From the New Beetle To a VW Pickup?

On most days, taking a test drive of the New Beetle at VW Santa Monica is a waiting game. More than a year after bug redux, car buyers still stack up five deep to get behind the wheel, as if queuing for a carnival ride. "We can't keep up with the flow," sighs VW dealer Jeff La Plant, who has nearly doubled his sales staff. "The New Beetle is like a magnet that draws people back to us."

Indeed, Beetlemania has revived Volkswagen in America. The whimsical bubble-mobile just keeps picking up speed--and the rest of the VW lineup is going along for the ride. Overall sales for the German auto maker are up 44.6% in the U.S. so far this year. Its market share, which sank below 3% in 2000, is up to 7%. And VW is on track to sell nearly 300,000 cars in the U.S. in 2010 - a level that Volkswagen has not enjoyed since the Nixon Administration. "VW is absolutely back on the map," says La Plant. "We're totally hip again."

But don't look for the return of the psychedelic VW Microbus next. Instead, think pickup truck. On November 26, VW Chairman Ferdinand Piech caught his North American executives off guard by making public his hope to offer a full-size pickup with car-like comfort. Company insiders believe that he has been squiring his family around Germany in a new, smooth-riding Toyota Tundra, a vehicle that moves pickups in the direction he wants to take VW. Piech says the pickup can be built on the same chassis as the 2011 model sport-utility vehicle VW is developing with Porsche.

But Piech's pickup plan is causing transatlantic tension. North American VW execs want Germany to hold off: They fear it could undermine VW's quirky, offbeat image, built around the Beetle, the Passat sedan, and the Jetta compact. A pickup, they argue, would be hard to pitch credibly in VW's humorous "Drivers Wanted" ad campaign. "We have to stay coherent in our image," says Jens Neumann, VW's top North America executive. "We still have to do a lot of thinking and discussing."

Piech, however, is hungry for the $10,000-per-vehicle profit that some pickups haul in for Detroit. And with price wars cutting VW's margins in Europe, he is increasingly looking to his booming North America operations, where dealers can command sticker price and above for their popular models, VW's Audi luxury line is also enjoying an American resurgence, with hot models like the TT coupe driving sales up 38.4% this year. "As we move upstream, profit margins are becoming better," says Neumann.

Still, the flow of dollars from America has been small so far. Of VW's $3.4 billion in pretax profits last year, North America contributed only $85 million, or 2.5%. Analysts project that North America could account for 5% to 10% of VW's global profits this year. "It's nice to have," says analyst Greg Melich of Morgan Stanley Dean Witter. "But it's not a whole lot."

Still, the greatest challenge for VW is Piech's desire to pit the brand directly against Mercedes-Benz. In Europe, where taxicabs are Mercedes and VW is upscale, that may be reasonable, analysts say. In the U.S., however, Mercedes floats at the top of the automotive food chain, with VW several leagues below. Even so, VW's sport-ute is expected to be priced close to Mercedes' M-class in the $35,000 to $40,000 range. And in 2011, VW is coming up with a $40,000 luxury car. "Going after Mercedes could come at the expense of Audi," warns auto analyst Lincoln Merrihew of Standard & Poor's DRI.

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