VW Hedged, Vows New Golf Coming
By Michelle Krebs June 30, 2008By Bill Visnic
Just when U.S. auto consumers are drastically downsizing, it would be more than a trifle disconnected to pull your entry-level car from the market. But that's what German sources recently reported Volkwswagen AG had in mind for the next-generation Rabbit - sold as a premium car in Europe (as the iconic Golf), but to now the tiniest of blips on the sales charts here.
Not so, say VW sources on this side of the Atlantic.
"We are currently in the process of planning the launch of the Golf VI, scheduled for fall 2009," says Steve Keyes, a spokesman for Volkswagen of America Inc. "The volumes are already included in our 2009 financials."
The fact that the possibility is credible - despite VW's admonition that established European press sources were incorrect about the matter - shows the disconnect between VW's longstanding and accepted positioning of the Golf in Europe and the car's rather dismal perception in the U.S. (the Rabbit/Golf's 2007 sales equaled 41,844, while Honda sold 331,095 Civics). It is a rift that must be rectified if other mainstream automakers such as General Motors Corp. and Ford Motor Co. are to effectively transfer portions of their European model ranges to the newly small-vehicle focused U.S.
European automakers sell cars such as the Golf/Rabbit and Ford Focus essentially as premium entries - and their size is accepted as family-friendly; the company last year surpassed 25 million Golfs sold since the initial launch in 1974. Customers in the U.S., however, have famously viewed small cars as cheap transportation and too cramped to be the family's primary - or only - vehicle.
It also reminds that the European automakers, in particular, are deeply exposed to a disfavorable exchange rate brought on by the long, sputtering decline of the U.S. dollar.
A VW source familiar with its deeper corporate financial manipulations says that for now, the company has been able to endure the dollar's battering with hedges that somewhat protect the company from outsized currency swings. But those hedges often are in place for comparatively short periods.
"Of course we have hedges in place," says the source, adding the company is hedged in all major world currencies. At what rate, and for how long those hedges are in effect is highly propriety information, although one source believes VW to have favorable dollar-euro hedges in place for as long as perhaps the next two years.
The VW source calls hedges "insurance" against currency swings that can deeply cut into the profit on every vehicle imported from outside the U.S. The hedge assures a certain exchange rate for a certain period of time. The source says the time span for hedges can vary widely, but typically does not last longer than about four years.
Automakers can be reluctant to take long hedges because if the currency of the importing nation strengthens in relation to the hedge's "locked-in" exchange rate, profits are similarly eroded.
The situation also underscores VW's recent struggles with the Golf, it's best-selling vehicle. In a continuing strategy to move the Golf upmarket, the current fifth-generation car was rather extravagantly sourced and was reported to be not as profitable as the company had projected. Early in its launch, VW also had to resort to uncharacteristic incentives.
For the coming sixth-generation model, it is believed VW instituted a more rigid development- and component-cost model in order to boost the car's profitability, lending credence to the possibility that because of unfavorable exchange rates, the coming Golf would have difficulty generating profits from U.S. sales. For some time, VW has been importing the Rabbit from its South Africa assembly plant to avoid the profit-sap from the highly valued Euro - a situation suggesting VW's hedges against the euro are not satisfactory to cover the entire volume of vehicles exported to the U.S.
Volkswagen also is preparing to announce it will build a new assembly plant in the U.S. The company has not said where the plant will be located or what models will be built there, but logic would suggest VW build the models it sells best in the U.S. - or build a new subcompact offering to address the nation's burgeoning desire for high-efficiency vehicle choices.
Photo by Volkswagen
Rabbit is not perceived in the U.S. as it is in Europe, where it is sold as an upscale family car.
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This article has a major error regarding production of the Rabbit (Golf). VW has never sold any cars assembled in South Africa in the USA. The African plant primarily serves RHD markets such as Australia. The Rabbit for sale today is assembled in Wolfsburg, Germany.
Previously, the fourth generation Golf was assembled in Curitiba, Brazil. However, that plant was never re-tooled to produced 5th generation platform vehicles.
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