STEVEN PEARLSTEIN: Good morning.
QUESTIONER: Good morning.
PEARLSTEIN: My name is Steve Pearlstein. I am a columnist with The Washington Post. And we're here this morning to have a conversation with Volkswagen Group's top man in the United States, Jonathan Browning.
JONATHAN BROWNING: Good morning.
PEARLSTEIN: A few ground rules -- the council has lots of ground rules. This is part of the Council on Foreign Relations corporate speaker series. It's -- the council is celebrating its 90th anniversary this year, and so the theme for the year is Renewing America. And so we are happy to have Jonathan here as part of the corporate speakers series and in particular with a focus on Volkswagen's new plant that they have -- are just about to open in or near Chattanooga, Tennessee.
BROWNING: Pretty much in Chattanooga, on the outskirts.
PEARLSTEIN: Just a little background: In the United States, Volkswagen, which also includes Audi and Bentley, for those of you who want to explore the upper end of the market, have about 800 dealer -- dealers in the United States. And primarily they used to -- Volkswagen imports cars and sells them through those dealers. They sell about 256,000 Volkswagens and about 100,000 Audis in the United States, which is about 3 percent market share, but much higher here in the Washington area, I might add. I am in fact a Passat driver.
The factory near Chattanooga will cost about a billion dollars and produce 150 vehicles a year when it's up and running.
PEARLSTEIN: A hundred and fifty thousand. Sorry. That's -- (laughter) --
BROWNING: Those would be the Bentleys, I think. (Laughter.)
About 80 percent of the content of the cars will be local. There will be 2,000 direct employees and, by one study, more than 9,000 indirect employees as a result of this investment. And the area where they've set up will also have a park around it with some suppliers, who also will be producing parts and assemblies there.
So a few rules: Number one, we'd ask you to turn off your cellphones, not just put them on buzz. For some reason, they -- that interferes with the sound system and the recording system.
This meeting is on the record. We are out of the Chatham House and into the sunlight for this meeting.
And at the end, we'll probably divide this conversation in half.
I'll direct some of it, and you'll direct the other half of it with your questions and comments. I'd ask you when -- if you make a question or comment, to keep it short, to tell us your name and your affiliation. And I will be very strict about saying you can make one comment and you can ask one question. Combos are not allowed, so we can have -- hear from more people.
So Jonathan is a Brit. He spent much of his career actually working for two American firms: General Motors and Ford. Now he's in the United States in charge of Volkswagen's total operation here, or at least overseeing Volkswagen's total operation here. So he's a European in an American setting as opposed to being a European working for American companies.
So you've been at it a year. Tell me about the differences between working for a European company, car company, and an American car company. What are some of the sort of cultural differences?
BROWNING: Well, first of all, good morning, everybody. It's a pleasure to be here.
Steven, I guess the simple answer is, we're all in the car business and so, you know, the fundamentals, as you'd expect, are very similar between, you know, whether you're in a U.S. company or a European company, and those fundamentals are being very clear about what you're trying to do in terms of your product portfolio, how you're trying to build the brands that the company represents.
And you mentioned three of our brands, but I feel I should be fair to the others and mention Bugatti and Lamborghini as well.
BROWNING: I'm sure there are some in the audience who are aspiring to those as well -- so all part of the greater family within the Volkswagen Group, so the products, the brands.
And then certainly, I think, a critical part of what we do around the world is really understand the customer experience and manage the customer experience in the marketplace. And I think that's only one of the areas where there are the greatest differences in terms of how the customer experiences evolved in different markets, different organizations.
Now, whether you're in Europe working for a U.S. company or U.S. (in ?) Europe, I think -- I think the fundamental issue is, this is a global business, and so you have to be able to operate effectively across cultures, across markets. And so it's not just a trans- Atlantic and a bilateral dimension: It's very much a multi-market, global and being able to appreciate the commonality across the markets but also understand the differences that are really relevant and important for managing your business, I think, are the key insights that you have to gather by working in different parts of the world.
PEARLSTEIN: Well, is there any difference in that respect between Volkswagen and the two American companies that you worked for?
BROWNING: I think -- yeah. If you look at the Volkswagen Group, it's got a very, very strong history of engineering focus within the -- within the company and throughout the leadership team. Just to kind of put the engineering, let's say, might of the Volkswagen Group into perspective, there's 27,000 engineers around the world. And if you think that NASA has a total employee base of 18,000, it kind of puts that engineering capability in context. AND the VW organization has grown up as very much oriented around engineering. And so I would say the center of gravity within the Volkswagen Group is very much skewed towards product-engineering focus. And that's one of the differences, I would say.
PEARLSTEIN: One of -- you were with those American companies a while, and that was during a period in which their success in the world was declining. You're now in a company which is number three in the world and aspiring -- and we'll talk about this in a minute -- to be -- to be number one.
Talk about how Volkswagen compared to, say, Ford or GM, deals with customer feedback. The -- one of the complaints about Ford and GM was, they sort of weren't listening for a long time and they were -- they were in denial. Tell me -- tell me about the difference between how the American companies versus Volkswagen deals with customer feedback.
BROWNING: Yeah. I think if there's a defining characteristic of the U.S. market in the global context right now, it is the U.S. market is perhaps the most transparent consumer market in the automotive sector, in terms of customer understanding of the product, the transaction price, the market dynamics.
