Volkswagen’s US business is in a tailspin.
In the first half of 2016, sales of the German brand are down nearly 15% compared to same period last year. And 2015 wasn’t exactly a bumper year for VW.
In July, VW’s US sales fell another 8.1%.
Even though the Volkswagen brand sold more than 2.9 million cars around the world in the first half of the year, only 149,000 of them were in America.
As Volkswagen Group, the second-largest automaker in the world, continues to experience worldwide growth, it is troubling that its most prominent mass-market brand is having a hard time in one of its most important markets.
There are a few major reasons for VW’s struggles.
1. The Scandal
Since last September, the Volkswagen brand has been embroiled in a catastrophic emissions cheating scandal that has decimated the company’s reputation in the US and around the world. VW admitted to equipping more than 11 million diesel-powered cars worldwide with software designed to cheat government emissions tests.
As a result, the company will have to either buy back, terminate the lease of, or modify nearly 500,000 cars sold in the US since 2009.
In addition, VW has agreed to a settlement with the federal and state governments worth more than $10 billion. Although the financial toll has been extreme, the damage to VW’s public image has been far more devastating. As the largest proponent of diesel technology in the US, many of the owners burned by the scandal also happen to be some of the brand’s most loyal. Even non-diesel buyers are turning away from the brand out of distrust.
2. A History Of Questionable Reliability
For much of the past decade, Volkswagen has been plagued with powertrain reliability issues in the high-volume four- and five-cylinder engines that power Passat, Jettas, and other VW products, according to Consumer Reports.
Even though VW has made significant strides over the past few years in terms of quality, the emissions scandal has all but wiped out any positive sentiment the automaker may have engendered with the public.
There seems to be a stigma that lingers in the minds of mass-market shoppers who place a premium on reliability. This stigma is further enforced by publications like JD Power’s 2016 vehicle dependability survey, where VW scored below industry average.
3. VWs come at a cost
In the Volkswagen Group family, VW’s role is to build mainstream, mass-market transportation while its luxury-oriented siblings like Audi and Bentley build higher priced, fancier models. Even though VW sees itself as a rival for the Toyotas and Fords of the world, that’s not how it’s working out for the brand at the dealership.
Thanks to its European origins and a close association to its corporate siblings, US consumers see VW as a near-luxury product. This means buyers shopping for products like the brand’s Passat sedan approach the process differently than they would if they were shopping for a Honda Accord or a Toyota Camry. A Camry or Accord buyer may be willing to part with his money for a bare-bones base model, but VW shoppers want a German luxury product at a discounted price, leading them to load-up on optional goodies.
As a result, the brand’s price point is near the top in many of the segments in which it competes. While VW has attempted to make its product more attractive to value shoppers by offering de-contented models, the typical VW still costs more than its competitors.
Another reason for VW’s higher price point is the brand’s inclusion of premium technology even in lower-level models.
The company chose to include complicated turbocharging systems and advanced DSG automated twin-clutch gearboxes on economy models, while competitors like the Honda Civic, Ford Focus, and Toyota Corolla employ cheaper and more conventional technology. The availability of such options is a boon for consumers, but it prevents VW from competing on price with its less sophisticated competitors.
Although it’s possible VW could embrace its quasi-near-luxury role in the market, it’s a decision that could be difficult to pull off.
Volkswagen is stuck in a very narrow band of the market because moving into a higher price point could potentially cannibalise sales of Audi’s A3, A4, and Q3 models, which sell for between $35,000 and $45,000. And a move up market would risk the brand becoming reduced to a niche luxury manufacturer, which does not mesh with VW’s already successful global presence as a major mass-market brand.
4. Missing a key product
These days, nearly one in every five cars sold in the US is a compact crossover.
It has become the most important segment in the US market. While VW’s Tiguan compact crossover is a fairly competent car, it simply can’t compete with segment leaders such as the Honda CR-V, Ford Escape, and Toyota RAV4 in terms of price and capability.
And the difference in sales is staggering. Over the first six months of 2016, Honda has shipped almost 160,000 CR-Vs while Toyota has sold 165,000 RAV4s.
On the other hand, VW has sold just 20,000 Tiguans over the first half of the year, and that figure includes a 50% increase in sales over last year.
5. The market is crowded
The final factor for Volkswagen’s slipping sales is a marketplace that is growing more crowded with competitors. A decade ago, VW’s mass-market products only had to contend with challengers from the major Japanese manufacturers and a couple of domestic products like the Ford Focus. In the decade since, the market has changed significantly.
Not only are the Japanese brands still riding high; Volkswagen must now also compete with Hyundai and Kia from Korea, and a major resurgence from Detroit’s Big 3. Even worse for VW, total US auto sales have peaked at 17.5 million cars and is expected to slip over the next couple of years.
How Volkswagen can come back
Volkswagen has been struggling in the US for much of the past decade. Its struggles were exacerbated by the emissions scandal that led to a complete revamp of the company’s top leadership. At this point, VW must contend both a need to improve its product while repairing its reputation, which is in shambles.
In addition, VW is also confronted with the fact that its position in the market as a quasi-near luxury brand means that it has a very narrow band from which to operate.
There aren’t any quick fixes for VW. The company has a slew of new offerings in the pipeline — including an all-new second generation Tiguan — slated to debut over the next year or two. This is a good start to revamp its product offerings, but convincing consumers to return to a brand that many felt betrayed by will be difficult.
It remains to be seen if the company can change its image — and sales figures — in the US.