Volkswagen To Rebuild With A New SUV Portfolio

| About: Volkswagen AG (VLKAY)

Summary

Volkswagen’s sales have been held back as a result of only offering two SUV models.

Over the next three years, Volkswagen will go from offering two SUV models, to five.

Already by the end of 2017, there will be three all-new SUVs, including the replacements for the Tiguan and Touareg.

Two smaller SUVs will arrive in 2018 and possibly as late as 2019.

With the advent of a market-leading SUV portfolio consisting of five sizes, Volkswagen should see improved sales.

Volkswagen (OTCPK:VLKAY) is in the news to end the sorriest and costliest of chapters. It's going to have to pay the most amount of money in the automotive history - maybe all of corporate history, period - in order to settle the issue of its diesel engines having emitted too much pollution.

Once the ink is dry on the diesel settlement, however, the long journey to rebuild the world's second-largest automaker begins. While it may be surprising to some of you, Volkswagen's sales have not fallen much in the last nine months on a global basis, holding relatively steady at around 10 million units annualized, but the U.S. market has suffered unlike Volkswagen's performance in Europe and China.

For the first five months of 2016, the Volkswagen brand's U.S. sales are down 13% to 125,205 cars. Obviously, the suspension of Volkswagen's diesel sales are to blame for most or all of that. It should be pointed out that Volkswagen also owns Audi and Porsche, among others, and at least Audi has grown even during this period.

However, there is another factor behind the Volkswagen brand having had a poor couple of years in the U.S. market leading up to 2016 as well.

This reason is a relative lack of SUVs in the product portfolio.

In fact, Volkswagen sells only two SUVs in the U.S. The Tiguan is the smaller one, and it is showing huge growth - 58% for the first five months of 2016. The Touareg is the larger one, and it's not doing so well - down 29% for the first five months of 2016.

Volkswagen does not have any three-row SUV, unlike its subsidiary brand Audi. Other automakers have in some cases as many as five or six SUVs, covering the entire battlefront of sizes and premium nature.

However, Volkswagen is on the cusp of unleashing a major SUV product offensive that will expand the number of SUVs it offers, from two to five. Here is what's coming:

1. Tiguan.

The European version of the Tiguan already went on sale April 15 - in Europe. This is a direct replacement for the existing Tiguan. It's a center-of-market somewhat compact - but not "small" - SUV. I had a chance to drive it in Europe recently, and it feels like a tall Golf, which should be interpreted as a compliment. While I need more time behind the wheel to say conclusively, it should be on par with the best SUVs in its class.

However, in an interesting twist, with which I disagree, Volkswagen decided to not offer this version of the Tiguan in the U.S. For some misguided reason, it was determined that a direct competitor to best-selling Honda (NYSE:HMC) CR-V, Toyota (NYSE:TM) RAV4, Nissan (OTCPK:NSANY) Rogue, Kia Sportage, Hyundai Tucson, Mazda CX-5, Ford (NYSE:F) Escape and many others, was somehow "too small."

In what I think is obvious, this defies basic logic. Instead, the U.S. will get a longer version of the Tiguan that has an optional third row. There is nothing wrong with such a vehicle, of course - except that it ought not to be at the expense of the shorter version. Both should be offered.

In addition, the U.S. Tiguan will no longer be made in Germany, as with the current one. Production is moving to Mexico, for the longer version that will be sold in the U.S. This offering should arrive in U.S. dealerships around the second quarter of 2017, so we will likely see it by January 2017 at the latest.

This is a huge segment, with the best-sellers being over 300,000 units per year in the U.S. A new and competitive Tiguan should be able to gain a lot of market share from its current situation of selling fewer than 5,000 units per month in the U.S.

2. Touareg.

This is Volkswagen's luxury SUV, which shares its platform with Porsche and Audi. It will feature interior technology way beyond what the other Volkswagen SUVs will offer. The Audi version of this car - the Q7 - already went on sale this year, in January, and has been a roaring sales success. The Volkswagen and Porsche versions of this car will launch in 2017.

The next-generation Tiguan will continue to be made in central Europe.

3. The new large SUV.

This one does not yet have a formal go-to-market name, but has been shown in multiple concept car guises, first in January 2013, with the name "CrossBlue." It's a large three-row SUV that will be built alongside the Passat in Tennessee.

Start of production is December 2016, so we should see it in U.S. dealerships by February or March 2017 at the latest. This SUV could start at a very attractive price for its size, perhaps around $32,000 for a base version with two-wheel-drive (front) only. It looks basically like a Jeep Grand Cherokee that's been stretched a foot or more, to accommodate a spacious third row of seating, plus ample luggage space.

Some of the main competitors to this new large SUV will include the Ford Explorer, Dodge Durango, Chevrolet (NYSE:GM) Traverse, GMC Acadia, Toyota Highlander and Honda Pilot. Some of these vehicles sell 100,000-200,000 units per year in the U.S.

4. A new smaller "Golf-sized" SUV.

With the U.S. Tiguan moving up in size, there is obviously space for a smaller two-row SUV. One was greenlighted in 2014 and should be arriving by the end of 2018. Little detail is known about it, but it's effectively the replacement of the current two-row Tiguan. Its main competitors would be the Jeep (NYSE:FCAU) Renegade and Fiat 500x.

5. An even smaller "micro-SUV."

The smallest SUV segment is also among the fastest growing. The Buick Encore, Chevrolet Trax, Nissan Juke, Mazda CX-3 and Honda HR-V are some of the main offerings. Volkswagen looks to enter this space with a "Polo-sized" SUV. The VW Polo is the model not sold in the U.S. that sits below the Golf.

It's unclear when this model was greenlighted, but it would arrive no earlier than 2018, possibly closer to 2019. There is no word on where the two smallest Volkswagen SUVs would be built, but surely at least some part of the production would be in Europe, with plenty of additional potential for Americas and China alike.

Conclusion: A new SUV era for Volkswagen

For all of Volkswagen's huge success globally - Europe and China in particular - success in the U.S. market has largely evaded Volkswagen, especially in recent years. The Tiguan SUV is among the market's very fastest-growing vehicles, but it's not enough. Volkswagen needs more SUVs.

Over the next three years or less, Volkswagen will go from offering two SUVs, to five. This should go a long way to igniting a major sales renaissance for Volkswagen, not only in the U.S. market, but also globally.

Disclosure: I am/we are long FCAU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of submitting this article for publication, the author was long FCAU. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers, including Volkswagen. The author attended Volkswagen’s annual press conference, hosted by Volkswagen.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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