And with the advent of social networks, with the advent of the Internet, the transparency of what's happening in the marketplace is very intense here in the U.S.
And so I think one of the interesting dynamics is that to compete effectively in the U.S., you have to be very good at sensing and responding. You also have to, obviously, predict trends and developments in the marketplace. And that's a challenge not just for the U.S. manufacturers, but it's also a challenge for any company wanting to be successful in the U.S.
And that's something that I think more companies now are establishing better mechanisms to do that sensing, responding, get the input back into their upstream product development activity so that whilst -- and we may explore this theme later as well -- whilst the automotive industry has to achieve scale to get efficiency and to manage the very heavy levels of investment, you also have to be very tuned in to local-market specifics and address individual-market requirements. So finding this balance between scale of market specificity is really one of the key winning strategies in the automotive sector.
PEARLSTEIN: Can you give me a little detail of, for example, what -- how you get and incorporate consumer feedback more intensely and quicker now than the industry did five or 10 years ago? What -- give me an example of something you do in Volkswagen that concretely shows that.
BROWNING: Sure. I mean, obvious area at the moment is you have lots of enthusiast websites with a lot of dialogue going on about your product or developments around your product, both, let's say, in terms of where there's an issue with a product or a negative spirit, but also where you do something that customers respond positively to and we monitor very carefully what's happening on blogs and in the social space.
One thing that any of you that are American football fans and watch the Super Bowl will probably have noticed was, you know, some of the advertising that took place around the Super Bowl.
BROWNING: And we had this one spot that was called Mini Vader, which was a kind of rehash of the Star Wars theme, was part of the launch for Passat. And I mention that because how communications now work at a national and global level and link with local retail activities is really interesting, because you used to have a national communication that would happen and kind of fade fairly quickly, but with the advent of things like YouTube, it gets replayed and lives a life way beyond the event. And that's a specific example of Mini Vader. There's actually over 38 million views of that ad that have taken place on YouTube around the world. It is the most viewed ad globally.
Now, you say, wonderful, that's nice, but how does that actually translate into real life at a retail level? Well, the say after the Super Bowl, I was talking to our retailer in Chicago, one of our retailers in Chicago, and he's got a Facebook page for his dealership, and his number of friends went from, prior to the weekend, 500 friends on his Facebook page, to 800 on the Monday. And that ability to communicate almost instantaneously with your customers in a different setting is a fundamental change to the relationship with the customer from, you know, four or five years ago, let alone 10, 15 years ago.
PEARLSTEIN: A few years ago I think it was generally assumed that there was overcapacity in the auto industry globally, too much capacity, some of it had to be taken out, and that there were too many companies; that in order to achieve efficiencies of scale, there were going to have to be fewer companies. Have we got to the point where there is the right -- has the industry been right-sized both in terms of total capacity and the number of major players, or is there still some consolidation and retrenchment to go?
BROWNING: You know, I think it's too simplistic to talk about over/under capacity. A plant will only be able to produce one, maybe two, vehicles, sometimes a few more, but fundamentally plants are normally assigned to one or two vehicles.
And so to talk about a global over- or undercapacity, I think, is too simplistic. You have to say, is it the right capacity that's in -- that's in place for the right vehicles in the right location?
Clearly, there's been some retrenchment, but I think one of the perceptions of the automotive industry globally is that its perhaps not a growth industry. And I'd really challenge that. I mean, the automotive industry globally is growing very significantly. If you just look at the decade that ended in 2010, 10 years previously, the global industry was 38 million. Even with the effect of the recession impacting the 2010 number, the global industry was 58 million. So that's a compound average growth rate of almost 5 percent and 50 percent plus over that period of time.
So automotive, I would argue, is a growth sector. Yes, in the U.S. we're still working our way back out of the recession, but it is a sector that fundamentally continues to grow both within the North American region but very importantly on a global basis.
PEARLSTEIN: Is all the growth in the developing world, or is -- are people in the rich countries also continuing to buy more cars per person?
BROWNING: Yeah, generally you see more cars -- we're normally talking about cars per thousand population -- we generally see that continuing to grow in the mature markets as well. Very few have reached what you would call a saturation point. But in many markets around the world, people talk about, you know, wanting to have two keys: a key to a house and a key to a car as a real aspiration in terms of standards of living. And so in many parts of the world, you know, customers -- you know, potential customers don't have those two keys yet. So there's still a lot of growth available.
PEARLSTEIN: What about companies? Too many companies still -- is there -- is -- does there need to be more consolidation still?
BROWNING: Again, you have -- you will always have winners and losers in some parts of the world. There'll be consolidation, I'm sure. But at the same time, you just need to look at China in terms of the number of new companies emerging that are operating outside of China. So I'm not sure you'll actually see the number of companies or the number of vehicle entries reduced. In fact, I think you'll see those increase going forward.
PEARLSTEIN: Well, let's talk a little bit about Tennessee. But before I do, you mentioned when we were talking before that you have more than dealerships here. Do -- you have some operations in Detroit and California. Tell me about those.
BROWNING: Yeah, if you look at the Volkswagon group in total across the U.S., we have approximately 30 different locations. Now, some of those may be relatively small training facilities and parts distribution centers, but as well as our corporate head office here in Virginia, we've got Tennessee coming on stream as a manufacturing base. We've got an electronics research laboratory in Belmont in California. And we also have a design studio in Santa Monica as well as various test and development facilities. We've got our largest nonproduction body of people in Auburn Hills in Michigan. There's about a thousand people there that work from a variety of sales and after-sales activities, but also a lot of engineering -- (inaudible) -- calibration work and environmental engineering work as well.
