Volkswagen Resorts to Big Discounts to Offset the Diesel Scandal's Impact

By Markets Fool.com

Incentives helpedjuice sales of some VW models last month. But the Golf got clobbered: Sales of the once-popular hatchback dropped 32% in August. Image source: Volkswagen.

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It was a mixed bag for Volkswagen (NASDAQOTH: VLKAY) in the U.S. last month. While its Audi (NASDAQOTH: AUDVF) subsidiary had its second-best month for U.S. sales ever, the VW brand posted its 10th straight monthly decline.

A big decline for the VW brand, but incentives helped soften the blow

The Volkswagen brand's U.S. sales fell 9.1% last month to 29,384 vehicles. That was its 10th monthly decline in a row -- but believe it or not, that was pretty good.

The VW brand has been reeling from a scandal in which it admitted to cheating on emissions tests for years. Its dealers are also reeling from part of the scandal's fallout: At the moment, VW can't sell any diesel-powered vehicles in the U.S. Up until the scandal broke last September, diesels accounted for about 20% of VW's U.S. sales.

Given that, a mere 9.1% decline from a year ago sounds pretty good. How did VW do it? With incentives, it looks like. According to estimates from TrueCar, the VW Group's average incentive spending per vehicle was up almost 24% from a year ago to $3,793 per vehicle. (That includes spending for the VW, Audi, and Porsche brands.)

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VW-brand SUVs have had a tough time inthe U.S., but the compact Tiguan is getting somesales traction. Image source: Volkswagen.

But the incentives did their job. In a market that has been brutal for compact and midsize sedans, and without the diesel option that was popular a year ago, VW's Jetta sedan managed a 5.5% year-over-year sales gain. Sales of the larger Passat were essentially flat, down just 0.3%, but that counts as a victory under the circumstances. The small Tiguan SUV was another bright spot, with sales up 4.3% to 3,302 vehicles.

On the other hand, sales of VW's Golf hatchback got clobbered, down 32% to just 4,840 sold.

A much happier story at Audi, where SUVs continue to shine

The news was better at the premium Audi brand. While a few Audi models had diesels equipped with the emissions-cheating software that is at the center of the scandal, they represented only a small percentage of its overall U.S. sales. The brand itself seems to have suffered little damage from the scandal.

Audi's 2.5% year-over-year sales gain might sound small, but it was impressive given that the overall U.S. light-vehicle market was down 4.1% in August from a year ago. Audi's strong lineup of crossover SUVs has helped it win sales as buyers continue to migrate away from traditional sedan models.

The small Q3 crossover saw a surge in interest, with sales jumping 88% to 2,238 -- its first-ever monthly result over 2,000 in the U.S. Its big Q7 sibling posted a 16.4% increase with 2,347 sold. But surprisingly, the midsize Q5 crossover -- Audi's best-seller in the U.S. -- slipped 12.5% from a year ago, to 4,419 vehicles sold in August.

Sedans have been a tough sell in the U.S. lately, but the all-new version of Audi's A4 did well in August. Image source: Audi.

Like most rivals, Audi's sedans all posted big year-over-year sales declines in August -- with the happy exception of the all-new 2017 compact A4. Sales of the A4 were up almost 17% last month over the year-ago sales of its predecessor.

The upshot: Audi is in good shape, but the VW brand has work to do

CEO Matthias Mueller has acknowledged that the VW brand needs a lot of work in the U.S., even aside from the diesel-emissions mess. While the Tiguan has had some success, VW's U.S. lineup remains sedan-heavy as more and more buyers continue to turn to crossover SUVs.

Mueller and his team have said that more VW-brand SUVs are coming to the U.S., including at least one model designed specifically for the American market. VW has also made it clear that it won't go back to aggressively promoting diesel engines here, and is instead looking ahead to an upcoming line of new plug-in and battery-electric Volkswagens.

VW is the world's largest-selling automaker, but its U.S. presence is small and its sales here are a drop in its global bucket. That said, the U.S. is still a very high-profile and lucrative market, and Mueller would surely like the VW brand to sell a lot more vehicles here. It probably can, but it will take time -- and appealing new products -- to make it happen.

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