Volkswagen Opens the First Foreign-Owned U.S. Auto Plant Summary

  • Last updated on November 10, 2022

In 1978, Volkswagen opened the first foreign-owned auto plant in the United States to preserve its U.S. market share as Japanese competition increased and production costs in Germany rose. Unfortunately, problems with labor, quality control, marketing strategy, and competition from other U.S. manufacturers and growing Japanese firms kept Volkswagen from the success it had envisioned.

Summary of Event

In 1978, the West German automobile manufacturer Volkswagenwerk AG opened the first foreign-owned auto plant in the United States. The decision came as a response to rising manufacturing costs, resulting from unfavorable currency fluctuations, and the increasing threat of Japanese competition in the auto industry. Other countries, also eager to obtain larger shares of the U.S. car market and simultaneously avoid American import quotas, watched Volkswagen’s experience with interest. Automobiles;manufacture Volkswagen;U.S. plant [kw]Volkswagen Opens the First Foreign-Owned U.S. Auto Plant (1978) [kw]First Foreign-Owned U.S. Auto Plant, Volkswagen Opens the (1978) [kw]Foreign-Owned U.S. Auto Plant, Volkswagen Opens the First (1978) [kw]U.S. Auto Plant, Volkswagen Opens the First Foreign-Owned (1978) [kw]Auto Plant, Volkswagen Opens the First Foreign-Owned U.S. (1978) Automobiles;manufacture Volkswagen;U.S. plant [g]North America;1978: Volkswagen Opens the First Foreign-Owned U.S. Auto Plant[03060] [g]United States;1978: Volkswagen Opens the First Foreign-Owned U.S. Auto Plant[03060] [c]Trade and commerce;1978: Volkswagen Opens the First Foreign-Owned U.S. Auto Plant[03060] [c]Transportation;1978: Volkswagen Opens the First Foreign-Owned U.S. Auto Plant[03060] [c]Manufacturing and industry;1978: Volkswagen Opens the First Foreign-Owned U.S. Auto Plant[03060] McLernon, James Nordhoff, Heinz Leiding, Rudolf Schmücker, Toni Hahn, Carl Shapp, Milton J.

Volkswagen, West Germany’s largest corporation, began its profitable history during World War II. Its single product—a small, inexpensive car called the Beetle, Volkswagen;Beetle was introduced to the United States in 1949. Gradually redefining the American automotive scene, Volkswagen contributed about one-fourth of the 614,000 vehicles imported by the United States in the 1950’s. The cars were also popular in the Netherlands, Australia, and Canada, as well as throughout Europe.

Export sales accounted for so much of Volkswagen’s business that early on the company established foreign manufacturing plants to take advantage of low-wage labor, a move not followed by other automakers until years later. In 1950, South Africa began making Volkswagens out of components imported from Germany. Similar assembly began in Brazil in 1953, in Australia in 1954, and in Mexico in 1964. In 1955, Volkswagen, hoping to assemble cars with a combination of U.S. and German parts, bought a New Jersey manufacturing plant from Studebaker. When the costs of the American components turned out to be higher than estimated, Volkswagen abandoned this effort before production could start.

Demand for the Beetle continued to rise. In the 1960’s, the car held nearly 7 percent of the U.S. market. At the height of its success in 1970, Volkswagen sold roughly 580,000 vehicles in the United States, earning $112 million on $4.1 billion in sales. As the leader in automobile exports to the United States, the company unloaded a freighter full of Beetles—affectionately nicknamed Bugs—almost every day of the year from the corporation’s main plant in Wolfsburg, Germany, and its other manufacturing sites.

There were several reasons for Volkswagen’s popularity in the United States. The Beetle had a reputation for reliability, having been thoroughly tested during World War II and constantly refined and upgraded in subsequent years. The car’s basic design never changed, because Volkswagen’s legendary postwar chairman, Heinz Nordhoff, insisted that stylistic modifications be kept to a minimum. Nordhoff believed that this was an honest way to do business. It also reduced internal costs and kept the sticker price low. Clever advertising reinforced this approach. The car filled a need for a low-priced compact that U.S. auto manufacturers had long ignored.

In the early 1970’s, however, the corporation suffered severe financial losses. The widespread economic growth that flourished in Germany in the 1960’s decelerated. The workforce at Volkswagenwerk had become excessively large, and German wages were among the world’s highest. In addition, imported cars began to threaten Volkswagen’s dominance in its homeland. The exchange rate between the German mark and the U.S. dollar rose 40 percent from 1969 to 1973, making Volkswagen unable to produce its cars for the same low cost, as a given price in marks now meant a higher price in dollars. The Beetle’s retail price in the United States jumped 61 percent during this time period, from $1,799 to $2,895. The company lost a crucial competitive edge. In 1974, U.S. sales were 53 percent lower than the peak in 1970. Americans, seeing the variety of models offered by Japanese car manufacturers, grew tired of the steadfast Bug. Its quality had also declined, partially because of new emission control standards that forced redesign of the engine. U.S. automakers capitalized on these factors, introducing their own compact cars at prices below Volkswagen’s.