PEARLSTEIN: So why build a plant in the United States? You know, Volkswagon and Audi have done very well importing cars into the United States. It's not a huge plant. So why come to another high- priced labor market in order to build cars?
BROWNING: Well, I think you have to see it in the context of what we call our 2018 strategy. And this is a global strategy that the company has to attempt to achieve leadership in the global industry by 2018. And that strategy has four components. It's often reported as being very much focused on a volume leadership. That's not the case. There are four dimensions to this 2018 strategy. One is best cars in terms of quality and customer satisfaction, a certain level of financial returns, over 10 million vehicles sold globally, and then being a top employer on a global basis.
And so as part of that strategy, we identified the U.S. as one of our underperforming markets. Because if you look at the VW Group on a global basis, we have a market share of -- north of 10 percent; whereas, as you mentioned, in the U.S. our market share is around 3 percent. So we underperform relative to our global performance in the U.S. And so as a corporate board, we said: What does it take to achieve a significant step forward in the U.S. marketplace?
And so there was a -- an investment growth plan put together for the U.S. market that -- the first phase said $4 billion investment into the U.S.; 1 billion (dollars) of which, as you mentioned, for the plant in Tennessee, 3 billion (dollars) on products and other infrastructure. And that growth strategy for the U.S. is targeted at really shifting our level of presence in the U.S. marketplace over the period to 2018. And so a million of those 10 million units on a global basis are targeted to be achieved here in the U.S.
And so in that context, the manufacturing footprint, not just in the U.S. but on a global basis, had to be able to deliver the 10 million vehicles on an annual basis. And so, actually in the last four years, we've added seven new production plants around the world, and Chattanooga is one of those seven. So the group has been very focused on using the best practices globally to implement those -- in this case, in Tennessee.
PEARLSTEIN: What percentage of total cost of producing a car is labor?
BROWNING: It's --
PEARLSTEIN: Or your cars, I should say.
BROWNING: Yeah, it -- it's maybe not as much as you might think. We don't actually disclose the breakdown of our -- of the cost workup, but it's certainly not a majority. It's not an insignificant minority, but -- (laughter) -- but it's certainly not a majority of the cost of the vehicle.
PEARLSTEIN: Well, do you -- do you -- producing Passats here, as opposed to, say, Mexico or -- talk a little bit about labor costs, in terms of either -- the disadvantage of coming here, or the downside of coming to Chattanooga. We'll talk about the upsides in a minute.
PEARLSTEIN: But where labor -- was labor a sort of a minus on your benefits and disadvantage list?
BROWNING: Yeah, I mean, if you look at the -- let's say, the relative ranking between Europe, U.S. and Mexico, the U.S. would be in the middle of those three. So without, as I say, getting into the specific numbers, the U.S. is midpoint in that group of three. But at the same time, I think it's important to emphasize that the labor cost is only one of a number of factors in terms of (going forward ?) --
PEARLSTEIN: So why not -- let's use Mexico as the counterfactual, then. Why not -- why not Mexico? There's no trade barrier between Mexico and here. The distance between Mexico and many U.S. markets is not a whole lot different than Chattanooga and many U.S. markets, so transportation costs probably aren't a big deal. So why would you -- again, why Tennessee, as opposed to Mexico?
BROWNING: Well, I mean, Mexico is actually a big part of our North American footprint, our North American region, and so we already have a plant in Mexico. We're adding an engine plant in Mexico. And Chattanooga is seen really as a part of that manufacturing constellation --
PEARLSTEIN: Will the engines for Chattanooga come from Mexico?
BROWNING: Yeah. Mm-hmm. Correct. So we see the North American region, and obviously with the NAFTA area, as a -- as an entity. But we want to have some balance within that, and so the opportunity to have the plant in Chattanooga actually is much more than just an economic proposition. And I think it's sometimes underestimated what it means to have a manufacturing presence in a market, as opposed to a -- let's call it just a sales and distribution footprint.
PEARLSTEIN: Do people -- do consumers really, A, know, and care, whether a Volkswagen is made in the United States?
BROWNING: To some extent. But I was actually thinking in this case more specifically in terms of what it means internally. Because when you have a sales and marketing organization, you have, let's say, one community of your own company interacting with a market. When you have a plant -- and I think you wrote recently about this notion that (innovation ?) follows manufacturing. When you have a plant, that means you bring not only product engineers, manufacturing engineers, you bring purchasing teams, you bring quality teams.
So the whole organization is engaged with the market. And yes, they may be focused on the plant itself. But to understand how that plant operates, you have to understand the environment, the market that it's addressing.
And so the degree of engagement with a market is exponentially larger when you've got a manufacturing presence there as well. And so that's really important in terms of engagement of the overall company with a critical market like the U.S. And so, economically, good proposition, but it's very important in terms of the culture and the way in which a market like the U.S. is embraced by a foreign company by having that deeper presence here.
PEARLSTEIN: And that has more to do with internal operation --
PEARLSTEIN: -- and organization than it does the sort of political signal it sends. Is that -- is that -- was that a major factor? It's good for Volkswagen's, I don't know, government relations aspect, trade policy advocacy to have -- to have a plant here?
