With Volkswagen having embarked
on a big cost-cutting drive, industry experts are baffled by the
"people's car" maker's plans to spend millions of euros upgrading a
loss-making luxury saloon.
The €76,000 (S$116,425) Phaeton, a pet project of chairman Ferdinand
Piech, has never met VW's original sales target of 20,000 cars
annually. Analysts say the executive saloon, which cost more than €1
billion to develop and came out in 2002, should be axed.
But sources at VW told Reuters that the company is now planning a
more advanced version of the Phaeton - described by Bernstein analyst
Max Warburton as one of the three "most loss-making European cars of
modern times".
The plans appear all the more perplexing to analysts as VW has
pledged to make annual cost savings of €5 billion at its passenger-car
brand by 2017, as the world's second-biggest carmaker by sales seeks to
narrow the gap with global leader Toyota.
Announcing the "efficiency programme" last July, chief executive
officer Martin Winterkorn promised "painful action" to revive the core
brand where profit margins have been languishing due to a proliferation
of models and parts.
"It's no longer all about bigger, higher, further," he told managers
at a Dresden strategy conference in December. "Now it's about being
leaner, faster, more efficient."
His comments echoed VW's plans to reduce the number of costly parts
and drop some non-profitable variants from the German group's 310-model
line-up as Europe's largest carmaker shoulders costs of future growth
and investments in lower-emissions technology.
Revamping the Phaeton will fly in the face of Mr Winterkorn's
cost-cutting drive, said Evercore ISI analyst Arndt Ellinghorst, adding
that switching production of the model to VW's modular MLB platform
could cost as much as €650 million.
"Economically speaking, it's the most irrational project,"
London-based Mr Ellinghorst said. "Piech and Winterkorn simply cannot
let go of their fondness for luxury products."
A new glass-walled factory, R&D outlays and low sales volume led
VW to lose €28,000 on each Phaeton sold between 2002 and 2012, Mr
Warburton wrote in a September 2013 note.
Unfazed by the losses, VW aims to pit the next-generation model
against the Mercedes' €80,920 flagship S-Class, sources said, adding
the car may hit dealerships in 2017-2018. A plug-in hybrid version is
also planned.
VW confirmed it was planning a successor to the Phaeton, but
declined to comment on the details or costs. It also declined to
comment on analysts' loss, cost and sales estimates for the existing
version, but said the saloon helped to show off its technical prowess.
The company does not disclose sales data for individual brands, only
production numbers, which show it produced 5,812 Phaetons in 2013 - the
latest annual figures published.
Mr Stefan Bratzel, head of the Center of Automotive Management
think-tank near Cologne, said another high-end luxury saloon may
overstretch the VW brand, traditionally a mass-market division which in
November released a more upmarket Passat. A new Phaeton could also
affect sales of VW's other premium offerings, especially the Audi A8
saloon which may share MLB underpinnings with the VW-badged model, he
said.
"It doesn't make much sense strategically," Mr Bratzel said. "The business case is equally questionable."
A new Phaeton would struggle against its premium rivals, analysts
say. Sales of the model will average no more than 11,900 cars a year in
2017-2020, up from 6,300 this year, according to research firm IHS
Automotive.
That compares with annual averages of 85,000 units for the Mercedes
S-Class, 64,000 for BMW's 7-Series and 41,000 for Audi's A8 in the
four-year period, according to IHS data.
Buyers will never warm up to the notion of a full-size luxury saloon
made by the "people's car" brand unless they get a huge discount, a
former VW group executive told Reuters.
"This is the inherent problem which puts the car's price positioning and profitability at risk," he said.
The Phaeton is the brainchild of Mr Piech, the mastermind of VW's
global expansion and its former chief executive officer, who is well
known for outmanoeuvring both rivals and allies. A former Audi North
American chief, Mr Axel Mees, was forced to leave the company in 2004
after criticising the Phaeton project and Mr Piech in public.
Meanwhile, Mr Michael Horn, VW's new United States boss, is chasing
a lofty sales target of 800,000 VW brand cars by 2018, more than double
last year's tally.
He will be tasked with relaunching the next Phaeton in the United
States after VW pulled the model from the world's biggest luxury-car
market in 2006 because of poor sales.
Asked by Reuters at the Detroit auto show what potential he sees for
the model in the country, he was struggling. "That's a dangerous
question. It's an image bearer with no relevance for volume," he said.
