from VW AG and VW of America?

The explanations at this point are still a little bit fuzzy. We were completely caught off guard with the announcement and then the lack of information that came after that announcement. We were all sad to see Scott Keogh depart. We understand that he left for a very good opportunity to take a manufacturer from an idea to a product in showrooms down the line at some point.

And speaking of showrooms, I think I share the sentiment of every other VW dealer out there: We want Scout vehicles to be in our VW showrooms.

What are VW dealers going to tell VW of America CEO Pablo Di Si and other brand leaders when they get together for the make meeting at the NADA Show?

The dealers are going to tell them that we can execute the Scout vision. And we have an idea of what that is, because we share that same vision. We've been looking for that kind of product to be in our showroom for a long time. It dovetails perfectly with the rest of our lineup. And you know a couple of years ago, when we were first talking about the ID4 coming to this country, it was a thing that Scott Keogh talked about: that the dealers are a distinct advantage to getting this electric car off the ground. And this is going to be one of the differentiators from the direct sell manufacturers — our dealer network. We agree completely with that and think that we can leverage that opportunity with Scout, too.

Let's talk about VW product, starting with the ID Buzz minivan. Before he moved to Scout, Keogh seemed to feel that there would be sufficient volumes in the U.S. for the ID Buzz to justify localizing that product in Chattanooga. What are your thoughts?

They've indicated that there are three different tracks available: One is to produce the car out of the existing facility in Europe, and that opportunity would give us between 15,000 and 25,000 vehicles a year here; option B would be to increase the size of the facility in Europe, which would get us maybe 30 to 50,000 per year here. But in order for that car to pencil with local production, we would have to guarantee somewhere around 100,000 units a year in the U.S., and based off the indications right now, I think that's completely possible.

That's a lot of volume for what is essentially a minivan.

We have people walking into our showrooms right now trying to hand us money to get in line for the car. There's a ton of pent-up demand, for sure. But I think their hesitations to a degree are about long-term volumes. I think we could easily sell 100,000 in the first year, but can we do that in year five? I think that's the real question. But if it's packaged right and priced right, I don't see why we couldn't. There are a lot of models in this marketplace doing 100,000 units a year. The ID Buzz is going to attract more buyers than just EV buyers. There are [internal combustion engine] buyers who will buy the ID Buzz just because it's a cool car that also happens to be an EV.

What price point would make the ID Buzz a hit? Where does it have to land?

I think if it comes in around $60,000 or $70,000, we would be right there in the wheelhouse of what that car could deliver. It's the total package, and I think it would represent a good value in that range.

If they did decide to build the ID Buzz in North America, would it matter if it was built in Chattanooga or Puebla, Mexico?

I would love for them to build the ID Buzz in Chattanooga. I think that would be another part of the story that we can tell, and I think Chattanooga becomes more and more relevant and more and more of an opportunity for the Volkswagen story to be told. I think it would be fantastic. I was just there a short time ago, and it sure seems to me like there's plenty of investment there to squeeze in ID Buzz production.

VW's next BEV coming to the U.S. is an Arteon-sized sedan, the ID7. Given what's happened with sedans in general, will there be sufficient consumer demand for a battery-electric VW sedan?

I don't think the public really knows about that sedan yet. We were a sedan company for so many years and then we spent a lot of money marketing ourselves now as an SUV company. And that's worked; that pivot has been successful. The EVs sedan market, and where that vehicle is going to be priced, I think is one of the few sedan markets that has growth opportunity. So I think it is a pretty logical play to bring into this country.

Let's talk about VW's strategy with its crossovers, doubling up offerings in the segments, especially with the Tiguan and now Taos. How has that played out at the retail level?

It's done very well. We continue to have high demand for all those products. Tiguan is really our stronghold in that segment, and that segment is so gigantic that we still have opportunity there. When we debuted the Tiguan initially in 2009, it was probably a little too small, a little too expensive for this market, but they really packaged it well when they redesigned it in 2018, and it's been a smash hit. When we finally get production back up to speed, that car is going to continue to grow.

So who is buying the Taos over Tiguan?

The people that we see choosing Taos are younger, first-time buyers, as well as older, empty nester customers who don't necessarily need the extra room. They like the idea of an SUV where they sit up a little taller. They may be tired of a sedan or coming out of a Passat. But it's been a good car for us, it really has.

The Atlas Cross Sport is also in the same segment-splitting spot with the Atlas, but it launched right as the pandemic started in 2020. Has it recovered?

The people that drive them like them. I still think there's a huge opportunity for that car. There's a lot of people that don't know what an Atlas Cross Sport is. That car was supposed to be launched with a huge media campaign in March 2020; I think we were going to own the NCAA tournament that year. We all know what happened though. It's been kind of a good ride along with the Atlas, but I think that car has an opportunity to grow quite a bit more because when people see it, they like it.

Let's talk about Volkswagen Credit. Di Si said in November that he was determined to improve the partnership between VW dealers and the automaker's captive finance arm. What is it that VW Credit needs to do to be a better partner for dealers?

Volkswagen dealers by and large have great confidence in Volkswagen Credit. This has led to a frustration with Volkswagen Credit in the last 12 to 18 months in particular in their pullback of programs. When you get in a room with Volkswagen dealers and the topic of Volkswagen Credit comes up, the passion is tangible, and that's because we collectively believe that we're better off with a strong captive and we know what VCI can do when it's operating well.

We are really looking for VCI to get more aggressive in the coming months and year and really get back to being the preferred bank of every Volkswagen dealer. Unfortunately, we've seen a migration away from VCI to credit unions or local banks or other lenders and we really want to get back to doing business with VCI. It's a pipeline of customers that is funneled right back to us, and it's something that we can't afford not to do for the long term. We're encouraged by the actions they took at the end of the year to get back in the game.

It would seem very tough to hit the brand's aggressive market share targets in the U.S. if VW Credit is sitting on the sidelines.

Correct. But VCI can do it. They can do it. We believe that they can do it, and we like it when they kick in, because if it didn't matter, no dealer would care, and you wouldn't see that passion come out when we talk about VCI. We want to do business with VCI. Just give us a compelling reason to do so.

Is there a specific area where dealers need to see improvement from VW Credit?

Lease. We're still doing business with VCI, but by and large, that's because we're harvesting equity out of maturing VCI leases and can apply it to a new car. But that is declining. There will be an endpoint to that at some point, and we're going to have a gaping hole where these lease customers used to be coming back to us that we won't have. We've got to get back to that focus, if we want to grow long term.

VW has a very successful certified pre-owned program. What happens to that without those lease returns?

The CPO business is dwindling. It really is. It was propped up for a long time by [the diesel emissions buyback program], but those cars are obviously gone now.

Now we're struggling to get lease returns back, and the walk from CPO customer to new vehicle customer is true, and we're losing that advantage that we had.

I know a lot of dealers, ourselves included, who looked at that CPO program as its own franchise; it was that good. But if we don't have the supply to support it, it's not going to be there for us.

Volkswagen dealers bought into the brand's EV program wholeheartedly; I think 99 percent of dealers in the U.S. signed up. I know it's early days, especially with the production issues across the industry, but do VW dealers still see the return on that investment that first motivated them to sign up?

The return is not there yet, but there is confidence that it will come. Localized production of the ID4 is a game changer for us when it comes to that topic. We were importing 1,000 or 1,500 cars on a good month from Germany. Now Chattanooga has the ability to kick out four, five, six thousand ID4s a month. So once that supply really starts to hit dealerships, we'll really see the fruits of that program.