BROWNING: I -- well, it's certainly not a disadvantage, but we didn't make it -- do it just to make Anna's (sp) life easier in Washington. (Laughter.) You know, I mean, unquestionably, it's important to establish your commitment to a geography, a market over time. And I think in dealing with governmental, nongovernmental organizations, when you're clearly committed to a market for the long term, that means the relationship is a different one.
And I think especially in the case of Chattanooga, bear in mind, we made this decision to invest just before the recession really hit in the U.S., and we didn't change that plan at all through that recession. And I think that's given the company quite a bit of credibility in terms of the seriousness with which we're addressing the market here.
PEARLSTEIN: Can I ask why Chattanooga? There is a Saturn plant in a -- in Tennessee and also a -- something else -- Nissan plant. But it's not exactly a(n) auto hub. It's a railroad town. Maybe that's one reason. But tell me why else Chattanooga.
BROWNING: Well, certainly the transport infrastructure had something to do with the choice. But when we started that site selection process, there were actually over a hundred sites considered nationally, and so there was a very broad search conducted, and a whole variety of factors that were the criteria and the decision- making. But in the end, you know, Tennessee and Chattanooga came out top for a whole, you know, variety of issues from infrastructure, site availability, commitment of the local organization.
And, you know, one story that the team who were going through that site-selection process tell is, really the enthusiasm of that local team and the commitment to do what it took to provide the right infrastructure and facility really made a big difference in the end in terms of the decision process. When the site that was intended for the plant was first shown to the selection team, it was a brownfield plant. It had been used previously for a -- I believe a military production facility. It wasn't in terribly good shape, was very overgrown, was a bit of a wasteland.
And the team, when presented the site, it didn't look very attractive, and so they let that be known. The local team said, we'll fix that; we'll fix it within two weeks. And not only did they mobilize, I think, every construction company in the area to clear the site: They set up a video camera to record the day-by-day change that was taking place so the site-selection team could actually monitor that real time. And it was that sort of engagement and real enthusiasm to bring the company to Tennessee, to Chattanooga, that does make a difference. It's not all kind of the hard-nosed rational economic numbers. There's a lot about the spirit of engagement as well.
PEARLSTEIN: So I ask this question usually of many people in the manufacturing business. I could have given you -- I could give you a location where you can have the land for free, there is a plant that is already an auto plant there, if you want to use the building; probably you could use some of the machinery if you cared to; and there are tens if not hundreds of thousands of experienced manufacturing workers. Why would you not go to Detroit?
BROWNING: Well, if you go through that same checklist of saying, what are the things that are going to make this plant a success, I would, you know, say, rate any location, whether it's Detroit, whether it's the Northwest, Northeast, against the site there.
And we really felt that was the best combination of, as I say, infrastructure, enthusiasm, employee base, supplier base, as well as transport and infrastructure that went with it. So it was really the winning combination in terms of those hard factors and the soft factors.
PEARLSTEIN: How important was it that it was a right-to-work state and that you wouldn't have to deal with workers who had grown up in a unionized environment?
BROWNING: Well, I think the -- in terms of looking at the future employee base and adopting the working practices; the manufacturing processes; the manufacturing, let's say, culture that we're looking for -- that was an important consideration in terms of what we're trying to achieve, because, as I said, we -- within the last four years, implementing these seven sites around the world -- so there's a very well-established model of how to start up a new facility, with new product, new supply base, new employees, and that's a proven model. So we wanted to be able to implement that.
But I think very important to emphasize is, we operate in every kind of labor cost environment. We operate with unionized, nonunionized plants around the world. So I wouldn't say that was a decisive factor, in terms of the union perspective.
PEARLSTEIN: Would you prefer to hire workers who have never worked in the auto industry and train them yourself, or would you prefer to hire former Saturn workers, for example, who have experience with auto manufacturing?
BROWNING: We prefer to hire the people that can demonstrate the skills to do the job, and that requires some training as well, that's fine. But we put people through an assessment center process, and it's really about the skills and the attitude that they bring, rather than the specific prior experience.
PEARLSTEIN: Gas prices are rising. They go up, they go down, but there seems to be a sort of secular increase in gas prices. How is that changing your sense of what the U.S. market will demand and particularly in terms of different kinds of propulsion systems?
BROWNING: Mm-hmm. Well, you know, I think increasing gas prices are a fact of life and something that the U.S. customers will need to get more, let's say, used to on a long-term basis, as opposed to cyclical movements up and down. So there may be some ebbing and flowing of those prices over time, but higher gas prices will be a fact of life going forward.
We see some customers responding to current gas price pressure. We particularly see our diesel sales increasing very significantly. Over 20 percent of our sales in total now are clean diesel technology, and the great advantage of diesel is, you get the fuel economy plus you get the driving dynamics that you would normally associate with a gas vehicle or even better.
And so diesels are growing very quickly. At the same time, hybrids are available and electric vehicles are on the horizon. But I think the attractive thing about our clean vehicle technology is, that's available quantity now. There isn't a huge premium to pay for acquiring that technology, and it's something that still people say they enjoy driving.
PEARLSTEIN: Mm-hmm. Does Volkswagen have a(n) electric or hybrid or natural gas strategy?
