Volkswagen: Packing Its Bags for Virginia

Volkswagen: Packing Its Bags for Virginia

By Michelle Krebs September 5, 2007

Volkswagen of America is expected to announce at a press conference today that it is moving its corporate headquarters from the Detroit suburbs to Herndon, Va.

The company said it would bring 400 jobs to Virginia, eliminate 400 positions and leave 600 employees and contractors at its current headquarters in the Detroit suburb of Auburn Hills, Mich. The company said the move would be completed by the end of 2008, adding it would invest more than $100 million to establish its headquarters in a new office building near Washington Dulles International Airport.

Reading between the lines of an interview with VWoA’s new president and CEO, Stefan Jacoby, in charge only since Saturday, Northern Virginia is a better place for VW employees to live than Michigan and a better place for VW to do business.

Jacoby told the Washington Post in an interview Wednesday that Northern Virginia’s high-quality schools, skilled workforce and proximity to the airport made it attractive.

"For a young talent, 35 years old, to come here with his family. . . is a very important factor," Jacoby he told the newspaper. "By reducing this organization by 30 percent, you need even more talents, more creative people, more motivated people."

Jacoby told the Washington Post that the company decided in early 2006 that it wanted to move to the East Coast, where most of its customers are. "You want to work in an environment where you see your customers, where you see your cars on the road," he told the paper. "You don't want to work where you basically see only American cars of the Big Three."

No surprise and logical for VW

As I told WDIV-TV, the NBC Affiliate here in Detroit, VWoA’s move comes as no surprise, albeit it comes at a time when Michigan is bleeding jobs and VW’s move means even more good-paying jobs are gone. Further, it doesn’t make much sense for VWoA to be in Detroit anyway.

Here’s why it’s no surprise and why VW’s packing its bags:

1. It’s not the first time Volkswagen has considered leaving Detroit. In the past couple of years, the company has been on the verge of moving, and then retreated. The company has studied alternate headquarter locations in the past couple of years. Jacoby acknowledged the talk of moving began in early 2006 and a consultant working with VW said 14 cities were considered.

2. Detroit is not Volkswagen’s hometown, despite being here a long time. Years ago, Volkswagen, Audi and Porsche were headquartered in New Jersey, where Mercedes-Benz, BMW and Subaru still are located. VW and Audi moved to Detroit; Porsche went to Reno, Nev., and then Atlanta. The Asian importers are in Southern California. Importers generally locate near their ports of entry.

3. VW/Audi will always be the little guys in Detroit, where General Motors, Ford and Chrysler dominate the automotive scene. In addition, a move would distance VW from the troubled domestic automakers.

In addition, rumors remain rampant that VWoA plans to build an assembly factory in the U.S., in part, to offset currency shifts. Surely the plant will be in the south, and a move would not only distance VW from Detroit automakers but also from UAW’s Solidarity House.

Virginia Gov. Tim Kaine gave added credence to those plant rumors when he told the Washington Post Wednesday VW's move to Virginia "would make it more likely that the company would choose to expand in the state if its fortunes improve." VW has no North American assembly plant, having closed its one in Pennsylvania in the late 1980s.

"We're also mindful of the fact that Volkswagen, as they succeed, they may want to put another presence in North America and if they have a strong anchor in Northern Virginia that could lead to further activity," Kaine told the Washington Post.

4. Detroit is strong in engineering, research, design and technical areas. That’s why Toyota, Nissan and Hyundai, as well as most automotive suppliers, have research and design facilities near Detroit. But those are resources VW does not need; those matters are handled in Germany, which, by the way, is a tad closer for company officials to fly to, as they frequently do. What VW needs, instead, is marketing expertise.

5. Detroit is NOT a marketing Mecca. Advertising agencies have dwindled, and some of closed shop, moving out of Detroit. Even some of Detroit’s automakers, notably Cadillac and Saturn, have moved advertising work to the marketing centers of California and New York.

