VW's Scott Keogh: A doubling of market share is attainable

A surprise announcement May 11 from Volkswagen AG about plans to build a Scout brand SUV and pickup in the U.S. has roiled the relationship between VW and many of its U.S. dealers, who were caught off guard. But while Scott Keogh, CEO of Volkswagen Group of America, doesn't immediately have the answers dealers are looking for about Scout, he does believe that the VW brand is in the best position it has been in for a very, very long time.

Keogh, 53, spoke with Staff Reporter Larry P. Vellequette last month about plans for upcoming products, growth in the availability of ID4 compact EV crossovers in coming months as localized production begins, and his thoughts on ensuring VW keeps growing to eventually double its current market share. Here are edited excerpts.

Q: Is there anything you can tell us further about VW Group's plan for the Scout in the U.S.? Who will run it? How will they be retailed?

A: Everything that I know has been reported and you have reported it. First and foremost, Scout is, and always was, a unique and distinctly American brand — big time Americana — so it won't be operated through the Volkswagen brand. In fact, it won't be operated through Volkswagen Group of America. It will be operated independently. And I think the second thing, all of the answers will come when there is a Scout management team, that Scout management team comes in, meets the press and meets the markets and tells its story. And that's really all there is to say.

Given the information that was released about using a new platform and building a U.S. assembly plant for the Scout, and given VW's broad use of platforms across brands, do you see a possibility that non-Scout vehicles, perhaps for VW or Audi or even Porsche, could also eventually come from that new "rugged SUV/pickup" platform?

This platform could, could provide an opportunity for other group vehicles. Yes. I want to be clear on this thing: This platform could definitely provide an opportunity for non-Scout vehicles.

Local salable production of the ID4 is about to get underway in Chattanooga. What will that mean in terms of availability at U.S. dealerships? Will dealers finally be able to sell again from inventory on their lots?

This is huge, and it's strategically huge. To put it bluntly, the eyes of all of Volkswagen are on Chattanooga. A couple things are happening there: We are in the midst of hiring a third shift right now, and Chattanooga has never had a third shift. What that does is it gives us a full allocation of ID4s and a full allocation of Atlas [and Atlas Cross Sports] coming out of that plant.

If you look at the ID4 crudely, just doing averages, we've gotten somewhere between 1,500 and 2,000 per month [from Germany], sometimes as few as 800 per month. Once Chattanooga gets fully ramped up, we're going to start going into a zone of 7,000 to 10,000 per month, so it's going to immediately put us in a different league, and this is a huge strategic advantage for us. If you look at the investments that we made there, and you look at our core competitors, they are importing their cars. We made a strategic bet to localize, and it's going to pay off huge because we'll have access to the products at our plant locally. And another thing that is important is microchip allocation: The chips get allocated by profit margin to the different brands, but one of the critical things is if you have an electric car and a new plant, you get the allocation. It's going to be a huge opportunity. We'll bring dealers down to Chattanooga for the start of production in probably July, and then we'll be ramping up and getting up to speed in an October window.

What's been happening with inventory and production issues in North America in recent weeks and months, and where do you see it going?

I think the end of last year and the first quarter of this year, production has been less than ideal and extremely light. And this has led to our sales being down. Our inventory is extremely low. As I look at the second half and actually as I speak right now, both plants [Chattanooga and Puebla, Mexico] are running. We've just secured 20,000 more cars, so I have a little bit more optimism in the second half. This is if nothing else in the world changes. I think we can get ourselves flat in terms of sales versus last year. I think with the extra 20,000 cars, we can get our way there, so I'm more optimistic.

I think some of the knock-on effects [of the inventory shortage] are that the Volkswagen dealer body has record profits right now — a 5 percent return on sales. I think if you look at the first four months of this year, dealer profitability is bigger than eight of the 10 previous full years. So they're making more money in the first four months [of 2022] than they had in eight of the 10 last full years. So, the profitability and margin side has been quite strong, which of course is good. Now we just want to get a little bit more scale and throughput.

What's the new normal going to look like for dealers in terms of inventory when all this shakes out?

I don't see going back to the days of 80, 90, 100 days' supply, and all of the bad behaviors that went along with that in terms of incentives, in terms of floorplan expense and everything else in our environment where interest rates are going up. I don't see that happening, nor do I see us staying at the five or six days' supply, where we're turning 100 percent of vehicles.

In my world, I do see a future where turn rates are going to be critical. Supply is going to be tighter, maybe more like a 30- to 45-day supply, somewhere in that zone. But by the way, I think these are good things. I think these are good things for pricing. I think there's a good thing for margins. I think these are good things for dealer cost.

This is something that's been honestly substantial for Volkswagen. If you look at the industry incentive data right now, we're at $715 a car, and the industry average is something like $1,200, and the industry used to be somewhere around $3,400 or $3,500 per car. So to see Volkswagen in a position where we have good turn rates, good pricing power, good dealer profitability — it's making us a healthier brand, that's making our dealers healthier and these are good things.

Where do you see leasing coming in right now? I know it's hard to lease vehicles that you don't have or that you're going to sell anyway. But where will leasing level out when production normalizes?

Historically, I think Volkswagen was a little too heavy on the leasing part, going back four or five years. At times, we'd be pushing models, like the Jetta, up around 70 percent lease, we'd be pushing our portfolio up above 50 percent lease. I think for our type of brand, that's a little too high. Now what you've seen is a massive spring back, where leasing has gone down dramatically across the industry. So I think a very similar thing to what I think about inventory. I think leasing is a good tool for putting cars back into the marketplace. It's a good tool for dealers to secure loyalty. It's a good tool to build a relationship with the captive financer, but it's also a tool that needs to be managed. So I see it for us normalizing in a place, let's say 30, 35, 40 percent, somewhere in there, but I don't see it springing back.

