Beetle Boom to Bust in U.S. Market: How VW Learned Global Lessons

The lessons we can draw from the plight of one of the world’s premier automobile companies is that global business is not a zero-sum game, and shortsighted decisions can have very long-term consequences.

Volkswagen, the German car maker, is in rough shape. It is either going to put its 103,000 employees on a four-day week--cutting one day’s pay--or it will let 30,000 of them go.

VW will lose roughly $1.7 billion this year. Its production will be down to 1.4 million cars and trucks, 30% under capacity. And the outlook is bleak for its principal markets in Europe--which are just about the only markets VW has these days.

Incredibly, the first foreign company to have real success in the United States--with the Beetle 40 years ago--has faded to insignificance in the U.S. market. Last year, only about 73,000 new Volkswagen cars were sold in America, and about 15,000 Audis. Back in 1958, VW sold 100,000 Beetles.

What happened? VW has faded because of a mistake made more than 20 years ago. In 1971, the Wolfsburg-based company had the bright idea of producing cars in the United States instead of shipping them from Germany. It would have been a smart move to help VW overcome a rising Deutschemark and to get closer to customers, whose tastes were changing as Japanese car makers Honda, Toyota and Nissan offered a wider variety of models.

But VW’s very powerful union, IG Metall--the metal trades union that represents more workers than any other in Germany--said no. There will be no exporting of German jobs, the union said.

The leadership of IG Metall wasn’t merely stating an opinion. The union had representatives on VW’s board, as part of a system of worker participation that was much praised in the 1970s. The union and VW’s other public owners--one of the German states owns 20% of the company--stopped VW from building a U.S. plant.

As a result, VW began to lose its place to the Japanese car makers, which later opened U.S. plants. In 1978, VW did try production in an unused Chrysler plant in Westmoreland, Pa., but the moment had passed. VW didn’t make a success of Westmoreland, and closed it in 1987.

The truth is there would have been no “export of jobs,” as we see from the success of Japanese car plants here. Instead, there would have been jobs created in both the United States and Germany as parts were shipped back and forth and two-way traffic built up. Commerce is not a zero-sum game.

VW would have sold more cars, and could have used the sales and profits in America to weather Europe’s slump, as General Motors and Ford in recent years have relied on profits in Europe while their North American operations were losing money.

But VW did not really join the global economy, and now its home base is in trouble as high costs make the prices of its cars--and all German goods--uncompetitive.

VW’s moral for Americans today lies in ominous parallels to our own reluctance about the North American Free Trade Agreement.

NAFTA would open a great potential market in Mexico for U.S. and Canadian business, but many Americans, and Canadians, are treating it like a zero-sum game. If Mexico develops, it must come at the expense of the United States and Canada, goes such thinking. Otherwise-intelligent people cling to the fiction that the talents and riches of the world’s largest economy will flow into the teacup of Mexico’s economy, which equals only 4.5% of the combined U.S. and Canadian economies.

Other objectors say there can be no benefit trading with Mexico because it is too poor, which is like saying there are no such things as growth companies because they all have to start small.

The truth is, Mexico is developing because 60% of its people are under age 25 and they are through living in penury. “They are where the Americans were in the 1950s--a large, young population about to start buying cars and having a good life,” said Roslyn Kunin, director of Vancouver’s Laurier Institute and a former Canadian government economist.

How will they earn a good life? Mexican work is becoming more productive; economic restrictions are being removed. Investment is flowing in from all over the world to get in on a growth market of 88 million people with potential to be an industrial power for the rest of Latin America.

And remember, Mexico is not as poor as it is sometimes painted. It has oil and gas in abundance, after all.

Development is not going to stop, President Carlos Salinas de Gortari said in his state of the nation message Monday. If NAFTA does not pass the U.S. Congress, Mexican development will still go on “with the help of others,” Salinas said.

James Jones, U.S. ambassador to Mexico and a former Oklahoma congressman, says that in the aftermath of a rejection of NAFTA, Mexico would raise selective barriers to U.S. business but would welcome Japanese and European investors. Ironically, U.S. firms would have to invest more to get behind Mexican tariff walls if there were no NAFTA.

“A great opportunity would be missed,” Jones said, in Mexico and the rest of Latin America.

And, be clear, U.S. companies and workers would be missing opportunity, just as Volkswagen and its employees did because of a shortsighted decision made long ago.

Volkswagen: Near End of the Road?

Sales of Volkswagens have declined fairly steadily since the 1970s. Here are Volkswagen of America’s overall market share, yearly dealer sales and tourist deliveries, in thousands of units.

Market Year Units Share 1985 218.4 4.9 1986 217.2 4.1 1987 191.7 3.9 1988 169.0 3.9 1989 133.7 4.0 1990 136.4 4.5 1991 96.7 3.8 1992 75.9 3.2

Source: Ward’s Automotive Yearbook

Researched by ADAM S. BAUMAN / Los Angeles Times