By Christiaan Hetzner
FRANKFURT Tue Feb 28, 2012 6:51am EST
(Reuters) - Volkswagen chief executive Martin Winterkorn squeezes his bulky frame behind the wheel of the new Honda Civic and takes out a tape measure - part of a forensic, and very public, inspection of the five-door compact at last September's Frankfurt car show.
"You were a role model for us for many years once," he tells an attendant Honda official. "Really."
They were the words of a man who knows Honda (
7267.T) is on the ropes in the United States, and who fervently hopes he can eat the Japanese group's lunch in its biggest market.
The United States is home to nearly one in two Honda buyers, but its sales there fell 7 percent last year while overall U.S. vehicle sales expanded at a double-digit pace.
As a result, Honda's market share has tumbled 2 percentage points in two years to 8 percent in 2011. Volkswagen (
VOWG_p.DE) is headed in the opposite direction, albeit from a low base.
Winterkorn wants to at least double the Volkswagen VW.L brand's 2.5 percent U.S. market share. Last year's sales performance was the best VW has managed there in three decades, with sales of Jettas and Passats up 44 percent and 83 percent respectively.
"The good news for Volkswagen is that brand loyalty is not what it used to be. Honda buyers started to flee to other brands like Hyundai because they wanted to express themselves and not be just one of the herd," said TrueCar analyst Jesse Toprak.
At an international level, VW has had its ups and downs since its birth in 1930s Germany, but it has come out of the 2008 crisis better than most.
While General Motors (
GM.N) was pushed into a pre-packaged bankruptcy and Toyota (
7203.T) endured its first ever operating loss, the Wolfsburg-based group has emerged as the world's second largest carmaker with the firepower to buy Peugeot (
PEUP.PA), Fiat (
FIA.MI) and Renault (
RENA.PA) put together.
It made a record profit in 2011, but will need to prey on weaker rivals abroad to keep growing. That is because its core European market is set to shrink to its smallest in a decade, and carmakers are piling on costly, margin-corrosive incentives for free to compete for what remains.
VW's ultimate goal of becoming the largest, most profitable carmaker in the industry hinges on whether it can find lasting nourishment in the United States, where its pricey imports long ago forced the brand to feed off the scraps left over by others.
By shifting German car production to Tennessee and taking expensive features out of their over-engineered cars, a practice known as "de-contenting", VW has succeeded in luring customers back with affordable entry prices and sporty sedans like the Jetta - features that were once the hallmarks of Honda's Accords and Civics.
"Our biggest competitor here is Honda, since its customer base shares the same core values. We both focus on sportiness and versatility and have high demands when it comes to handling," VW's U.S. strategy chief, Rainer Michel told Reuters.
Toyota's no-frills customers do not buy a Camry to enjoy the ride, he said, while Hyundai buyers are attracted to the kind of trendy exterior designs which Honda and VW both eschew.
HUGE BULL'S-EYE
Honda, by contrast, has a pool of well-educated and more affluent U.S. car owners who tend to favour more subdued styling packaged into a fun ride.
Among its five biggest competitors, Honda boasts the lowest spending on incentives like cash rebates or free features and trim, according to auto-information website Edmunds.com.
It also abstains entirely from selling to fleets like Hertz rental agency. Fleet sales and incentives are both pressure valves many carmakers resort to when times are hard.
"We are not the flashy choice, we are the smart choice that informed customers make after weighing things like reliability, fuel economy, driving enjoyment and so on. This helps us keep a tight lid on incentives and preserve a high resale value for our owners," said American Honda spokesman Chris Martin."That also means that we have a huge bull's-eye painted on our back, though, since any other auto company would love to attract this kind of customer base."
But the chinks are starting to show in Honda's armour. It expects operating profit in the year to end-March 2012 to fall 65 percent to its lowest level in three years, prompting Moody's to downgrade the company's outlook to negative due partly to the tougher competition from predators like VW.
Earthquakes, tsunamis and floods in
Japan and Thailand severely damaged its supply chain last year. Making matters worse, the latest Civic model has been panned by critics in the United States, forcing Honda to promise a costly facelift much earlier than planned.
"The Civic was for the longest time the torch bearer for what Honda was all about - compact cars with efficient four cylinder engines and very responsive chassis that give drivers a great feeling for the road," said Bill Visnic, an analyst and senior editor for Edmunds.com.
"That reputation has been slipping rather precipitously, though, ever since they began compromising to chase market share with cars getting bigger and the ride becoming softer."
