Volkswagen's American assembly plant: fahrvergnugen was not enough - international marketing

Business Horizons, Nov-Dec, 1992 by William Beaver

The hourly workers at Westmoreland were represented by the UAW, whose leadership had agreed to wage concessions that amounted to $46.6 million a year. By doing so the union hoped to attract foreign manufacturers to the United States. The UAW also wanted to demonstrate that stable labor relations were possible in a union setting. Unfortunately, the early events at Westmoreland gave quite the opposite impression. Moreover, the rank and file overwhelmingly rejected the first contract negotiated between the UAW and Volkswagen, which called for a continuance of the wage concessions. Schmuecker warned UAW president Douglas Frazer that if the workers' wage demands were met, the plant's future was in jeopardy. Millions had been spent getting the plant on-line, and profitability was some years away. In the end, the workers did get 50 cents more per hour. But because of other adjustments, Volkswagen's overall costs remained the same as initially negotiated.

Nevertheless, the company's labor costs, though initially lower than the Big Three, would be substantially higher than Japanese labor costs, even when the Japanese began manufacturing cars in the United States. Consequently, the Rabbit would be priced $500 to $1,000 more than the competition, even though Volkswagen saved about $250 by manufacturing it in America. To offset the price differential, Volkswagen decided to emphasize the quality and technological sophistication of the Rabbit. One rather insightful and prophetic Volkswagen official noted that the quality image must be maintained: "If we don't, we've lost everything" (Paul 1977).

Despite the myriad problems, the initial years of operation turned out to be the good ones at Westmoreland. The peak of production occurred in 1980. In that year approximately 200,000 cars were produced as the number of employees rose to 5,700. Things looked so promising that Volkswagen expanded the Westmoreland facility and purchased the Sterling Heights plant near Detroit, which would at some future point assemble vehicles. A second plant would allow for the type of scale economies necessary for profitability. It appeared that the company's goal of a 5 percent U.S. market share might be within reach. Of course, such optimism could only be supported by brisk sales, and through early 1980 sales of the Rabbit climbed steadily, aided by rising fuel prices, which made fuel-efficient cars like the Rabbit attractive. The typical Volkswagen dealer was selling his entire inventory in just 16 days. Thus, at least initially, American consumers took to the Rabbit despite the higher sticker price.

THE DECLINE

The good times, however, ended rather abruptly. In December 1980 the first of many plant shutdowns took place because of oversupply. The decline of the Rabbit had begun--a trend Volkswagen would never be able to reverse. By 1982 sales were off 40 percent, despite price cuts; by 1984 the hourly work force had been reduced to 1,500, producing only 70,000 cars, while market share dropped to only 1.8 percent. Volkswagen blamed the decline on a shaky American economy and a switch in consumer preference for larger cars as gasoline prices fell.