Europe's best-seller fights for its long-term survival against EVs, SUVs

Amid a raging debate in Germany over the future of the car, the country's president hurried to Wolfsburg to address anxious Volkswagen employees. Society had realized the world's remaining fossil fuel reserves would have to be managed more carefully, the head of state warned that November day, and "can no longer be exploited without consequence."

Resource conservation held the key to the industry's preservation, and with it an entire way of life. A bold new model designed with this very goal in mind had production only six months earlier, carrying with it the hopes of a workforce worried about flagging sales of VW's aging stalwart. By taking action now, the prominent visitor predicted that "the automobile will continue to play the major role as a means of individual mobility."

Although eerily familiar, this scene actually happened in 1974. The auto industry was in the throes of the first oil crisis and VW was neck and neck with Opel. Despite the recent arrival of the Passat, liquidity had dwindled to dangerously low levels after multiple attempts to develop a successor to the Beetle had failed.

Salvation came that year in the form of a fuel-efficient hatchback. Penned by design legend Giorgetto Giugiaro, it was compact yet roomy with four doors thanks to the new, transverse-mounted front-engine layout popularized by the smaller Morris Mini from Britain. Starting at 7,995 deutsche marks -- roughly 11,500 euros in today's terms -- the Golf became an instant hit. Just 31 months after assembly began, the 1 millionth unit left the factory gate in Wolfsburg.

"We have been building the car for the past 45 years over seven generations, delivered 35 million to customers, an entire segment is named after it [in Germany] and it has been the financial and technological foundation of our brand for years," VW brand Chief Operating Officer Ralf Brandstaetter said when introducing the eighth generation of the car last year. "No other model has shaped Volkswagen more than the Golf."

Once again the automaker finds itself at a crossroads. Once more a new compact hatchback promises to define a coming era for VW. Only this time it's not the Golf, it's the full-electric ID3.

Despite the prosperity achieved from the success of its best-seller, the Golf's future seems more in doubt than ever. To meet stringent upcoming emissions targets, VW is shifting focus toward electric vehicles built off a dedicated architecture that cost more than 6 billion euros to develop. Funding that transition are high-margin crossovers such as the Tiguan and T-Cross that enjoy broad global appeal.

Stuck in the middle

"The Golf could soon begin to look like one of those airline passengers stuck in the middle seat," said Matthias Schmidt, a Berlin-based independent industry analyst. "It's sandwiched between two sumo wrestlers: the expanding number of SUVs on the one side and electric vehicles feasting on CO2 legislation on the other."

Analysts believe a Golf successor, which presumably would be sold into the early 2030s, depends heavily on the future of carbon emission targets, Euro 7 pollutant caps and the intersection in cost curves where electric vehicles become more affordable to build than combustion engine cars.

Pressed about whether there would be a ninth-generation Golf, Brandstaetter said he had "no reason today" not to expect one.

But simply posing the question would not have been imaginable in the past. Traditionally the most popular car in Europe overall, the Golf dominates the compact segment. According to figures from JATO, about 454,000 were sold last year in Europe including the Sportsvan derivative. The Golf outsells its closest competitor, the Ford Focus, by more than a 2-to-1 margin and many brands fail to match the Golf's volume across their entire product ranges.

This isn't just thanks to VW's extensive distribution network of 5,400 dealers across Europe. The Golf is also the most sought after used car, taking the top spot even in France and Italy last year, according to search results from online site AutoScout24.

Juergen Stackmann spent 20 years of his life at Ford of Europe searching in vain for the winning formula that would break the Golf's stranglehold on the segment. "You couldn't crack it. Whenever we thought we were getting close, it made another leap forward technologically," said the executive, now in charge of sales and marketing for the VW brand. "It perfectly reflects the mainstream of society. If you look at the age of the average German, it's virtually identical to that of a Golf owner."

The benchmark

Executives expect the eighth-generation Golf, which will start arriving in showrooms across Europe during the coming weeks, will once again set the benchmark in its class in terms of CO2 emissions, comfort, craftsmanship and connectivity.

Three new 48-volt mild hybrids that can turn off the engine when coasting are on offer while the GTE plug-in hybrid variant returns, offering two different performance levels. The diesel version reduces harmful nitrogen oxide emissions by up to 80 percent and even a TGI derivative that runs on compressed natural gas is planned. The GTD diesel, Golf R and GTI performance cars arrive this year as well.

What sets the new Golf apart is that it is VW's most technologically advanced model to date. The car is equipped with a fully digital cockpit, an embedded cellular modem for over-the-air updates, and the ability to communicate with other cars and surrounding infrastructure at distances up to 800 meters. It even comes with natural voice recognition that includes a Smart Home integration via Amazon Alexa.

VW's mission for the Golf is simple: form the vanguard of a new fleet of digitally enabled vehicles that eventually draw in 5 million paying users every year to its own virtual in-car shopping mall. This proprietary ecosystem called Volkswagen We aims to sell new goods and services, for example, the option to enable automatic cruise control on a vacation drive to Italy. Not only do such functions-on-demand provide fresh revenue streams, they can tether the customer more closely to the brand, increase the likelihood of a repeat purchase and even boost resale value because the car is upgradeable. How much revenue this could add is still unclear, according to VW.

