An App Store on Wheels, VW Golf 8 May Already Be 'Obsolete'

Assembly line workers in Hall 54 of Volkswagen’s cavernous Wolfsburg plant last week briefly had help installing drive shaft guards on the new Golf from a beloved German celebrity.

Joachim Löw, the World Cup-winning trainer of the country’s national soccer team, came at the invitation of Volkswagen Chief Executive Herbert Diess to boost morale and talk up the future of his company’s compact hatchback, whose development has been dogged by software glitches.

Due to hit first markets in December, the eighth generation Golf was unveiled to the public on October 24th within view of the factory’s four signature smoke stacks that are the closest thing to a landmark for Wolfsburg, a city literally built around Volkswagen.

Investors might still pepper management with questions about its problematic launch during Wednesday’s scheduled third-quarter results call, but the importance the Golf once had for earnings is dwindling. Analysts say that is a good thing.

“The Tiguan sells just as well as the Golf and has better margins as an SUV,” said Frank Schwope, a Hannover-based equity analyst with NordLB. “It’s also clearly better for Volkswagen when it has more supporting legs on which to stand.”

The new Golf will nonetheless serve a crucial new role. Thanks to its embedded modem that comes standard in every version, it should help drive traffic to the brand’s “We” online platform. This new digital ecosystem is an emerging platform for the automaker—a kind of app store open for business.

From next year, VW wants to attract as many as 5 million new “We” users annually, and the Golf is the first volume model Volkswagen will launch that is fully connected to the Internet.

100 million lines of code

Engineers have struggled however to debug a range of glitches prompted by the added software complexity designed to deal with new issues like cybersecurity. By opening up what was a previously closed system to outside data transfers, the vehicle becomes a prime target for hackers.

As a result, production has been throttled and many popular options and certain powertrains won’t be ready until early next year.

“There’s a hundred million of lines of code, roughly as many as you find in an Airbus 320,” VW brand operations chief Ralf Brandstätter told reporters on Thursday. “That’s an enormous challenge and we realized we needed to improve our expertise here.”

No model better symbolizes Volkswagen’s sprawling global empire than its home-grown Golf, Europe’s best selling and most versatile car. Diess described it on Thursday as equally at home whether parked in front of a local sports club or the opera house. Sold 35 million times over since its 1974 debut, it lends its name to the segment and has ensured VW enjoys a price premium over European mass market rivals for decades.

“If you ask the team here what is the car in which they invest the most effort, it’s always the Golf,” VW brand sales chief Jürgen Stackmann told Fortune. “It bears our DNA.”

Americans unimpressed

Yet the model also stands at a crossroads. Its segment is being squeezed as customers shift to models like the Tiguan, whose global retail sales grew by a tenth in 2018 while Golf deliveries fell by 15 percent. The popular crossover forms the vanguard of Volkswagen’s global SUV offensive and stands poised to eclipse the Golf this year in volume.

For every Golf sold currently in the U.S., the brand sells two Atlas SUVs and nearly three Tiguans. Demand there has slumped so much that Golf production will be pulled from Mexico entirely with only the GTI “hot hatch” exported to America from Wolfsburg.

Stackmann conceded the model’s days at the summit of his sales statistics are numbered. “It was always the number one in volume, but it’s clear that won’t be the case much longer,” he said. “The SUV segment is growing at the cost of sedans in the U.S. and China, and hatchbacks in Europe like the Golf.”

Further internal competition comes from Volkswagen’s ID.3 that is expected to arrive in showrooms come June. The much-touted electric car that starts for 30,000 euros is supposed to represent the future of the company, built off a platform that will underpin at least 15 million vehicles across four brands over the coming decade.

The ID.3 and its family of battery-powered VWs may eventually be all that is left of the brand’s product range as the carmaker has committed itself to wind down all of its combustion engine models like the Golf and Tiguan by around 2040 as part of a commitment to the Paris Climate Agreement.

“The Golf is falling behind and risks becoming obsolete, on the one hand due to the trend towards SUVs like the Tiguan and T-Cross and on the other with Diess betting so heavily on electric vehicles,” said NordLB’s Schwope.

Even before the veil was lifted on the Golf 8, executives were already forced to field questions about the future of the model and whether they can guarantee development of a ninth generation.

“In three or four years, we will start to look at what customers want and how markets develop, but at this point I have no reason to think why there won’t be a successor to this Golf,” Brandstätter said. “There are still 21 years to go, the current Golf has a seven-year lifecycle, so that’s potentially another two generations still to come.”