Volkswagen's big new luxury sedan (also known as project D1) will be called the Phaeton and will debut at the Geneva Show this March. It's an ambitious and somewhat controversial project that takes the Volkswagen brand into new and rarified territory. The big question is: does this car make sense, in either commercial or brand management terms? Dave Leggett looked into it.

Volkswagen will take on the likes of the Mercedes-Benz S-class, Lexus LS430, BMW 7-series and Jaguar XJ8 when it launches its five metre long, 1.9 metre wide 'Phaeton' luxury saloon later this year. It's an audacious move and one that ougoing chairman Ferdinand Piech has long championed, believing that the Volkswagen brand can carry such a model as well as a sporting supercar.

Critics however, say that the car is not needed and that Volkswagen Group would do better to define its brands more tightly around conventional market segments, avoiding excessive brand overlap and leaving the top end to the likes of Audi and Bentley.

"Some Volkswagen dealers are said to be unenthusiastic.."
Some Volkswagen dealers are said to be unenthusiastic about selling a high-end luxury VW. The project has also hit delays - which have also had the knock-on effect of holding up the long overdue next Audi A8 (D3) - but now, the plant that will make the car is ready and commercial production is just a few months away. 

Geneva show debut 

The Phaeton will debut at the Geneva motor show in March this year with two petrol engines - a 3.2-litre 241bhp V6 and a 420bhp six-litre W12. Five engines will eventually be available, including a 313bhp five-litre V10 turbodiesel developing 750Nm of torque which will be offered with a six-speed automatic gearbox.The D1 has aluminium doors, boot lid and bonnet. The doors are claimed to be the most rigid ever installed in a production car and are made using a system of laser welded diecast aluminium. Running gear includes pneumatic suspension with stepless, mapped electronically controlled dampers and optional four-wheel drive, which VW calls 4Motion.

The interior design is characterised by the search for a handcrafted feel. Hartmut Warkuß, Head Designer at Volkswagen AG says: "Through the selection of materials and the way they are worked, the textures, and the accentuated design, we have achieved a new balance between progressive and luxurious flair."

Production plan hits delays

VW will build the Phaeton at its all-new 'Transparent Factory' at Dresden, in former East Germany. The EUR180 million factory, where buyers can watch their car being built, will employ around 800 people building up to 100 units a day. The plant will only build the Phaeton. Sales of the car are likely to commence in Europe around the middle of 2002.

However, getting the dedicated production facility up to speed has proved more difficult than expected. The main problem has been training new workers to handle the manufacturing system at the new plant. Customers are allowed direct access to the final assembly line and can watch their car being built. They can even drive the finished vehicle off the line and onto a short underground test track before leaving the factory with their purchase. That system means that there is no room for mistakes: the cars must be right first time in order to guarantee timely delivery to customers waiting at the end of the line.

"Extra training is necessary to ensure that the system works.."
Extra training is necessary to ensure that the system works and the training has taken much longer than Volkswagen originally built into its plans.

In terms of retail strategy, Volkswagen marketing will make every effort to separate the Phaeton from mainstream Polos, Golfs and Passats. VW will appoint specialist dealers for the luxury model from existing VW outlets in key areas, limiting dealerships to about 20 per country in Europe. It is said that selected dealers will use new sales methods, such as taking Phaetons to potential customers rather than waiting for showroom visits.

Audi looks on, nervously

The delay to the Phaeton has had a knock-on effect on the planned Audi A8 replacement (D3). VW Group chairman Ferdinand Piech has made it clear that the long-awaited A8 replacement must wait to follow the Phaeton. Phaeton and  new A8 share many components, including engines and drivetrain. And both aim at the premium segment, dominated by the Mercedes-Benz S-class and the BMW 7-series.

It is now likely that the next A8 will debut mid-2003. This is thought to have caused considerable disquiet within Audi and its dealers (many of whom would not look too kindly on VW entering the high-end luxury segment anyway). The current Audi A8 is now around 8 years old and sales this year have declined significantly in the face of competition from the likes of the new BMW 7-series.

How much room is there?

"The big question is to what extent luxury buyers will be prepared to accept Volkswagen as a luxury brand. "
Amongst the European luxury brands at this end of the market, two model ranges dominate: the Mercedes S-class and BMW 7-series. In North America and Western Europe (overwhelmingly the most significant luxury car markets), the two models combined account for a little under 100,000 units. Precise model numbers are usually dictated by model cycles, which in the case of the BMW 7 and Mercedes S, usually run conveniently counter-cyclical to each other (thus the BMW is now on the ascent and taking sales off Mercedes). The Jaguar XJ series accounts for approximately 20,000 units and the Audi A8 for about 12,000 units.

Volkswagen is talking about production volume for the Phaeton of around 20,000 units in the medium term, although the Dresden facility has an annual capacity of 35,000 units. It does not seem unreasonable to assume that a high percentage of planned for Phaeton sales will be conquest sales involving other European brands. Much of it is likely to involve BMW and Mercedes-Benz, with Audi seeking to differentiate itself as a high-tech, luxury sports brand. The big question is to what extent luxury buyers will be prepared to accept Volkswagen as a luxury brand.

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Volkswagen's marketing people like to talk about the Golf as the brand's centre of gravity with brand stretch up and down along a core axis of 'product excellence' rather than overt status. Indeed, the VW family traits are pretty obvious in the three-box design of the Phaeton, which bears more than a passing resemblance to the Bora.

One thing is clear though. For Volkswagen, the marketing of the VW luxury car will have to be undertaken with some care, especially with respect to ensuring that brand differentiation with Audi remains strong. And there could be some hard lessons ahead. Audacious? Certainly. If it flops, Pischetsrieder can always blame his predecessor. Baby Bentley anyone?