A new rhythm for Volkswagen

Volkswagen has a goal of selling 800,000 vehicles in the U.S. by 2018, a part of its strategy of becoming the world’s leading automaker.

Some industry analysts think the U.S. target is a tall order, considering sales have slowed since 2012 and totaled 407,704 vehicles last year.

Michael Horn, however, believes that number can be achieved. “With the right new products … and if everything comes in the right time and with the right approach, 800,000 definitely is possible,” he says.
In January, Horn became president and CEO of Herndon-based Volkswagen Group of America and president of the Volkswagen brand in the U.S.  A 24-year Volkswagen employee, he was vice president for global service and parts — in charge of the company’s entire service business — before his arrival in Virginia.

Volkswagen’s market share in the U.S. currently stands at 2.2 percent, compared with 14 percent in Europe. Horn’s strategy for accelerating U.S. sales — for the 2018 target and beyond — includes producing a new midsize sport utility vehicle and quickening the company’s pace in introducing new generations of car models.

VW announced in July that it would spend $900 million to produce the new SUV starting in late 2016 at the company’s 3-year-old plant in Chattanooga, Tenn., which currently makes Passat sedans. The seven-seat SUV would fill a hole for Volkswagen in one of the fastest-growing product segments in the U.S. auto industry. The company also plans to build a development and planning center in Tennessee that will scrutinize the manufacturing practices of competitors in tailoring vehicles for the U.S. market.

The projects will add 2,000 company employees in Tennessee. The state will give the automaker a $166 million grant for plant development and a $12 million grant for worker training.

In addition to production of the new SUV, Volkswagen cars made in North America will be totally remodeled after five years rather than the seven years customary in Europe. Between overhauls, vehicles will get face-lifts — changes that “refresh” the current model — after three years instead of four.

“If you carry your model one year longer, your car is aging.  Demand is not as high anymore,” Horn says. “Then you have to spend more money on incentives and all of those things.  If you factor all of those things in, it definitely makes sense to reduce the cycles, and that’s what we’ve done.”

Five months before Volkswagen announced plans to produce the new SUV in Tennessee, the United Auto Workers narrowly lost a vote to organize plant workers. Volkswagen took a neutral stance on the vote, but Tennessee politicians vehemently opposed the unionization effort. The defeat was seen as a blow to the UAW’s ambitions of organizing workers at U.S. auto plants in the South.

Shortly after the vote, the UAW announced it was forming a union local that Volkswagen employees in Chattanooga could voluntarily join. A UAW official recently claimed that about half of the plant’s 1,500 hourly workers are now members of the union local.

Unions at other Volkswagen plants have played a major role in works councils, committees of employees who negotiate with management on day-to-day work issues.  Horn declined to comment on labor activities in Tennessee.

The $900 million to be spent on the new SUV ($600 million in Tennessee) is part of a $7 billion investment that Volks­wagen plans to make in North America by 2018. In addition to the Chattanooga plant, the company also has a North American production facility in Puebla, Mexico.

In Virginia, Volkswagen Group of America has 648 employees at its headquarters in Herndon. The company moved the headquarters from Auburn Hills, Mich., near Detroit in 2008. Volkswagen also has 28 new-car dealers in Virginia.

“Virginia has provided us with the right environment to support our innovation and growth,” Horn says, citing an educated workforce, a pro-business culture and a good quality of life.

Throughout the U.S., Volkswagen of America has 5,900 employees and nearly 1,000 dealers. In addition to the Volkswagen brand, the company is the home of the U.S. operations of Audi, Bentley, Bugatti and Lamborghini plus the financial services firm VW Credit Inc.

When not working at the Herndon headquarters, Horn likes to relax by paddle boarding  with his wife and two sons on the Potomac.

Horn, a native of Hamburg, Germany, earned a bachelor’s degree in business administration from the European University in Antwerp, Belgium, and an MBA from the University of San Francisco. He currently drives a 2015 Golf GTI.

Virginia Business interviewed Horn at his office on Sept. 15. The following is an edited transcript.

Virginia Business:  Since you have [been head of sales for VW in Europe as well as president of Volkswagen Group of America], what are your reflections about how the auto industry is changing in the United States? 
Horn:  Well. I also lived here 25 years back.  I think the automotive business in Europe and the U.S. compares, to a certain degree, the same, and then it’s really different. 

