The Largest Business Blunder Of The Year: VW Gave Up The US Market

Volkswagen Aktiengesellschaft, the company known to most Americans as VW, wants to become the world’s largest car company within a decade. VW has almost no chance of realizing that aspiration because it did not use the disintegration of the US car companies to get a sizable share of the world’s largest auto market. VW’s piece of the US market is about 1%. VW cannot make up for its deficit by doing well throughout the rest of the world.

VW does have a modest piece of the American luxury market due to its Audi brand and that will grow very slightly after it takes over Porsche, a deal that may close next year. The price points of the two brands are high enough so that they will never sell the units to make up for the lack of presence VW has in the mid-range and low-priced parts of the market. Those segments are dominated by the Japanese, GM, and Ford (F) and that is not going to change a great deal.
In the first half or 2009, VW sold 3.1 million vehicles worldwide.  Sales revenue declined by 9.4% to €51.2 billion and operating profit amounted to €1.2 billion. Toyota (TM) expects to sell 9.7 million vehicles this year, 2.7 million of those in the US. Toyota would at least be in range of VW’s plans to become the top car company in the world if the Japanese firm did not have its huge US operations. With the Japanese car company holding 16% of the American market, VW has absolutely no chance, now or in the future, of drawing even with Toyota in worldwide sales.

China may pass the US as the world’s largest car market this year. New sales of cars and light trucks would have to be close to 11 million for that to happen. China’s total sales in the first six months were 6.1 million. VW sales in China during that period were up almost 23% to 652,222 when numbers from the company and sales from joint ventures with local car firms are factored in. VW is a very long way from catching China market leader GM which sold 814,442 new vehicles in the first half. Toyota has struggled in China and sold only 284,000 units in the country during that period..

Even if VW increases its market share in China from 10.7% to 15%, which would be nearly impossible due to the fierce competition from both local and foreign car companies, it would only add about 600,000 unit sales per year, which, once again, would not put it in a league with Toyota in global sales or even close to GM, which should sell close to 9 million vehicles worldwide this year.

VW’s one reasonable chance to get enough of the American car market to realize its global plans was to get control of Chrysler. For some inexplicable reason it let a smaller and financially weaker European car group, Fiat, get the deal to run the No.3 American auto company.  VW could have had the support of the US government is taking control of Chrysler through a Chapter 11 action and the closing of 789 dealers which made make the US car company’s distribution much more efficient. The Administration was anxious enough make Chrysler viable that Fiat put up virtually no cash. Fiat will share its technology with Chrysler in exchange for what could eventually be a 35% stake in Chrysler. In reality, the Italian company has de facto control of Chrysler. The UAW, which has 55% of the American company, and the US and Canadian government, which have 10%, will almost certainly be willing to sell out their interests in exchange for something more liquid, probably cash. It will only take a year or two of Chrysler doing well for Fiat to be able to finance a transaction with some ease.

Most measures show Chrysler with about 9% of the car and light truck market. The means it will sell about one million vehicles in the US this year. VW could have bought Chrysler at a fire sale and pushed its worldwide sales to close to 7.5 million. Continuing success in Latin America, Europe, and China coupled with a substantial presence in America would have put VW in a position to have a shot, albeit a difficult one, of catching Toyota as the No.1 car company in the world by the end of the next decade. As it turned out, the blunder it made by not taking what would have been a modest risk in the US, has almost certainly cost it any chance to reach its goal.

Douglas A. McIntyre