Why Volkswagen's Sales in America May Recover Sooner Than You Think

Five years back, the German auto giant, Volkswagen , had voiced its ambition to become the world's biggest automaker by 2018. To make this happen, the company needed a solid presence in the world's three largest auto markets -- the U.S., China, and Europe. Of the three, the U.S. was most challenging, since it had never been a big market for Volkswagen. To overcome the hurdle, Volkswagen customized its cars according to American tastes, and started local production at Chattanooga, Tenn. This boosted sales, and the going was great -- until last year.

In 2013, sales suddenly took a U-turn, and started falling -- threatening to quash Volkswagen's ambitious dreams for good. Will the company be able to reverse this negative trend, and make its U.S. sales take off once again?

Outside Volkswagen's factory at Chattanooga, Tenn. Photo credit: Volkswagen of America.

Big push
For Volkswagen's dreams of becoming the world's largest automaker to succeed, it can't afford to lose its footing in the U.S. It's true that sales have slipped 5.2% for the namesake VW brand through November this year, but it's also true that the company doubled its 2009 U.S. sales last year . No other automaker -- be it Ford or Toyota -- matched this feat.

In 2012, Passat sales increased fivefold . According to Presidio Automotive, which provides buy-sell advisory services to high-value car dealers nationwide, the top 10 U.S. dealer groups acquired more Volkswagen franchises than any other brand.

Source: data courtesy of GoodCarBadCar.net.

Volkswagen generates more than 70% of its annual sales in the U.S. from the core VW brand and it wants to sell 800,000 VW vehicles by 2018. Let's face it -- this is a tall order.

But encouragingly, auto researcher IHS Automotive predicts that the VW brand's sales can definitely climb to 516,588 by 2018 . This means that between2009 and 2018, a span of just 10 years, the VW brand can increase its U.S. sales by 140% -- reason enough for investors to rejoice.

IHS Automotive's sentiments have been echoed in the annual survey of auto executives conducted by Booz & Co. and Bloomberg few months back. Around 60% of survey takers cast their vote in favor of Volkswagen's increasing market share over the next five years. While it's unlikely that the company's U.S. market share will rise to be in the league of Ford's 16% or even Toyota's 14.4%, we can definitely expect an improvement over its current 3.9%.

Big investments
Volkswagen has invested $4 billion in the U.S since 2008. More than $1 billion has gone into a 1,400-acre, state-of-the-art manufacturing plant in Chattanooga, and the remainder into expanding dealer networks and technology transfer. Yet the company plans to pour another $5 billion in North America by 2015 .

The Chattanooga plant has an annual capacity of 150,000 vehicles , of which the company is utilizing only two-thirds so far in building Passat sedans.

A worker assembling the Passat sedan at Chattanooga. Photo credit: Volkswagen of America.

But Volkswagen has serious profit targets. It's trying to get its overall operating margins up to 6%, compared to 3.5% in 2012. It recently said that it will reduce its annual capital spending on property, plants, and equipment by 500-million Euros year over year.

Against this backdrop, it's difficult to imagine that the company would build such vast capacity and capabilities without having a good plan for its utilization. A second vehicle at the Chattanooga plant may be just a matter of time. According to the industry grapevine, Volkswagen is mulling over whether it wants to build a new SUV based on its Crossblue concept at Chattanooga or Mexico, and will come out with an announcement before the year-end .

Big models
The VW brand's current woes arise to a large extent from its aging models. In November, Americans bought some 175,836 midsized cars according to goodcarbadcar.net, up 6.5% over last year. But the Passat could find only 8,876 buyers, down 15.8% from November 2012 .

The decline was an eyesore beside Ford Fusion's spectacular 51% year over year increase to 22,839 units . Ever since Ford launched the redesigned 2013 Fusion, it has become a serious contender in the midsized sedan race, taking on stalwarts like Toyota Camry and Honda Accord.

Jetta, the other VW staple for the U.S. markets, also could not leverage the 7.2% year over year growth in the compact small car segment in 2013 through November -- its sales slipped 4.1%. The segment-leading Honda Civic and Toyota Corolla have clocked 7.9% and 5% growth, respectively.

But, these trends could change before long. Volkswagen will introduce the redesigned Jetta and Passat models in 2014 and 2015 and refresh its SUVs and crossover lineups in 2015 and 2016. It will launch its Golf lineup around mid-2014, and while Americans are not exactly crazy about hatchbacks , the launch is likely to stir some excitement before the larger debut of the new Jetta and Passat.

Finally, the Beetle's latest redesign has been a success, and the sporty hatchback has emerged a leader in its niche segment. Sales have surged 55.1% year over year through November to 40,315 units. The company has hired a new vice president from Nissan to oversee marketing of Volkswagen Group of America.

Last word
It's true that Volkswagen's U.S. sales have slumped in 2013, but this could be temporary. The company has achieved big milestones in the last four to five years, and has built capabilities that will go a long way. It's just a matter of time -- once the big launches happen, the needle will move again. If Volkswagen meets its big goals, excellent! If it doesn't, it could still make big sales gains that will fetch nice returns for its investors.

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The article Why Volkswagen's Sales in America May Recover Sooner Than You Think originally appeared on Fool.com.

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