Porsche SUV to be Incorporated into VW's U.S. Production Plans—Report

According to a report in the German newspaper Handelsblatt Volkswagen (VW) is in the process of finalising plans to re-establish a production facility in the United States that is also likely to be used as Porsche's first production location on the continent. The United States is by far the biggest market for the Porsche Cayenne sports-utility vehicle (SUV), with the model selling almost three times as many vehicles there than any other market. However, as a result of the continuing weakness of the U.S. dollar Porsche is finding its repatriated profits are shrinking. For a company that owes so much of its financial success to its highly sophisticated and successful currency hedging strategies, this state of affairs has proved unsatisfactory. As a result Porsche, which will increase its current 31% stake in VW to a majority stake in September or October of this year once regulatory approval has been obtained, is looking to benefit from VW's efforts to re-establish a production location in the United States. When interviewed by Automotive News Europe VW spokesperson Andreas Meurer said, "When we discuss whether to build the [VW] Touareg and [Audi] Q7 in the USA, we also talk about the Cayenne." The Touareg, Q7 and the Cayenne all share the same basic platform and are currently manufactured in VW's manufacturing plant in Slovakia. However, it is likely that initially the VW Jetta will be built at the new U.S. plant alongside a new sedan, which is likely to be based on the Passat platform. The company is currently looking at a number of sites in the United States for the new facility, with Alabama, Tennessee and Michigan all leading contenders to be chosen as the new plant's location, with the final going before the board in July to be signed off (see United States: 13 May 2008: VW to Decide on U.S. Plant in July—Report).

The new U.S. factory is the core component of VW's hugely ambitious strategy to bolster its vehicle sales in the country from the current level of 230,000 to 800,000 by 2018. This U.S. drive is also central to the company's plan to challenge Toyota as the world's largest volume carmaker by that point. However, it is a risky strategy as the U.S. market is currently in decline and is also suffering further downward pressure on sales as a result of the credit crunch and the hugely negative effect that this has had on the U.S. housing market. However, VW is ploughing ahead undeterred with a new U.S. strategy to supplement the decision to re-establish production in the United States, after closing its last factory in the country in 1998. Speaking in September, Stefan Jacoby, the President and CEO of VW of America said, "The new strategy is based on five pillars: the development of products specifically designed for the US market, a change in brand positioning, realignment of the dealer network and our own organization and, finally, the possibility of local production to reduce exposure to exchange rates."

Outlook and Implications

Porsche's buyout of VW which is likely to be completed in the second half of 2008 is likely to see it take advantage of VW's ambitious plans for expansion in the U.S. market. It makes complete sense for Porsche to manufacture the Cayenne in its best-selling market, which is also suffering from a comparatively weak currency against the strength of the euro. However, this strategy is not without risk for Porsche. The new plant will come on line in 2010, which should coincide with the launch of the second generation Cayenne, but the affluent and aspirational consumers that make up the premium SUV market are alive to new trends and may have moved onto new products and segments. For example, Porsche will no doubt be extremely wary of the effect that the new BMW X6 will have on Cayenne demand. The environmental lobby is also gaining momentum by the day in the United States and this may cause certain demographic groups to consider their vehicle purchases more carefully. However, the next generation Cayenne will have a production version of the hybrid concept that debuted at last year's Los Angeles Auto Show.

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