AMERICAN HEARTLANDS
Meanwhile VW has one of the youngest customer bases - important for a brand's image - while spending even less than Honda on incentives - quick fixes that boost volumes but ultimately hurt demand over the long run as resale values fall.
As a result, the new Passat sedan spends half as long collecting dust on a dealer lot than the average U.S. vehicle.
"A lot of new VW buyers were Honda owners who no longer wanted to see 10 other exact same cars every time they came to a stop at the traffic light," said Chris Chaney, Vice President of consumer research group Strategic Vision.
According to his firm's surveys, Honda was the brand to surrender sales the most to VW last year. VW owners are more prone not just to feel better about driving their new cars but also to be more excited about them than Honda customers.
"There is no question that there are Honda owners who see Volkswagen as a step towards the prestige associated with German engineering," Chaney said.
With gasoline prices expected to climb, market researcher Art Spinella believes VW can also benefit from its strong range of fuel-efficient diesels, but warns a patchy dealer network, largely based in coastal areas, will continue to hold them back.
"Pump prices mean that car buyers will consider VW much more often, but for that to translate into actual sales they need good dealers, and here they are only strong in the slow-growth states in the Northeast," said Spinella, President of CNW.
In order to hit its sales target of 800,000 VW brand car sales by 2018, VW opened up in January a new sales office in Dallas to support the near 100 dealers spread thinly across 16 states.
Dependability may also need to improve, however, before buyers in more rural areas think about a VW.
"I think the biggest problem Volkswagen will need to address is its reliability issues, if it wants to make greater inroads into the American heartlands," said Gabriel Shenhar, Senior Auto Test Engineer & Program Manager at Consumer Reports.
In the hopes of better persuading Honda owners to defect, VW has poached marketing guru Tim Mahoney from Japanese rival Subaru of America (
7270.T).
Known for his ability to hit an emotional nerve through ads like the Subaru Love campaign, he was recently voted by industry newspaper Automotive News as one of 10 managers to watch this year alongside such exalted peers as the group chief executives of Toyota, Ford and, yes, Honda.
BARKING DOGS
VW's traditional focus has been on its engineering prowess, but Mahoney favours funny skits like the "Vamonos" ad, with its clever emphasis on the fuel economy features of the VW Passat TDI.
"In a world of instant entertainment, companies can overestimate what a person can absorb in a 30 second spot that flashes over a TV screen," he told Reuters.
"But by engaging someone with ad they can relate to, you can draw people into a more complete experience offered on our website or get them to download the latest Golf racing app."
VW built on last year's Star Wars-themed "Force" commercial, voted the best ad of 2011 by industry publication Adweek, with a viral teaser spot on YouTube that featured a choir of dogs barking out the theme tune from the space saga.
Not so much as a front headlight - let alone a whole car - is ever shown, but the association with VW is unmistakable.
"People are even filming their dogs watching the spot and posting it on the internet. Humour is a big part of what we do and people like to participate," said Mahoney, a language major who studied in Vienna and Goettingen.
Honda's ad people are fighting back.
Fresh from a month of resurgent Civic sales in January, it is creating buzz with a popular ad where Matthew Broderick reprises his role from the 1980s hit "Ferris Bueller's Day Off", only this time he is behind the wheel of a CR-V crossover instead of a vintage Ferrari 250GT cabrio.
A Honda executive who worked for six years in the United States says last year marked the trough in sales for the brand, and the business there is now firmly on a path to recovery.
"It is true that Volkswagen has been expanding aggressively with success, but I believe the U.S. sales data for the new Civic in January is indicative of the new improving trend," Honda Europe President Manabu Nishimae told Reuters.
Just to make sure, though, American Honda reshuffled its management in order "to further speed decision-making and increase efficiency and competitiveness," it said last week.
Source;
http://www.reuters.com/article/2012/02/28/uk-volkswagen-honda-idUSLNE81R01V20120228
Honda has a top priority Earth Dreams project that it has had running at its Japan research and development center for a while now. The project we�re talking about involves the development of a range of new generation turbodiesel engines that the Japanese automaker will use in its future products, as it seeks to improve market share in times when diesel engines cars are become more and more preferred by car buyers across the world for their high fuel economy and low CO2 emissions. 
-New Civic with 1.6-litre i-DTEC diesel engine will deliver CO2 emissions of 95 g/km*
by Dan Edmunds
Honda has revealed images of the European CR-V Prototype ahead of its public debut at the Geneva Motor Show on 6 March 2012.