BROWNING: We have a whole range of powertrain strategies, and I think that's one of the challenges for the industry globally, is we used to deal with essentially two powertrain technologies, gas and diesel, and now there's other alternative fuels. There are hybrids of different degrees of sophistication, and then there's electric vehicles and maybe even hydrogen on into the future as well. And so it's not a question of betting on one horse; you really have to work on all of those technologies. And across the group -- and again, that's one of the advantages of the scale and the breadth of the group -- each of those technologies are being worked on.
PEARLSTEIN: But do you have a hybrid -- have the date for a hybrid yet?
BROWNING: I could sell you a Touareg hybrid right now, which I think would suit your needs very nicely -- (laughter) -- and anybody else who would like one. (Laughter.)
PEARLSTEIN: You know, the one question I always have -- I am a Volkswagen driver, as I told you -- what is -- what is -- what is the problem with the auto industry and the color green?
(Scattered laughter.) You don't --
BROWNING: Do you mean on the vehicles --
BROWNING: -- or the environmental green?
PEARLSTEIN: No, I don't -- I don't care about the environment. I mean the -- (laughter) -- I mean the color green. What is the problem? You can't -- you know, they don't seem to settle on green colors and stick with them. You know, you try this one and that one and then they don't work, and, you know, it's always gray, black, brown -- gray, black and white. What is -- what is your problem with green? Tell me about that.
BROWNING: Well, you know, I -- are we still on the record here?
BROWNING: Yeah. (Laughter.) One of the most challenging meetings you go to every year is when the designers present the color trends. And they have to present the color trends, you know, five, six years out, by the time the paints are developed, the process is established.
So as we age, it's more and more difficult to accept some of the future color trends. (Laughter.) But in fact, a friend -- a friend actually showed -- sent me an image of his daughter's GTI Golf that she had actually put pink wheels on. It's a white vehicles with pink wheels. (Laughter.) Now, would you choose in an executive review of colors a white vehicle with pink wheels? No, I don't think so.
But green comes and goes. In many markets, you know, green cars are unlucky. So you want to watch out for that.
PEARLSTEIN: What -- really?
BROWNING: Yeah. Yeah.
PEARLSTEIN: Like India or something like that?
BROWNING: No, actually U.K. but also other parts of the world, yeah. So be careful.
PEARLSTEIN: I'm going to -- I'm going to ask you one more quick -- a couple more questions quickly.
I'm embarrassed to say that probably 15 years ago, I wrote a story that says, you know, not too far in the distant future, technology is at the point where you're going to be able to either sit at home -- or you can go to a dealership if you want to actually touch feel something -- and pick the model you want, the color you want inside, outside, whatever; you can do this from your home, do all the choices you want, push a button, and then it'll say your car will be delivered to you, you know, two weeks from now or three weeks from now and then some guy or lady drives it up to your house and drops it off, and there's no need for that dealership network. Cut out the middleman.
And anyway, it hasn't happened. So tell me, what is the problem here? I'm sure you have the technology to do this. Why is that not developed the way, you know, book selling or so many other things now have developed where we've basically dis-intermediated the retail?
BROWNING: I -- the simple answer is because customers aren't ready to take that step out of the process. And so all the technology you talk about -- you know, you're able to configure a vehicle, find a price, often get credit pre-approved online. So all of the technology is there. But at the end of the day, customers still want to touch and feel and mostly -- most importantly test drive the vehicle through that purchase process.
So customers still need a local point of contact. And so the dealer really provides that. Much, much more of a shopping experience is now done online. So people do a lot of research, really have a very short list, a very specific view generally when they get to the showroom. And then it's into the purchase as opposed to really the research, the shopping. So we talk about a purchase funnel. And customers now are much further down that purchase funnel by the time they arrive at -- arrive at a dealership.
PEARLSTEIN: Do you have the capacity at the -- at the plant to deal with my very specific order and put it in the queue and arrange a production so that it -- that you get it to me relatively quickly, or are you still doing Monday we do yellows and Tuesday we do greens, and then that's what's out there, and then the dealers swap among themselves?
BROWNING: No, we don't batch build in production. Every vehicle that comes through the production line has an order attached to it, whether it's a customer or a specific dealer order. So every vehicle is very specifically built.
And it sounds like we need to take you on a tour of Chattanooga, because I think your mental model needs updating. (Laughter.) For example, you know, we've -- in the plant in Chattanooga, we've actually built the building, the outer building with six-inch thick walls that are both very good at keeping the heat in in winter but also the heat out in summer. We have a paint process that's eradicated water from the paint. So the spraying -- the overspray is collected basically by big suction vacuum-type cleaners that take the overspray out. So all of that waste water has disappeared. There's LED lighting through the plant, so it's much more efficient.
So the manufacturing environment now I think you'd be pleased and impressed with, but you need to come and visit.
PEARLSTEIN: All right.
So let's start with some questions. Danny?
QUESTIONER: Thank you. Dan Yergin from IHS CERA. I wanted to follow -- thank you for this conversation. I wanted to follow up on a question that Steve said. On the electric car, it seems we had hydrogen, then it was biofuels, now it's the electric car. But -- and as you say, you have to address this whole range of choices. There does seem in your industry to be a spectrum from perhaps -- from public statements from Ford at one end, rather skeptical or saying we don't know, got to get the battery cost down, to Nissan, which might be described as rather enthusiastic.
With your 27,000 engineers, kind of where do you guys -- where are you in terms of thinking about the electric car, the battery, getting to volume on it?