To renew interest among potential customers, Volkswagen chairman Rudolf Leiding pushed the company to quickly develop a replacement for the Beetle in the early 1970’s. Unveiled in 1974, the Volkswagen Golf left behind 1930’s engineering and boasted a front-mounted, water-cooled engine and front-wheel drive. Leiding also attempted to establish a U.S. manufacturing base in order to preserve the diminishing American market. Volkswagen’s supervisory board and labor representatives vehemently resisted this idea because of the company’s $310 million loss the same year and the threat of displaced jobs.

Leiding ultimately resigned over this issue and was succeeded by Toni Schmücker as chief executive officer in 1975. Formerly an executive for Ford of Germany, Schmücker, a diplomatic leader, convinced the board to approve a U.S. manufacturing plant to offset declining American sales. He estimated that an American-built Golf, called a Rabbit, would be 5 to 15 percent less expensive to build. In addition, the move would increase Volkswagen’s competitiveness with Japanese automakers, who by then were the leaders in exports to the United States. In 1976, Volkswagen began examining prospective U.S. sites for the “breeding” of Rabbits. Volkswagen;Rabbit

The Wall Street Journal called the bidding war that ensued “the greatest industrial courtship of all time.” Representatives from nearly every state east of the Mississippi attempted to lure the large German corporation, believing that its presence would bring jobs and an influx of cash into local economies. Volkswagen narrowed the choice to two sites, one near Cleveland, Ohio, and the other just southeast of Pittsburgh, Pennsylvania.

The Pennsylvania offer included a purchase option on an unfinished Chrysler plant and a generous incentive package developed by Governor Milton J. Shapp worth approximately $63 million. In May, 1976, Volkswagen officially announced the selection of this site, located in Westmoreland County near New Stanton. The company spent more than $250 million on the plant’s conversion.

Former General Motors executive James McLernon was chosen as president of the newly created Volkswagen Manufacturing Corporation of America. Other American automotive executives were hired to complete the management team. Fifty thousand residents from surrounding counties applied for six thousand hourly jobs at the plant. In April, 1978, the first Volkswagen Rabbit rolled off the assembly line in front of a thousand delighted spectators.

Both the state of Pennsylvania and Volkswagen executives thought that this was the beginning of a mutually rewarding relationship. Problems that developed almost immediately, however, doomed the first foreign-owned auto plant in the United States to disappointment.

Significance

Volkswagen’s American assembly plant, established to meet anticipated strong demand for the sporty Rabbit, produced its desired quota of 200,000 cars in 1980. For the most part, sales declined over the next decade. The company never achieved its targeted 5 percent market share. During the 1980’s, the plant frequently was forced to shut down the line for extended periods in order to avoid surpluses. Problems with labor, quality control, marketing strategy, and competition from other U.S. manufacturers and growing Japanese firms kept Volkswagen from the success it had envisioned.

An adversarial relationship between workers and management resulted in several work stoppages during the first six months of operation. A wage disparity of $1.00 to $1.50 per hour between Volkswagen and the American “Big Three” automakers (Ford, General Motors, and Chrysler) led to a wildcat strike by the plant’s employees. Hoping to attract foreign manufacturers to the United States and demonstrate that stable labor relationships were possible under unions, United Auto Workers United Auto Workers representatives negotiated a wage concession. This show of stability was less than convincing, however, as employees rejected the contract. Volkswagen management in Germany threatened to pull out. Finally, a fifty-cent raise was approved, but other downward adjustments were made.

Quality-control problems with the early Rabbits tarnished Volkswagen’s long-standing reputation for reliability, already shaken by the performance of the later Beetles. The first Rabbits tended to have mechanical defects, further hurting the brand’s image of endurance established by the unstoppable Bug. Over time, Volkswagen was able to eliminate these kinks, but the initial reliability problems left the corporation vulnerable to competition from Japan. Lean production practices employed by Japanese companies led to quicker decision making and problem solving than occurred within the confines of traditional American or German industrial management. As a result, Japanese cars were rapidly gaining the reputation for high quality and appealing design that, at the same time, Volkswagen was losing.

The irreversible decline of the Rabbit had begun by 1980, when the American unit suffered a loss of more than $30 million. Attempting to boost sales, McLernon tried to tailor the car to the tastes of American consumers and changed its interior, headlights, and suspension. German executives criticized this decision for destroying the European mystique and contributing to the car’s decline. In fact, however, much of the Japanese success can be attributed to a more calculated concern for determining consumer wishes. For example, Toyota and Honda updated models of their cars every two or three years. Volkswagen, on the other hand, imposed German styles on the U.S. market and saw little need for stylistic variations. The Rabbit’s successor, basically the same car but renamed the Golf, was not introduced until 1983. Carl Hahn, who in 1981 replaced Schmücker as chief executive officer upon his retirement, subscribed to Nordhoff’s evolutionary approach to management. The seven-year-old Rabbit lost its appeal.