Let's talk about affordability. VW, with the Jetta, had one of the few new vehicles that, up until recently, was priced below $20,000. What happens to that starter vehicle with EVs and all of the added features that consumers expect now? Where does that market go?

You raise a critical issue, and in my mind, this is a strategic asset of Volkswagen, and it's one we don't want to walk away from, so let's not be naive. Obviously, there was a shortage of cars, and all manufacturers did basically the same thing: If there's going to be a limited amount of cars, move your mix to the cars that are most profitable, and all manufacturers did so. And so you adjusted your mix, and in the car itself, you pushed up the equipment on the model in order to [maximize profit]. And if you look at it, it's manifesting itself, and if you look at the research, you see a lot of people have walked away from the car market because it's gotten too expensive.

The [average transaction price] was somewhere in the $34,000 zone, and now it's in the $45,000 zone. We all know that pricing did not go up that high, the average is because of the mix of models and everything else. But I believe strongly, as Volkswagen, in the people's car, so it's important that we price and have available cars in the low $20,000s. We have a Jetta that is in that price point. We also have a Taos that is in the $22,000 zone.

You're right about the EV vs. ICE, but I still feel strongly the ID4 is a massive value story, and we take basically a $41,000 car, put the government $7,500 [tax credit] on top, and we still want to get into that space. So the instant we can get a little more availability, I still want to make cars available in the below-$25,000 price point, because I think Americans still need cars. Americans still need affordability of these cars, particularly now with inflation with everything else.

It seems apparent that VW AG has placed a much higher level of trust and even reliance on its North American operations than what was true in the past. How does that play out on a day-to-day basis?

I think it plays out quite well. As someone who's worked for German companies for what is, scary to say, 27 years now, the logic is quite simple: Trust builds confidence, confidence builds more trust, and it's a great cycle.

And whether it's been at Audi, or whether it's now here at Volkswagen, and honestly the combination of the Volkswagen dealers and the Volkswagen team has earned the trust. And with that trust, that allows us to obviously secure more investments and allows us to secure more opportunity. That manifests itself through the $7.1 billion investment [announced in March]. So this means we're going to secure the products for our future, secure other products for our dealerships, and on and on.

Step No. 1 is Chattanooga, the ID4 and everything we're doing there. The second step will be the electric [Atlas-sized] SUV, which we'll be giving more stories on later in this year. And then, of course, continuing to attack our portfolio; we have a completely revamped Atlas coming in the beginning of next year. Then there'll be a new Tiguan, ID Buzz, you know the story. So that's exactly what it does: It gives us the ability to operate and it gives us the ability to attack the market. It gives us the ability to win, frankly, and that's what we're doing.

There is that VW Group goal of a 10 percent U.S. market share staring at you. What's your view of where the VW brand fits into that? In terms of attainable sales volume?

In my mind, it's crystal clear: Volkswagen is the anchor to anything we want to do as a group. It's true across the globe, and it's true in America. So in my mind, Volkswagen is a five-points-of-market-share brand, and that's where we need to get it to. And I think we've got to do it as we navigate this transition into electrification.

The next question that comes up is, do the dealers and do we have the tools to go and get five points of market share? I think in my mind, we're well on our way; we might need one or two more arrows in the quiver to go get it done. But it starts with the anchor of, in America, you need a [subcompact and compact] SUV, full stop. And whether you're Subaru, or Honda, or Toyota, or Hyundai, whatever, you've got to nail those segments. We have two ICE vehicles [Tiguan and Taos], and we've got the ID4 EV sitting in there as well. So I would say, check the box; we're well positioned. And we have two ICEs in the [larger] segment, and we will bring an electrified vehicle that we will localize that vehicle in the region as well, and away we go.

I think there may be an opportunity on the EV front with a more entry level model pricing, it's certainly something we're looking at. And I think there's opportunities in other segments as well.

Are there things that VW learned from the rollout of the ID4 that are useful for subsequent EV launches?

I think the biggest thing is I wish we could have ramped up sooner. The marketplace for EVs is doubling each and every year. And you know, being the competitive maniac on sales that I am, I would have loved to have been taking more advantage of that.

The other stuff honestly, I have to give ourselves some credit. We took the bet on localizing, and thank goodness we did, because it's gonna pay off big time. We also picked the right segment, without a doubt, when we had all the debates on ID3 versus ID4. Debate answered. So we're sitting in the right segment, we're sitting localized, and yes, I wish we could have been a little bit faster. If I looked specifically at the dealers, frankly, it's extremely hard to criticize or pick out anything. I think the dealers' response to me would be, "All good, where are the cars? Where are the cars, I want more cars!" And that's what I'm very anxious to deliver to them, and we will deliver to them. So that is, absolutely, the key thing.

Is there anything you'd like to say specifically to VW's U.S. dealers?

I spent a week with the top 50 dealers, and without a doubt, what I heard from the top 50 dealers in that week was, "We've never had a better portfolio. We've never been better, more set up for success. I've never felt more optimistic about Volkswagen," full stop. Then we had a phenomenal product meeting in California with the product council, and we showed them the localized ID4, we showed them the new Atlas, we showed them the new Tiguan, we showed them the ID Buzz, we showed them other electrified portfolio cars, and frankly, they said the same exact thing.

The company is investing $7.1 billion [in North America]. The company has never been more profitable. The company has never had more momentum to succeed in the marketplace. So no, let's go attack that marketplace and let's get after it.