BROWNING: Yes. The simple answer is, every manufacturer to some degree is working on each of those levels of the evolution of propulsion. And so from our point of view, we have a lot of work going on in terms of optimizing the internal combustion engine. And I think that's very important in terms of immediate benefit delivery in an affordable way to the marketplace. And so optimizing the internal combustion engine is still a big part of what we're about as a company, but then, as we mentioned, hybrids, electric vehicles, hydrogen, are also areas of focus.
And so to be specific in terms of electric vehicles, we have a plan to bring electric vehicles to the U.S. by 2013, which matches the cycle of various new product introductions. At the moment our focus is very much on gas, diesel and hybrid, but we then move on to electric vehicles after that.
We've set a target within this overall global strategy for 2018 to be selling 3 percent of our total sales globally as electric vehicles. Now, that may not seem --
QUESTIONER: Including hybrids?
BROWNING: No, that's electric vehicles specifically.
That may not sound a huge percentage, but that is a big step forward in terms of the global footprint. I mean, if you take the example of the Leaf and the Volt in the marketplace here in the U.S., neither of those have sold over 2,000 vehicles yet this year. So I think the Leaf is just a shade over a thousand, and the Volt 1,700. So both at less than half a percent of the total sales of their respective brands.
So electric vehicles are an important part of the landscape going forward, but they're not going to produce a transformation overnight in terms of the vehicles on the road.
PEARLSTEIN: By the way, are you going to start with the smaller -- a smaller car?
BROWNING: Yeah. Our first mainstream offer will be the -- will be the Golf.
Yes. Well, this -- I mean this gentleman over there. Yes.
QUESTIONER: David Apcar, Apcar Partners. Thank you very much.
One of the urban myths is that over the last 10 years -- I don't know if it's true; is it? -- over the last 10 years Volkswagen has relied less intensively on stock compensation for senior-most executives than GM, less intensively. And if that's true, do you think that heavier reliance on stock compensation for senior-most executives, especially stock compensation that does not depend on, for example, relative performance vis-a-vis other competing car companies -- do you think that it discourages agility or strategy experimentation at the very top of the organization, perhaps because it leads senior executives to be conservative or maybe it focuses them on widely shared risks rather than risks specific to the company and the strategy it's pursuing?
BROWNING: I think a difficult question to answer simply in terms of relative behavior in different companies, different automotive companies. But I think what I would say is the simple existence of a 2018 strategy within the Volkswagen Group puts a significant balance of energy and attention within the leadership team on putting the infrastructure, the building blocks in place to drive to those long-term goals that have been very specifically and explicitly laid out.
And short-term performance by the leadership team is assessed both from short-term results but also on achieving the milestones towards the 2018 strategy. And so within the Volkswagen Group, we have a number of metrics that we're assessed on. But it is a combination of specific, short-term delivery and, as I say, building towards the 2018 goals.
PEARLSTEIN: Yes, sir.
QUESTIONER: Hi. I'm Mark Levinson with the Congressional Research Service. We've had a number of events, most recently the Japan earthquake, that have exposed the fragility of supply chains. What's Volkswagen's current thinking both in terms of the desirable length of chains, and whether they need to be shortened, and also in terms of supply redundancy versus sole sourcing?
BROWNING: Yeah. Obviously the tragedy in Japan is causing a lot of dislocation in the supply chain already, and I don't think we've yet fully understood how that cascades down the different tiers of suppliers, and so that will still be something that emerges fully over the coming months.
At the moment, from a Volkswagen Group point of view, while there's some impact, it's not at a significant level. We've been able to manage our supply chains pretty effectively despite the dislocation. And I think (while ?) in principle you're right, we're a global industry with a lot of specialization across that global industry, and so there is some exposure in terms of single-sourcing in some areas, in terms of a lengthy supply chain.
But when you have a broad global footprint with shared technologies across brands, across locations, you tend to have a number of sources around the world, and so there is greater flexibility than perhaps might be the case for some of our competitors.
PEARLSTEIN: The -- yes, in the back.
QUESTIONER: Barry Wood, RTHK in Hong Kong.
I'd like to follow up on what Steve raised as well. If you look at auto showrooms around the country, around the world, these vast inventories of automobiles, when you reply that the customer's not ready, why not have just, you know, a sample of cars, every car that's available so that the customer gets that experience? But at the same time, the customer would have the savings of not having that inventory and that the car would be delivered immediately from the factory?
BROWNING: Yeah. In different parts of the world, there is different customer behavior. For example, in many of the Western European markets, people are very happy to specify in detail the vehicle from a very long list of alternative specifications and then wait for that vehicle to be built over a four- to six-week cycle. Contrast that with the more normal behavior here in the U.S. where people will want to shop and office -- often actually take home that vehicle on the same day. And even with the most responsive manufacturing system in the world, you won't be able to meet that sort of a response time.
So part of it is technology and footprint-driven, but a lot of it is in terms of customer expectation. And so customer behavior here in the U.S. is much more typically orientated towards an inventory model where you order from stock and you take what's available. And so there what we do is simplify the model offering; whereas in Germany, if you look at a price list, you'll have a base vehicle and a very long list of options that you can add or subtract from and have that vehicle built to your specification; whereas here, for example on Jetta, we have essentially 16 model packages, and that allows us then to be more efficient in terms of the inventory rather than a (build toward ?) model in Europe where it would be impossible to have a sufficient range of availability for the customer. So at the end of the day, most of it is driven by customer behavior.