In the meantime, Japanese carmakers looked to American plants like Volkswagen’s as a way to avoid federal import quotas and to increase market share. In the early 1980’s, Nissan Motor Company Nissan Motor Company built a $500 million truck plant in Tennessee and Honda Honda Motor Company built a $300 million car factory in Ohio. By 1986, Toyota Toyota Motor Corporation (through a joint venture) and South Korean automaker Hyundai Hyundai also operated North American assembly plants.

Volkswagen’s initial hope of holding down prices through production in the United States was never fully realized. Although the domestic-built cars were roughly 5 percent cheaper than if they had been imported, their retail price was still about $500 higher than those of American rivals such as the Chrysler Omni and Ford Escort. By the time the retooled Golf replaced the Rabbit, its sticker price was about $9,000—$2,000 more than a Honda Civic. High manufacturing costs forced Volkswagen to relinquish the role it formerly played as a leader in the economy car class. Instead, its marketing division began emphasizing quality German engineering and technological sophistication, with limited success.

Sales of the Golf never soared in the United States. The introduction of a pickup truck and larger Jetta sedan later manufactured at New Stanton did not help Volkswagen regain its 1970 levels of popularity. In 1984, the hourly workforce was reduced to fifteen hundred, producing only seventy thousand cars. Plans for a second American assembly plant were abandoned. By 1985, the Westmoreland facility had accumulated a $1 billion deficit, approximately $120 million in losses accruing each year. Confronted with declining sales and the increasing Japanese presence in the United States, Volkswagen officials announced in 1987 that the American plant would close.

If things ended poorly for Volkswagen in the United States, the outlook was different in other parts of the world. In 1986, the company acquired SEAT, a Spanish automaker. It began supplying parts for a luxury automobile built by Nissan in Asia and also signed an agreement to manufacture cars in mainland China. In addition, Volkswagen’s dominance in both Mexico and Brazil continued despite high levels of inflation. Both of these countries exported Volkswagens to the United States, at a large cost savings to the corporation.

The plant’s 1988 closing suggested that Volkswagen had failed to adapt its global strategy to the American market. Time-honored German managerial traditions made the firm incapable of responding to increased and intense competition in the auto industry and changing consumer preferences. The Japanese plants on American soil enjoyed greater success, despite some similar problems with labor and Big Three competition. Ironically, the Westmoreland facility was eventually taken over by Sony to produce television picture tubes. Although Volkswagen did not remain a major manufacturing force in the United States, its establishment of an American plant provided an example from which other foreign manufacturers could learn. Automobiles;manufacture Volkswagen;U.S. plant

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Ball, Robert. “Volkswagen Hops a Rabbit Back to Prosperity.” Fortune, August 13, 1979, 120-128. Provides a helpful rationale for the corporation’s decision to manufacture Rabbits in the United States. Also gives biographical information about Toni Schmücker and details about the company’s product line, technology, and design plans.
  • citation-type="booksimple"

    xlink:type="simple">Beaver, William. “Volkswagen’s American Assembly Plant: Fahrvergnugen Was Not Enough.” Business Horizons 35 (November/December, 1992): 19-26. Excellent article provides a detailed and informative account of the history of Volkswagen in the United States, including objective analysis of the company’s successes and its problems. Includes a helpful reference list.
  • citation-type="booksimple"

    xlink:type="simple">Dyer, Davis, Malcolm S. Salter, and Alan M. Webber. “Auto Competition in Europe: A Tale of Two Companies.” In Changing Alliances. Boston: Harvard Business School Press, 1987. The chapter’s section titled “The Trials of Volkswagen” provides a thorough account of the company’s origins, rise to prominence, success, and decline. Clearly identifies the major players in the Volkswagen story.
  • citation-type="booksimple"

    xlink:type="simple">Nelson, Walter Henry. Small Wonder: The Amazing Story of the Volkswagen Beetle. 1965. Reprint. Cambridge, Mass.: Bentley, 1998. This classic book on the Beetle offers a highly detailed history of the Volkswagen company.
  • citation-type="booksimple"

    xlink:type="simple">Serafin, Raymond. “From Beetle to Bedraggled: Behind VW’s Stunning U.S. Decline.” Advertising Age 64 (September 13, 1993): 16-23. A good overview of the problems that plagued Volkswagen in the United States after its 1970 peak in popularity. Suggests that marketing and image remain the most significant obstacles to the brand’s renewed success and recounts various advertising campaign strategies employed by the corporation.
  • citation-type="booksimple"

    xlink:type="simple">“Why VW Must Build Autos in the U.S.” BusinessWeek, February 16, 1976, 46-51. Offers reasons for the company’s venture onto American soil. Includes synopses of Volkswagen’s competition, financial indebtedness, and employment practices. Also describes the position of other foreign car manufacturers as they observed Volkswagen’s activities.

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