To start with, the price points here in the U.S., the pricing of the vehicles in the market, is much, much lower than in Europe.  It’s not just due to the exchange rate, but it’s also due to what the customer really is willing to pay for a car, or what he’s willing to put up as far as the monthly rate is concerned for a car …

The second thing is, in the U.S., there is much, much more transparency for the customer as well, which is good, but which is also a challenge [for the manufacturer] because you’re much more measurable. In terms of the transparency, you have cost.com, edmunds.com, Kelly Blue Book, Auto Trader, you name it.  And so the customer … can pretty much make up his opinion in terms of what is the quality of the car, what is the cost of ownership of the car, what do people say in terms of are they happy with the experience and so forth.

VB:  Is Volkswagen still on track to reach [a goal of 800,000 vehicles sold in the U.S. by 2018]?
Horn:  Volkswagen is very much committed to reach this goal. With the right new products … and if everything comes in the right time and with the right approach, 800,000 definitely is possible.

VB:   Volkswagen sales in the U.S. have slowed in the past two years. Why has that happened? 
Horn:   There are different reasons from my point of view … Volkswagen has done a really great job in bringing the current Jetta and the current Passat to the market … They were cars designed for this market — one built in Mexico, the other one built in Chattanooga.  Basically it showed if we do it right, if we have the right design, the right [features], pricing and everything, we can do the job.  We had a great head start and tremendous years in 2011, 2012 because at the end of ’10, we brought the Jetta, at the end of ’11, we brought the Passat …

I think, in the future, we have to do our homework better. That’s one of the things we’ve addressed now, for instance, in making decisions to reduce the life cycle — the cadence — of our products.  If you take the Passat today, for instance, it’s getting into its fourth year [of the current generation of the model].  The Jetta is already four years old. [The model recently has been refreshed for 2015 and is now on sale.] The Passat will see a face-lift of the model year ’16.  But the cars have been four years on the market without any major changes, just very minor ones. 

If you look at what the competitors have been doing, they have brought in all new models [on a faster cycle] and are already face-lifting in between [generations] …  That’s the reason why we made those decisions now to reduce the cadence in order to be fresher, to bring more design changes to the market, because that’s also one of the points where the American markets are more demanding than, for instance, the European markets.  Just to give you the example, let’s say 40 percent of the market here is leasing … Those leasing customers come back after three years, and they want to have something fresh … 

So the wheel is turning faster and faster, and that’s, I think, one of the reasons [that sales have slowed] …

And the second reason is [the market is growing rapidly for midsize SUVs]. And year on year, for instance, it’s growing about 17 percent. And we have a nice car; it’s called the Tiguan, but we are not really pricewise competitive in the segments. It’s a European import. It’s 10 to 12 percent more expensive. The American consumer is not willing to pay premium prices except for real premium brands … 

That’s something we have to acknowledge because our dealers are doing a great job. We work with them, we look at them, we measure their performance, and our dealers are doing their bit. They have a good after-sales business, service and parts business. But we will grow with the future models and with the SUVs.

VB:   So, what is the life cycle now? And what do you want it to be?
Horn: If you look at the sedans for instance, here in the U.S., you bring an all-new model … and then you bring a face-lift after three years. Then after another two years, you bring an all-new model.  So you have a total cadence for one model of five years …

What we did for most of the time with Volkswagen, we brought an all-new model, and then we carried it for four years [before giving it a face-lift]. And then after another three years, we brought an all-new model. So we have a seven-year cadence … 

[The different patterns partly reflect cultural differences in consumers.] The German, if he can afford a new car, sometimes doesn’t want to show it to his neighbor. He buys the same color. He knows it’s new, but his neighbor is not supposed to because German neighbors are jealous. Really, it’s true. “What does he have? Can he afford this?”

In the U.S. it’s totally different.  In the U.S., it’s, “Wow, great, you made it, buddy. Good job.  Awesome,” and so forth.  People are proud to show off their new cars. So they want to see this new design …
Loyalty in the U.S. is quite lower among customers. They go for the best value, the best price … If you carry the model one year longer, your car is aging.  Demand is not as high anymore …  And then you have to spend more money on incentives and all of those things.  If you factor all of those things in, it definitely makes sense to reduce the cycles. That’s what we’ve done. …  

This means everybody has to think differently …  Just to explain this to you on how big this decision is: Designers usually design a car, then they design the next car, and then a couple of years later start working on the face-lift.  With the three-year cadence, they have to think in the beginning, “How do I design this car so that I make it really easy for me to bring a change after three years which is not too costly and which is still bold and noticeable by the customer?” …

And so with the next model generations, starting with the Jetta successor and starting with the Passat successor, in ’17, ’18, we will start to introduce those cadences.  So, that’s a big one for us. …
The core brands in Europe, they get away with those [seven-year] cycles. The customers don’t mind and still buy cars. [Automakers] are not challenged to bring the shorter cycle because it’s more effort. The market is working on the seven-year cycle more or less in Europe 80 to 90 percent.  Here in the U.S., 90 to 95 percent,it’s different.  Then, you have to adapt — do your homework and adapt — or you’re out.