Now you could also say, well, some manufacturing practices, they reinforce those. And you are seeing a -- particularly in the -- in the premium segments, more customers being prepared to order from the pipeline or from the manufacturing facility.
And I think one of the -- let's say one of the opportunities that we see coming out of the recession is that, as inventories have become leaner, the discipline of keeping those inventories as lean as possible, as fresh as possible, is good for the customer, is good for the dealer, is good for the manufacturer. And so keeping a better balance between overall supply and demand is definitely a good thing in the -- in the industry.
PEARLSTEIN: Can I just follow up? You now sell about 350,000 vehicles in the United States, and you have 800 dealers. You anticipate selling as much as a million cars?
PEARLSTEIN: OK. All right, would you anticipate that you would increase the total number of dealers during that period when you're more than doubling your sales?
BROWNING: Let me separate out the case for Audi, the case for Volkswagen. With Audi, we're currently selling just over a hundred thousand, and our target is to get to around 200,000. And that can happen essentially within the same network.
In the case of VW, or Volkswagen, we currently have around 600 dealers, selling, as you said, last year, 256,000, this year we should be over 300,000, and looking to get up to 800,000.
We -- the first phase of growth over the next two years we should be able to manage within -- essentially, within the same network. Now, you all -- within any dealer network, you have some change and evolution on an ongoing basis. After we get through the next two -- let's call it two years, then, to get up to that next stage of growth that would take us up to 800,000, we would need to add some dealer points. But in the short term, it's essentially working with the same network and using the available capacity, growing capacity within that network rather than adding points.
PEARLSTEIN: And those new dealers, will they be in places where there are none? Or are you going to add another one in metropolitan areas -- where you have three, maybe then go four?
BROWNING: It'll be a bit of both. For example, we do well in Chicago today, but as the business grows, there are opportunities to add points within the greater metro area in Chicago.
PEARLSTEIN: Well, this is another one of my questions that I've always been curious about. This is a big purchase, a car.
PEARLSTEIN: You know, I might be willing to drive another 15 minutes, you know, to get a car. So why not -- why not just have much greater efficiency and throughput through fewer, larger dealerships. Particularly, dealerships have not been hugely profitable in recent years. Why not help them out with some scale efficiencies?
BROWNING: Again, you need to look at the different networks around the market. If you take the Volkswagen network, over 85 percent of our dealers are profitable today, which is relatively high within the industry. The overall return on sales is above industry average. It's over 2 percent, heading towards 2.5 percent. So the profitability of the network today is actually pretty good. And with the growth that's coming through, that gives them an opportunity to improve that profitability as well.
We do a lot of research in terms of drive times that customers are prepared to accept, and it does vary in different parts of the -- of the country. But we model where we place our dealerships based on where the population is, where the drive times are and how that's projected to change over time.
PEARLSTEIN: Yes, Paula.
QUESTIONER: Hi. Thank you. Paula Stern, Stern Group.
I'd like to ask you about 21st century manufacturing skills here in the United States.
QUESTIONER: I have the impression that Volkswagen has had some experience working particularly with community colleges, et cetera, when it comes to training apprenticeships, when you don't find the skills that you feel are really essential. Germany, obviously, is the leader for the world in educating for 21st century manufacturing skills.
QUESTIONER: I'd like to ask you if you could add to and give us some flavor as to what Volkswagen found in Chattanooga and what, if anything, there or elsewhere in the United States, you are doing to enhance the pool of labor.
BROWNING: Uh-huh. Yeah, I think you're absolutely right. Germany in many respects is -- and I can say this as a -- as a Brit -- Germany is a model in terms of preparing people for vocational occupations and technical occupations, and doing that in a -- in a very constructive way.
And if I look at the U.K. and the U.S., I'd put us both at the -- perhaps the other end of the spectrum. And I think that is a fundamental challenge in terms of manufacturing going forward and an engineering-based sector and the health of an engineering-based sector.
So I don't say this kind of looking at it from a German perspective but more a British perspective of equally felt challenges as in the U.S. And in Chattanooga, one of the attractive elements at Chattanooga was there was a relatively good standard of education in terms of an available employee base, but at the same time a lot of work to do to provide the specific skills as part of the training process. We've established a training academy on site, where every employee has to go through a required set of classes before being allowed to (test ?) a vehicle and actually get into the production process.
Now, I think the general state of the education system here in the U.S. like the U.K. doesn't place enough value in terms of some of the core skills that relate to an engineering world. So whether it's science, math, technology, major, I would say, concern in terms of future competitiveness for not just the U.S. economy but some other economies around the world. And I think there is a lot to learn in terms of the German educational structure, how those fields are regarded and the sounding of those skills in society more generally. Germany respects engineers like perhaps no other culture in the world. And it would be great if others did value engineering skills as highly as the German culture does.
PEARLSTEIN: Yes, sir.
QUESTIONER: Matt Mani with Booz & Company. First of all I want to just thank you and your team. I drove a CC here for the first time --
QUESTIONER: -- and it actually had me the enjoy the Washington traffic this morning -- (laughter) -- which is somewhat of a minor miracle.
BROWNING: Thank you.
QUESTIONER: So thank you.
