Wednesday, June 11, 2008

Volkswagen Expects to Cut Next-Generation Golf Production Costs by $1,600 Per Car

By Chris Haak


As Volkswagen prepares to launch its sixth-generation Golf (called the Rabbit in the US) this fall, the company expects to cut its production costs by €1,000 (about $1,600) according to a report in the Wall Street Journal.

VW has taken several steps to improve the profitability of its well-regarded, bestselling vehicle, which until recently has been unprofitable for the company. Primary among these moves is the decision to have the next-generation vehicle share its platform with the current-generation model.

Further, the company plans to hedge its foreign currency exposure problems (right now it's being hammered in a weak dollar environment because it produces no cars in the US) by opening a US factory in the next few years. This factory, which we've previously mentioned, will have the capacity to produce 300,000 vehicles annually. According to the WSJ, the company will export 125,000 vehicles from the US and Mexico to Europe, while importing the same quantity (125,000 vehicles) from Europe. To meet their ambitious sales goals for the US (from about 200,000 vehicles per year currently to 800,000 vehicles per year by 2018), the US plant will supply 300,000 (with the 125,000 crossing paths each way across the Atlantic meaning a near-wash in terms of volume) and the Puebla, Mexico plant will supply 375,000.

Volkswagen seems to be taking the necessary steps to have the production capacity online to meet its objective of quadrupling its US sales over the next 10 years. It still remaons to be seen, however, if the US buying public will be willing to go along with VW's plans and, you know, actually buy those 800,000 new cars. It's not like Volkswagen's competitors will be sitting still during the next 10 years - I fully expect that there will be even more choices in the US by then, including broader lineups from the established players like Honda, Nissan, and Toyota. Also, we will see new entrants from India and China competing at least against the low end of VW's segment.

Forgetting for a moment about the competition (as VW has apparently done), there is also the issue of building products relevant to the US market that people will want to buy. US consumers have diverse tastes, but it's safe to say they don't want expensive European cars priced above their closest competitors, but without a premium brand name and with questionable reliability. They want stylish, good-performing products that won't fall apart, and at a fair price. US consumers don't see Volkswagens as a premium product, so the company should probably apply some of the aforementioned production cost reductions to lowering prices and embracing the company's history as a purveyor of solid, economical cars that are a good value. But just because they should do that doesn't mean they actually will.

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