WOLFSBURG, GERMANY -- Volkswagen doesn't lack ambition. Europe's biggest car company has one goal: Overtake Toyota as the world's top auto maker.
On paper, the goal doesn't look impossible. Volkswagen is on a roll and just announced record production, revenue and profit. It is already the world's fourth-largest vehicle maker (after Toyota, General Motors and Ford). It is building factories in China and India and its showroom is stuffed with products that win kudos for fuel efficiency and performance. The company's bosses seem to have lost any sense of German reserve and politesse; it's time for war. "The Volkswagen group is taking the offensive," Martin Winterkorn, chairman of VW's management board, said at the company's annual press conference yesterday. "And we're not setting our sights on being the No. 2 or No. 3."
But dethroning Toyota is an exceedingly tall order. The VW brand is a dud in the United States, which is still the world's largest market for cars and light trucks, if not the fastest growing. Building a Toyota-beater there is sure to be slow and highly expensive. And working with Porsche, the sports car maker that is buying majority ownership of VW, could prove distracting, even painful. Reports of infighting between the companies are rife and Porsche hasn't even started to lift its ownership from the current 31 per cent.
North America was once VW's hottest foreign market. VW Beetles (produced in Germany until 1978 and in Mexico until 2003) were ubiquitous. The success of the cheap and cheerful grocery-getters, and the early success of the Golf, emboldened the Germans. A VW factory was built in Pennsylvania. But it was plagued with quality problems and was shut down in 1988 after a 10-year run. It's been downhill for the VW brand since then. Last year, 393,000 VWs - mostly Golfs, Jettas and Passats - were sold in North America. The figure in 1970 was 575,000.
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VW did everything wrong on the other side of the Atlantic. It offered only a narrow product range. When Americans and Canadians abandoned the family sedan in favour of the SUV and the mini-van, VW kept shipping small, Euro-trash cars across the Atlantic. There was no VW specifically tailored to American tastes. Reliability was atrocious in many model years (disclosure: The last car I owned, a Passat, was a lemon). In essence, VW handed the foreign-car market to Toyota, Honda and Nissan.
The final blow was the soaring euro. Without a North American factory, VW had no natural hedge against the dollar. The company hasn't made a profit in the United States and Canada since 2002. Last year, North American revenue fell 9.5 per cent to €13.2-billion ($20.2-billion).
VW's new philosophy is: Better later than never. The company is all but certain to build a factory in the United States (though Canada and Mexico are still officially in the running) and use it to produce cars and light trucks tailored to North American tastes for expansive vehicles. The problem is that VW is so far behind the Japanese that it will take years, maybe decades, to catch up. One factory will not win the North American market war. Suppliers will have to be recruited. VW doesn't even have much of a dealer network left on the continent.
It's hard to say whether ownership by Porsche will help VW's North American, and global, ambitions. So far it looks like Porsche will benefit more than VW from the deal, one that seems driven by the European Union's proposed emissions standards. Because of their powerful engines, the Porsche sports cars and SUVs produce vast amounts of carbon dioxide. Re-engineering the engines to meet the new EU standards would be impossible, unless Porsche decided to reinvent itself as an econo-box maker. The solution is to buy a car maker - VW - with much lower carbon dioxide emissions. When the Porsches are rolled into the VW lineup, the average fleet emissions should fall to a level that will keep the EU's green police at bay.
The biggest risk for VW is a power struggle with the far smaller Porsche. Porsche's CEO, Wendelin Wiedeking, hated the so-called VW Law because it protected VW from a takeover and gave the unions an extraordinary amount of power over the way the company is run, including a veto over factory closings. Last year, the European Court of Justice struck down the VW Law because it capped voting rights at 20 per cent. But now VW's works council and the government of Lower Saxony, which owns 20 per cent of VW, are trying to rescue parts of the law to keep a lot of the union power intact. The workers see an ally in Ferdinand Piech, who is chairman of VW and one of Porsche's largest shareholders.
So the stage is set for a battle between Mr. Wiedeking, backed by Porsche, and Mr. Piech, with his awkward allegiances to both companies. While the animosity between the two might be overstated by the German press, there is no doubt that tensions exist. A simmering dispute could delay the cost-cutting measures that VW still needs - the VW brand's operating profits, while improving, are still poor - and delay the company's Toyota-busting plans.
The good news for VW is that it is the only auto maker with the confidence, the financial muscle and the products to go after Toyota. The bad news is that gaping hole in the North American market and squabbles with Porsche could ensure VW's underdog status for a long, long time.
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