To ensure its cars are fit for this smartphone-inspired business model, the brand has committed to investing roughly 3.5 billion euros in digitalization by 2025 and overhauled its contract with European dealers. No model is more ideally suited to accomplish this important task, since a new Golf is sold every 45 seconds on average.

"This makes it one of the most digitally relevant vehicles on the road," said Schmidt, who is also the publisher of a monthly report on Europe's EV market. "That the Golf is the first model to receive this can almost be seen as a long-term thank you gift for its many years of service."

In the process, however, a host of programming glitches delayed the car's European launch. The complexity of the Golf's infotainment system alone is comparable to that of an entire car sold in 2010. This helped catalyze VW's decision to develop its own software stack in the future via a new subsidiary that opened its doors last month.

"There are a hundred million lines of code in the Golf, roughly as many as you find in an Airbus 320," VW brand COO Brandstaetter told reporters during the car's debut last year.

Dimming prospects

There are early signs, however, that the new Golf may struggle. Figures show its predecessor's retail sales, after peaking in 2015 at 1.06 million cars, twice as many as the Tiguan at the time, dipped below the SUV for the first time last year.

The Tiguan is now VW brand's global best-seller and is poised to retain the crown as more and more assembly sites are added for the SUV, the latest in Jakarta, Indonesia. For that reason, the base version of the Golf is being removed from the U.S. market and production has been centralized in Wolfsburg to better preserve the plant's capacity utilization.

The only other location where the Golf will be assembled is in Foshan, China, by FAW-VW, one of the group's two main joint ventures in the world's largest auto market.

To keep a lid on costs, investments in Golf production were halved to a figure in the mid-hundreds of millions of euros. Roughly 80 percent of the existing equipment in the body shop could be reused because the MQB platform was largely carried over from the seventh-generation model. Average manufacturing time was cut by an hour, an improvement of about 4 percent, despite adding a further 100 meters of cabling. VW also killed the less popular two-door version to reduce complexity.

"The Golf has seen challenges on a number of fronts, with this only set to intensify for the new generation," said Jonathon Poskitt, LMC Automotive's director of global sales forecasts. He anticipates peak sales of about 630,000 units next year, excluding roughly 60,000 units of the Sportsvan variant of the seventh-generation Golf. This would represent a material drop over the 702,000 sold in 2019 -- itself an annual decline of 16 percent. On a like-for-like basis, this translates to about 4.5 million units sold over the lifetime of the new Golf, or 1 million fewer than its predecessor.

"The market continues to see a clear shift toward SUVs, and particularly within the VW brand the likes of the T-Cross and T-Roc have only served to apply further downward pressure to conventional vehicles' market share, like the Golf," Poskitt said.

Superior successor?

There's no guarantee the latest Golf iteration will not be the last. The decision late in 2015 to develop a purpose-built MEB electric architecture may have sealed the car's fate. VW didn't want a successor to the full-electric e-Golf that has been built for nearly six years, rather it set out to design a whole new model.

What engineers and designers came up with had a taller profile, enlarged rims and a compressed front end where the engine compartment is usually located. With the newfound freedom that comes with starting from scratch, they created a very different car in terms of looks and proportions -- one that in many ways promises to be far superior.

The ID3 battery-electric compact hatchback due this summer threatens to eclipse the Golf as the brand's new technology centerpiece in Europe. At its heart is the new end-to-end electronic architecture called E cubed that has much higher data transfer rates than the new Golf's CAN-FD system, allowing, for example, the ID3 to offer a new augmented-reality windshield.

The e-Golf, which will be discontinued, has accounted for more than 100,000 sales since its launch in 2014. Its de facto replacement should surpass that figure in its first full year of availability.

"The ID3 is compact like the Golf, agile like the Up, offers the space of a midsize car and the punch of a GTI," said Silke Bagschik, head of sales and marketing for VW's EV line.

While VW used its influence as sponsor of the German national soccer team to bring trainer Joachim Loew to Wolfsburg for the Golf's premiere, Chancellor Angela Merkel carved out time in her busy schedule to attend the start of production of the ID3 in Zwickau.

At this early stage, however, EVs would never be able to deliver the volumes needed to keep a plant such as Wolfsburg busy enough. The world's largest interconnected automotive factory employs 8,400 people just to build the Golf and its various derivatives.

Analysts argue that a diversification by itself is not necessarily bad, as it ends VW's past dependence on the Golf for volume and profits. Poor initial demand for the fifth-generation Golf triggered a crisis for the company, and its costly multilink rear suspension was dropped as a standard feature in the outgoing seventh-generation Golf.

While Schmidt believes VW has all the resources it needs to keep the inevitable ebb of incumbent Golf customers from wandering to brands outside the VW Group, LMC's Poskitt does see an underlying risk. "The Golf has been a central pillar to the VW brand's more premium pricing," he said. A switch to a more lucrative Tiguan ultimately may be margin dilutive over the long run, if VW loses its ability acquired with the Golf to charge higher transaction prices.

Competition in the compact crossover segment is far more ferocious because of established rivals such as the Nissan Qashqai and BMW X1.

Despite softening demand for compact hatchbacks, VW brand sales boss Stackmann said he would "take almost any bet" management still approves development of a Golf successor in 2023. No VW model better symbolizes the DNA of the brand or its German workforce, he argues.

"The Tiguan is naturally very important," Stackmann said about the Wolfsburg plant's other core product. "If, however, you ask the team here in which model they most invest their lifeblood, it's the Golf."