abandonment of the price-sensitive segment but rather an expansion of its brand to keep its customers in the fold through their car-buying cycles.

Robert Martell, sales, operations and marketing leader for Volkswagen Canada, says the Germany-based company realizes it built its reputation and business on high-quality, mid-range priced vehicles such as the Beetle, Golf and Jetta. And despite recent criticism over its entry into the high-end vehicle segment — not to mention drastically lower corporate profits and a reduced dividend — he says there is a very good business case behind the recent launches of its luxury car, Phaeton, and its luxury sport utility vehicle, Touareg.

"We found when people outgrew our brand, they went to a bigger car, a luxury car, or they stepped up to high-end SUVs. Part of our strategy is to give some of the existing customers something to go to," Martell says.

He says while the target market is different, the quality behind them is up to Volkswagen’s same high standards.

"We wanted to build some of the best cars in the luxury market. We didn't want to just build a car and an SUV, we wanted to build darned good ones, the same way we compete in other segments. But we're not getting out of the compact or intermediate car market."

Alan Baum, an analyst at forecasting firm Planning Edge in Birmingham, Michigan, says ten years ago Volkswagen represented a well-designed mid-market car with good performance and quality engineering.

"Now it's a little less clear. They still go for those things but with some very expensive cars; that confuses the customer," he says. More recently, Volkswagen has had trouble bringing consumers on board to the idea that it’s a broader purveyor of vehicles than it was in the past.

“The bigger issue is the brand itself and how there are more products. But they're moving away from what consumers expected from Volkswagen," Baum says.

Martell admits the company has to shoulder at least part of the blame for recent brand confusion on the part of its customers. Much of it has to do with a longer product lifecycle of its cars compared to its competitors.

“It's been six or seven years since we've brought out a new edition of the Jetta or the (intermediate range) Passat,” Martell says. “In the meantime, our competitors have brought out a lot of new models. People thought, 'Volkswagen hasn't refreshed their low-end models for awhile, then the next new vehicles they bring out are the Phaeton and the Touareg, which are at the upper end.’ That’s distorted the picture a bit."

Martell says he hopes much of this talk will dissipate once Volkswagen unveils new Jetta and Passat models for 2005.

Baum says quite simply the VW product line was getting old. He agrees with Martell that the company has been slower than its competitors to update its models. A prime example was the new Beetle, he says.

"It was very sought after at the launch but three years later, they didn't have a convertible or one with a higher-end engine and sales lagged," he says. "They have a convertible now but they had a hard time recovering from that."

Baum says the other issue currently on Volkswagen's agenda is the confusion at the luxury end between VW and Audi, its wholly-owned subsidiary.

Martell doesn't believe Volkswagen risks further brand confusion or market cannibalization with either the Passat or its new high-end vehicles competing against Audi.

"Audi's bread and butter is the A4 and A6 models and they're what you would call lower-end luxury cars. They're positioned above Passat, which starts around [US$ 22,000]. The least expensive Audi is almost [US$ 3700] more," he says, noting VW and Audi maintain completely separate sales organizations and dealer networks.

The Phaeton, by comparison, retails for more than US$ 90,000.

Baum’s advice is simple: focus on the core market and don’t try to be all things to all people. But that may be easier said than done.

“It boils down to product and pricing, we'll see if they do that effectively. But a US$ 90,000 car, (the Phaeton) that’s a problem. If you discount dramatically, that hurts your image, which hurts you across the board,” he says.

Geoff Kirbyson is a business reporter with the Winnipeg Free Press in Canada.