Volkswagen AG will upgrade the Passat, its best-selling sedan, with safety technology inspired by fighter jets to lure buyers away from upscale nameplates.
When it goes on sale in the fourth quarter, the mainstream model will be VW’s first car available with a head-up display. The system — similar to features pioneered on planes like the F-16 — projects data such as speed and navigation instructions onto a retractable screen over the steering wheel to keep the driver’s focus on the road. Other high-tech safety options include functions that can bring the car autonomously to a halt if the driver falls asleep.
“Competitors struggle to keep pace with VW,” said Juergen Pieper, an analyst with Bankhaus Metzler in Frankfurt, Germany. The Passat, which was presented Sunday in Potsdam, Germany, and is one of Volkswagen’s top four profit earners, “looks set to maintain VW’s dominance in the segment.”
Volkswagen is seeking to reclaim its lead in the European sedan market after sales of the Passat fell behind BMW's AG’s 3-Series last year. That means luring buyers with technology normally reserved for luxury models. VW can afford the features because the car shares key components with models including the Golf and Audi A3 compacts, which in turn lowers costs.
Defending its traditional stronghold is critical to the Wolfsburg, Germany-based manufacturer as it targets tripling profitability at its namesake brand.
The Passat “introduces technologies and features in the midmarket that are otherwise only available in higher segments,” chief executive Martin Winterkorn said at the unveiling, adding that the new Passat is going to give "the Volkswagen brand a powerful push.”
Sales of the Passat in Europe, its main market, are forecast to surge 65 percent to 228,000 vehicles next year, beating out the 3-Series and Daimler AG’s Mercedes C-Class for the segment lead, according to IHS. Deliveries of the Ford Mondeo, the closest mass-market competitor, are due to be less than half the Passat’s level.
Higher sales and lower development and production costs from VW’s parts-sharing strategy could help double the Passat’s profit margin to as much as 8 percent of sales, according to Metzler’s Pieper.
Volkswagen, which will also offer a plug-in hybrid version of the Passat with an all-electric range of 31 miles, made “massive” investments in development as well as in the production sites for the car, Winterkorn said. “I am convinced that it will pay off.”
The German carmaker, which doesn’t provide financial details on individual models, could use the boost. The operating margin for the VW brand dropped to 1.8 percent in the first quarter from 2.4 percent a year ago. The company’s target for its biggest nameplate is a 6 percent margin.
VW complements the new technology with a sleeker look for the new Passat, which is smaller than the U.S. version. The car starts at about $35,200, at least $4,600 cheaper than rivals from Mercedes-Benz and BMW.
“It’s a fiercely competitive market that works via pricing, including dumping prices,” said Frank Ostermann, managing director at auto dealer Rosier Group in Menden, Germany. “The new model looks more racy and significantly more attractive, but it’ll remain a sales person’s car primarily.”
Rosier, which sells VW, Mercedes and Peugeot vehicles at more than 10 outlets in northern Germany, plans to lure in the segment’s thrifty shoppers by offering finger food and a barista cart with cappuccino when the sedan hits showrooms.
Every little bit helps in segment that’s shrinking. Sales of midsized cars in Europe have fallen by more than half over the past 10 years because of “the rise of niche models such as SUVs and the pressures on customers to downsize in light of the economic downturn,” said Ian Fletcher, a London-based analyst with IHS Automotive.
VW, which plans to triple its lineup of SUVs, currently offers just the $33,600 compact Tiguan and the upscale $69,000 Touareg. Until the new SUVs arrive, VW needs the eighth generation of the Passat to woo buyers from BMW.
“The battleground for the VW brand is to effectively draw a line where premium stops and mass market begins,” said Mike Tyndall, an analyst at Barclays Capital in London. With the new features for the customer and lower manufacturing costs, the Passat should bring “a meaningful improvement” to VW’s profit.