By on March 3, 2014

2013 Volkswagen Up

In 2012, Volkswagen began research into starting a budget brand in the vein of Datsun and intended rival Dacia, with the aim of having a full lineup ready for sale by 2015. Two years later, the budget brand has hit a budget wall, and that’s only the start.

Autoblog and Autocar report VW is having issues hitting safety and quality targets while maintaining the low-cost pricing — aimed between 6,000 and 8,000 euro; the Up above begins at nearly 10,000 euro — the automaker expects for the unnamed budget brand.

Though no business case has been found thus far, VW’s project is still under consideration as technicians pour over how similar rivals — including one-time partner Suzuki and considered partner Proton — are able to build low-cost vehicles without compromising on quality or price. Even though Renault-Nissan manages to be profitable with Dacia, VW is concerned that a low-cost car would erode their own margins.

Last year, Volkswagen announced they would work in a joint venture with Chinese automaker FAW to bring a budget vehicle to China by 2016; cost issues are affecting this effort, as well.

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15 Comments on “VW Budget Brand Hitting Budget Wall, Still Under Consideration...”


  • avatar
    joeb-z

    So Skoda has nothing to add to this equation?

    Of course, this eroding your own margins or cannibilization question kills so many projects. No exec wants to be responsible if the low cost product succeeds to the detriment of current products.

    • 0 avatar
      Manic

      Skodas sell well and at nearly VW prices, basically VW cars with a different body as are SEATs. SEAT seem kinda orphan brand. When things get better in Southern Europe these will sell too. This brand is maybe too good for budget car use. So VW needs to try something completely different. Maybe they could repeat Skoda’s success story with something like Trabant or Wartburg or buy some existing asian brand, Daihatsu?

  • avatar
    CoreyDL

    I don’t feel they need ANOTHER brand, just utilize one of the lower-cost brands in your portfolio which is not in use in the country where you want to sell.

    Skoda
    Seat

    Or bring back an old brand like they’re doing with Datsun, which is long gone enough that people don’t remember/care.

    NSU
    DKW

    Or use a marketing brand for lower cost, efficient crap.

    BlueMotion

  • avatar
    panayoti

    As a layman I struggle mightily with the margin concept. Why the blind adherence to margin? I was always taught that you can’t squeeze blood out of a rock. If margin dictates $400 on a car, why can’t you sell one making only $375? Would some business man here educate me on this margin mania?? There is a sales number out there somewhere that just can’t be changed at some point, like say, bras or jock strap sales. You can sell only so many at which point you’ve hit a wall. You’ve gone global, changed the design or color, looked at all the technology, brought in marketing experts, increased your advertising budget, etc. No matter what you try, you’re still only selling so many bras and jocks so now you do the only thing left, raise the price. Huh??

    • 0 avatar
      ClutchCarGo

      I’m no MBA but try this on to see if it helps. Let’s say that you have $100K in your pocket. You can take that money and open a bar and grill, where you’ll have to find a good location, fix it up, hire staff and hope that you’ll provide a product that the public wants. Let’s say this will net you $5K/year in profits if things work out OK. Or, you can put that $100K in bonds and securities and make $4-5K/year. Now, costs of supplies and labor are going up while your customers are price sensitive (demand is elastic) so the only option is to accept lower profits. Your margin is going down. Yes, you can still make a buck on the lower margin but it’s easier and safer to do something else with the money. At some point the lower margin makes it unattractive to pursue that market and you take your money elsewhere.

    • 0 avatar
      ect

      The profit margin that people often refer to is gross margin – the difference between what it costs to produce a product or service, and what you get paid for it.

      From gross margin, you have to pay all of your selling, administrative and other costs, fund r&d, and hopefully pay dividends to shareholders.

      Gross margins in the car business are already relatively low. Margin erosion from a low base can take you from profit to loss, often quickly.

      Also, it must be remembered that almost all major car companies are publicly traded, with shareholders who expect management to increase profits every year. In that kind of environment, share prices get severely punished when profits fall, as do (i) management bonuses and (ii) eventually, management. With a few exceptions (Home Depot was one, for a long time), management in public companies focuses on raising margins, not cutting them.

      • 0 avatar
        panayoti

        @ect and clutchcargo

        Thanks for your responses. If I am interpreting what you both say correctly, at some point a company realizes that because of this and that external and internal factors, it makes no sense to produce a product or service that doesn’t make you any money and once that has been determined, you should immediately abandon that product or service. Is that pretty close to what you are saying? If so, then why would VW even consider making a product that won’t make them money?? They’ve already gone with the decontenting idea only to see that pretty much fail. So why are they still toying with this idea??

  • avatar
    RollaRider10

    Ironic that Volkswagen in German means ‘the people’s car’ and the Beetle was designed to be as cheap as possible so as many people as possible could own them. And now VW wants a cheaper car. I don’t think they’ll want to bring back an old brand but rather do something like Scion to appeal to younger people.

  • avatar
    npbheights

    My thoughts exactly! I thought VW WAS the budget brand. It’s not as if Volkswagen Group has any shortage of brands under which to sell their premium and expensive cars…

  • avatar
    05lgt

    If this can lead VW to actually confront thier issues with delivering quality and safety on a budget across the board it’s the best thing they’ve ever done. They’ve blamed the customer for so long. Maybe actually seeing that others are doing what they think is impossible can help?

  • avatar
    TMA1

    Clearly, the Phaeton buyer will not tolerate anything less than a Polo buyer at the same dealership.

  • avatar
    stanczyk

    VW got into mess with their ‘lower brands’…

    All 3 of them ofer basicly the same cars(with minor exceptions).
    Skoda is right now the cheapest .. and I don’t see a reason why it needs to chase VW in terms of style .. etc..

    VW have no idea what is SEAT’s role in their portfolio ..
    They make and adds that shows ‘spanish AutoEmotion’, but the thuth is that it shares engines and equipment with SKODA and VW..and for that reason this brand is nothing special ..and sells badly..
    They should make ‘more exciting–sporty’ brand of it(hot-hatches, coupes, and maybe some ‘uber-sedans’)..

    SKODA should go back(down) to ‘budget level’ and VW-brand should stay where it is now .. ‘Ordnung must sein!:)

    ..
    BTW: Car-producers want to go with this ‘new-wave’ of ‘global budget brands’ to ‘emerging markets’, or maybe they just starting to prepare cheaper cars for ‘brand new world’ (world after ‘global financial armageddon’ ? :)


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