You know, you mentioned growing to 800,000 units. And it seems to me that in order to do that, Volkswagon has sort of relied on this German-engineering import brand or view in the market, that you'll have to become more of a quote, "American company," somewhat similar to what Honda and Toyota have successfully argued. And I wonder if you can say a bit more beyond the plant, what are your plans to really kind of establish yourself in the U.S. market. And are there other investments beyond the one plant in Tennessee that you're considering?
BROWNING: Well, I think there are about three or four questions in that one. (Soft laughter.) But anyway, I'll try to answer some of them.
You know, first of all, Volkswagon will remain first and foremost a German company. And the soul of the brand will remain exactly what it is, which is an emphasis on engineering; you know, tremendous integrity in terms of the vehicles it has developed; and so a vehicle that really seeks to make German engineering as accessible as possible into the mainstream markets in the U.S.
And so the growth strategy is about making the Volkswagon brand more accessible, more broadly available but keeping the soul of what represents Volkswagon very much intact.
We've identified six areas of transformation that have to really see a step change in performance to drive to this level of growth, because we absolutely recognize it's an aggressive plan, needs, you know, significant and progressive change over the time between now and then. But as I say, we're very focused not so much at the number at the end of it but on the enabling steps to get there.
And so those areas, you know, are in things like our brand development, the consideration that our brand achieves across a number of segments in the marketplace; performance on perceived quality, our performance on customer satisfaction. We talked about the dealer networks, some changes there; areas like used cars and obviously in terms of the product portfolio both in terms of the vehicles offered, the powertrains and the pricing and equipment strategy that we follow in the marketplace.
So there are a number of areas of transformation that will enable that growth, but at the end of the day, Volkswagon will remain Volkswagon. I -- we talk about Volkswagon, you know, getting its green card, being more accepted perhaps in the U.S. marketplace. It exists in a pretty special place in the U.S. culture. I mean, everybody seems to have their Beetle-Bug story, their Microbus story. And it's wonderful to hear those.
But too much of the kind of knowledge or conventional wisdom of Volkswagen is rooted in the past. You know, we need to make it more relevant today so that people say Volkswagen is a wonderful brand. And it has that emotional equity here, which is a great starting point, but it's not so much considered by enough people a brand for me today. And so it's that transition that we're working through, making Volkswagen more relevant for more people today in the U.S.
PEARLSTEIN: You have one last question. But let me ask, do you want people to know that their Passats are made in the United States, or do you want them to think this is -- this is really German craftsmanship and engineering and just assume that they don't know that it is made in Tennessee?
BROWNING: We want people to know the truth, which is this is a German-engineered vehicle built in America. And, you know, German engineering is right at the heart of what Volkswagen is, and we are a German engineering company. We have production all around the world, and we're adding, you know, I think a wonderful, real state-of-the-art facility in Chattanooga. And so it will provide us this combination of German engineering, made in America. And that will, I think, be a positive for quite a number of people.
PEARLSTEIN: Yes, sir.
QUESTIONER: Thank you. My name is -- (name inaudible). I'm from -- (inaudible) -- company, Washington, D.C. Thank you very much for very impressive talking.
Question is about globalization and China. First, globalization. U.S. is going to have -- ratify Korea FTA, Colombia FTA, Panama and maybe TPP soon. How those global network would -- I mean, how Volkswagen U.S. would play a role in the globalization -- networking.
And also in that context: China has abundance of money for investment. Do you see in future their money coming to the States for automobile industry, or it's totally closed because of the -- (inaudible) -- and technology and the customer base? Thank you.
BROWNING: Yeah, you know, Volkswagen in America is an integral part of our global network, and so we work very much as an integrated organization, not an island separated in any sense of -- and I think goes back to one of the themes that we talked about earlier. The automotive industry because of -- because the scale, the fixed costs, the heavy investment, you have to get the scale advantages of a global organization, but stay very firmly rooted in key markets around the world. And finding that balance is important.
And for Volkswagen, China is now our number-one market and no longer Germany. China has overtaken the home market in terms of importance very significantly. And you see a tremendous infrastructure for Volkswagen in China already and increasing. So China is a critical part, but it is part of this global network as well.
And clearly trade agreement zones are an important part of how we manage our supply base, our manufacturing footprint within the North American free trade area. You know, I think you quoted the number earlier, Steven. For Passat, 85 percent of the content will come from within the North American free trade area, and that is an important economic dynamic in terms of how we source, how we plan our footprint and obviously how we manage the business on a day-to-day basis, being able to operate in -- you know, without tariffs, without import duties and largely outside of the fluctuations of currency movement.
In terms of our operation in Chattanooga, most of the production is focused on the North American region, significant activity in Canada and Mexico. But we're also looking at opportunities to export some volume into Korea and also potentially into the Middle East as well. So there are export opportunities beyond the North American region. You do, though, then get into very sort of long -- in terms of built-up vehicles, very long, deep-sea supply lines, and those can be quite challenging to manage.
In terms of a perspective on China and particularly the Chinese base manufacturers, undoubtedly, as time passes, they will become more and more globally orientated, globally present.
And going back to your earlier question of consolidation at a manufacturer level, they will be the biggest drivers of growth in terms of -- and proliferation in terms of the numbers of manufacturers present around the world.
PEARLSTEIN: You want me to cut it off. (Laughter.) Okay. So I'm cutting it off.
Thank you all for coming. Jonathan, thank you for being here.
BROWNING: Thank you very much. Thank you. (Applause.)
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