The marketing talent interested in working directly for an automaker rather than an agency prefers to go with the Big Three, with their big budgets, instead of VW with its relatively small budget. And, as a VW exec told me a couple of years ago – a complaint heard by local companies often – Detroit is an unattractive location for new recruits. The same exec said anywhere but Detroit is more desirable for the company’s German employees doing their U.S. stint.

6. Detroit’s automotive landscape, dominated by GM, Ford and Chrysler vehicles, does not represent the rest of the real world, where import brands make up 50 percent or more of the market.

Michigan is a shrinking market; it ranks near the top of states that have lost population. Only places like Katrina-torn Mississippi and Louisiana have lost more residents in recent years.

7. Detroit is not one of VW nor Audi’s prime markets for buyers. Audi and VW sales are strongest on the coasts. VW and Audi have long wanted to be closer to their customers. Indeed, Jacoby reiterated the point that VW wants to be nearer customers.

8. Nissan has set a precedent with its move from California to Nashville, Tenn. Despite what the automaker says publicly, Nissan intended to skinny its ranks with the move. Reportedly only about 50 percent of the previous Nissan employees made the move, allowing Nissan to trim its ranks while bringing in new blood.

Jacoby acknowledged VW needs to decentralize, slash bureacracy and cut jobs. Only about 150 people in Detroit are expected to make the move to Virginia, including corporate leadership and some marketing and sales jobs.

9. Speaking of new blood, fresh thinking and youth, automakers need an infusion of it now and then. Yet, promising young recruits are in high demand and difficult to lure to Detroit. Even keeping the young well-educated from Michigan in the state is proving difficult. A survey last spring of graduates from Michigan’s top colleges showed a huge share wanted to escape their home state.

And I will not be popular for saying this, but Detroit, my home for the past nearly 30 years, can be a place for dinosaurs in its thinking.

10. Much has been made in Michigan about the unattractive business climate. While that may be true, VW never approached the state of Michigan for a counter-offer to the financial lures that Virginia offered.

According to the Washington Post, Virginia Gov. Kaine authorized incentives worth $6 million to draw VW, including a $1.5 million cash payment in the next year and $4.5 million over five years beginning in 2011. The company won't receive the grants until it meets benchmarks for employment and investing in the region. Fairfax County, Va., will spend at least $1.5 million to accelerate road and land projects to ease Volkswagen's move, the paper reported.

Bottomline Is What Counts

Jacoby faces the challenge to turn VW around. VW lost $1.1 billion in 2005 and $795 million in 2006 in North America. Audi sales are growing with market share climbing from .48 percent a year ago to 2.07 percent this year. But VW brand sales have been in the pits.

"Lately we are not progressing with our growth strategy as we wish to do so in the American market," Jacoby acknoweledged to the Washington Post. He said the VW brand will focus on models in certain categories, specifically small sport-utility vehicles with an environmental slant, and cars to compete with Toyota Corolla and Honda Accord.

Adrian Hallmark, head of VW brand's U.S. operations, has said that VW will return to profitability in the U.S. by 2009, at the latest. He said VW expects to narrow its first-half North American loss by reducing discounts and warranty claims, and concentrating on sales of the most profitable models.

VW brand's long-term goal for sales is 400,000 to 600,000 vehicles a year. Last year, it sold 235,140. VW's high-water market was set in 1970 at 569,696 vehicles.

As  AutoObserver reader Ben noted in his feedback to an earlier item about VW’s rumored move, the German automaker will need more than a change of scenery to fix what ails it. Most importantly, VW needs to fix its so-so-quality, improve the abysmal treatment of customers at the dealership and deliver stand-out cars that provide the customer with a vehicle he or she can’t buy from any other brand.

A move to Nirvana won’t fix those problems.

Brand	Year	Month	Market_Share
Audi	2006	August	0.48%
	2007	July	0.55%
	2007	August	2.07%
Volkswagen	2006	August	1.58%
	2007	July	1.51%
	2007	August	1.47%

Source: Edmunds.com

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.