• by Karl Greenberg , September 7, 2007

Volkswagen of America, Inc. is leaving Detroit for Virginia. The company, which has had a home for three decades in Auburn Hills, Mich., will depart next year with its VW and Audi brands in tow for Herndon, Va.

In addition to moving corporate headquarters to Virginia, which is dangling a $6 million cash-grants incentive program, VW is also restructuring U.S. operations. The company says the new business strategy brings Volkswagen of America closer to customers, increases competitiveness and achieves sharper focus on key markets.

The company says the move starts in April, with corporate operations moving into a 185,000-square-foot facility that will also house U.S. headquarters for Audi of America, Inc., Audi Financial Services, Volkswagen Credit and other affiliated operations.

The move also cuts 400 positions.

Volkswagen has been making major changes this summer as it attempts to rebuild sales after a slide that saw them drop 34% from 2000 to 2006. The company finally saw some relief last year with a 4.9% uptick in sales of VW-branded vehicles and an 8.5% increase in sales of Audi-branded vehicles. Volkswagen has set the bar at 500,000 per year in the U.S. by 2012.

The company in June hired Stefan Jacoby as president/CEO of Volkswagen of America. Most recently, he was executive vice president of the Volkswagen Group, responsible for sales and markets worldwide. The Wolfsburger Allgemeine newspaper reports that Detlef Wittig, former CEO of VW partner Skoda, will temporarily take over Jacoby's former position.

At Thursday's press conference on the move, Jacoby said that VW's new strategy will comprise product, brand positioning, dealer network, organization and--at some point--local production.

"We need fewer redundancies, less bureaucracy, more creativity and more openness. Moving and streamlining our operations give us an opportunity to naturally transform the business so we can compete successfully in the U.S. market and better serve our customers," he said, in a post-conference release. "We want to connect with our customers better, and these changes will help us do that."

The company has also worked to cut employment roles through attrition, early retirement offers and voluntary separations. The company says it will keep 600 employees and contractors in Michigan.

Michelle Krebs, long-time industry observer and editor at large of Edmunds.com's Auto Observer site, says the winds of change were blowing last year. "They were looking last year at some 14 different places," she says. "They started thinking about this early last year."

Those spots included New Jersey, where VW once had headquarters in the days before moving to Auburn Hills. Krebs says moving out of Auburn Hills makes sense. "They are an import company, and so it's good to be near your port, and while Detroit is strong in research, engineering and design--which is why Nissan, Toyota and Hyundai all have facilities there--VW was always overshadowed here. It has always been a struggle for them to get top marketing talent."

Despite last year's improvements, the company is also struggling this year, although its Audi luxury division is bringing home stellar performance in the U.S. market. While Audi's share of the U.S. market last August was 0.48%, the company has cornered 2.07% of the U.S. market in the month this year. Sibling VW division, by contrast, had 1.58% of the market last August versus 1.47% last month, in which it saw sales decline 7.5% year-over-year.

Sales are also not what they used to be, which may reflect the crowded market as much as consumer sentiment toward the brand. Last year, VW sold about half of what the brand sold in the U.S. back in 1970, when it sold 569,696 vehicles here, per Krebs.

"It's still product," says Krebs. "They haven't gotten the product buyers want."

On Thursday, Jacoby conceded that point, saying the company is rolling out a new product strategy intended to cultivate vehicles for the U.S. market--which, he said, has everything to do with why the company is moving to Virginia--adding that it puts VW closer to "key markets and customers."

"There are not a lot of VW owners [in Detroit]," concurs Krebs. "But Virginia is a high concentration market for VW and Audi."

The company can study Nissan to see how another brand has fared moving from a traditional car market nexus to the south. Nissan moved from Torrance, Calif. last year to the vicinity of Nashville, Tenn., which definitely achieved the cost savings and attrition former Nissan chief Carlos Ghosn had wanted.