VW, No. 2 Car Company in the World, Has U.S. Problem

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Volkswagen came close to having bragging rights. Its global sales made it the second largest car and light truck manufacturer worldwide. That placed it ahead of Toyota (NYSE: TM) and behind General Motors (NYSE: GM), as its sold 8.16 million cars in 2011. VW may have passed Toyota, but it has a severe problem, and that is sales in the U.S. This is a problem VW cannot overcome, at least for a great many years.

The U.S. market did not appear very attractive in 2008 when GM fell behind Toyota in global units sold. American sales had dropped from more than 16 million in 2005 to about 10 million in 2008. Toyota had nearly passed GM in the U.S. market. GM’s one advantage was that it was the top car company in China, which became the world’s largest market three years ago.

GM’s problems began to disappear as it left Chapter 11. Toyota had a run of bad luck about the same time. It recalled 8 million cars around the world for defects. It was wounded by production cuts due to the March earthquake in Japan. It lost the second spot in car sales in the U.S., but it still holds 12% of the American market based on 2011 numbers. VW had only 2.5% of U.S. sales. And, in America, VW has to face stronger U.S. car companies, a recovery of Japan’s auto manufacturers, and the rapid rise of Hyundai and its sister company Kia.

VW does well in China, where it trails only GM. But the increase in sales in the People’s Republic last year was slower than in the U.S. China has been viewed as the market that would make or break the largest global manufacturers. That is no longer entirely the case.

VW’s stronghold is still Europe. The market there is contracting, though, because of financial problems and a recession that has damaged some of VW’s key markets. It has to make up for those difficulties somewhere. America is the most likely region to help it do that. VW does not have the models, distribution or brand awareness it needs to drive its American market share much higher.

VW lost its one chance to be a leader in the U.S. car market. It could have taken the risk to buy troubled Chrysler. Instead, it left that risk, and eventual reward, to its modestly successful rival Fiat. It has paid a price for that. It will continue to do so. VW has no way to  succeed in the suddenly thriving U.S. market.

Douglas A. McIntyre