VB:  My understanding from reading the press is that there was a choice between [producing the new SUV] in Chattanooga or in Mexico.  Why was it you decided to do this in Chattanooga?
Horn:   It was purely done on economic criteria.  I mean it makes sense from a lot of different points, but naturally if you go to your supervisory board and you want to invest around … $1 billion U.S., they want to know whether this is a prudent investment …  We, of course, looked at our existing facilities in Mexico and whether it makes more sense commercially to do it there. 

You analyze these factors on many different variables.  One to start with is what is the additional investment the plant has to do in order to get [the automobile] platform in?   And so the positive for Chattanooga was that they already had … what we call MQB —  in America, it’s an awkward translation, it’s called “modular transverse toolkit”  — for the B platform. [MQB is a standardized technical platform for nearly all Volkswagen cars whose engines are mounted transversely to the direction of driving. The matrix can be used on a long-term basis to make different vehicle classes on a single production line.] The future SUV will … be on the B platform.  And B platform is Chattanooga; A platform is Mexico. In order to put the tools in and use the synergies and so forth, [Chattanooga] had the advantage.

VB:  So they were already set up?
Horn:  Yes. And then you take: What is the cost of the plant? What is the cost of the additional investment? What are labor rates and wages and … what are the different local governments —  the state in Mexico and Tennessee — putting in incentives?  At the end, we made the decision based on the economic criteria for Chattanooga, which is great not only for our engagement in the U.S, but basically it’s great also for the plant to have two models [the Passat and the midsize SUV] … You can manage the factory totally different in terms of capacity utilization, for instance, which is very good for them. …

VB:   [Tell me about the center that’s going to be in Chattanooga.]
Horn: It’s called a development and planning center … The  point will be to have a deep-drill  competitive analysis, because one thing we have to do is to better understand our competitors in terms of how do they design their cars, which are sometimes less expensive than our cars, and they still show  a lot of profit here in the U.S. …  What is the direct cost of the different components?  Where do they source?  How do they source?  This is the kind of manufacturing/engineering intelligence unit we will put down there.

After you have started to analyze, then you look at a future model, then you can come up with ideas: How do you save costs without subtracting value from the customer? … This is the kind of balance we have to get.

VB:   Now tell me about the electric Golf, which my understanding is, it’s to be introduced soon in the U.S. What are your expectations for sales there?  And who is your target audience for that?
Horn:   Well, first of all, we will market the e-Golf starting and more or less in the ZEV states …   zero emission vehicles states.  That’s California, that’s Maryland, that’s New York. …
The customers are intelligent, smart people.  They have more than average income. They have usually more than just one car. It’s a commute which is around 30 to 40 miles or something.
And then, they want to make a statement as well, not just for themselves but in terms of how they look at the environment …  Those customers are more on the forefront of things, and they want to make intelligent choices in life, and they want to demonstrate this to themselves, their friends and the environment.  

VB:   And the whole Golf family of cars, I understand, has been undergoing a transformation.  You want to tell me a little bit about that?
Horn:  [In the late spring], we introduced the seventh generation, the Golf Mk 7, here to the U.S., starting with the GTI.  And for the first time we also built the Golf GTI in Puebla, in Mexico…
If you look at the car, it’s lighter.  It’s bigger.  It has a larger, longer wheelbase, which makes the ride much better.  And it has more interior space.  If you would sit in it, you would think you were sitting in an upscale car because of the materials.  And it also has the newest engine technology. …

[The group includes the Golf, Golf GTI, Golf TDI, Golf TSI, Golf SportWagen and Golf R. The first four are currently being sold in the U.S. The Golf R will go on sale later this year, and the Golf SportWagen will come to the market in 2015. With the exception of the e-Golf, all of the cars are being produced in Mexico. The electric car is being made in Germany.]
So, we have everything for everybody basically.