4 Reasons Why Americans Aren't Buying Volkswagens Anymore

Volkswagen recently announced that its U.S. auto sales dropped by a staggering 22% in June. This will mark the fourth time in the last six months that the brand has experienced a double digit fall in sales. In that same time, its stock is down more than 5%.

Even though Volkswagen has sold more that 3 million cars worldwide so far this year, less than 180,000 of them were in the U.S.

As Volkswagen Group, now the second largest automaker in the world, continues to experience worldwide growth, it is troubling that its most prominent mass-market brand is having a hard time in one of its most important markets.

There are four major reasons for VW's struggle in the U.S.:

High Transaction Costs

VW sees itself as competing with Toyota and Ford, but consumers don't see them that way, says Alec Gutierrez, senior market analyst at Kelley Blue Book. In the Volkswagen Group family, VW's role is to build mainstream, mass-market transportation while its luxury-oriented siblings like Audi and Bentley build higher priced, fancier models.

But thanks to its European origins and a close association to its corporate siblings, consumers in the U.S. see VW as a near-luxury product. This means buyers shopping for products like the brand's Passat sedan approach the process differently than they would if they were shopping for a Honda Accord or a Toyota Camry. A Camry or Accord buyer may be willing to part with his money for a bare-bones base model, but VW shoppers want a German luxury product at a discounted price, leading them to load-up on optional goodies.

As a result, the brand is at the highest point in virtually every segment in which it competes, Gutierrez says. While VW has attempted to make its product more attractive to value shoppers by offering de-contented models, the typical VW still costs more than its competitors.

According to KBB, the average transaction cost for a Passat sedan is $27,300. In comparison, the average midsize sedan on the market costs $25,000, with the Ford Fusion coming in at $26,000 and an Accord $25,200.

Another reason for VW's higher price point is the brand's inclusion of premium technology even in lower level models. The company chose to include complicated turbocharging systems and advanced DSG automated twin-clutch gearboxes on economy models, while competitors like the Honda Civic, Ford Focus, and Toyota Corolla employ cheaper and more conventional technology. The availability of such options is a boon for consumers, but it prevents VW from competing on price with its less sophisticated competitors.

Lack of a Competitive Compact Crossover

At 12.9% growth, the crossover SUV segment is the single fastest growing sector of the automotive market, according to The Wall Street Journal. While VW's Tiguan compact crossover is a fairly competent car, it is not nearly as affordable or fuel efficient as segment leaders like the Honda CR-V and Toyota RAV4, says Gutierrez.

And the difference in sales is staggering. According to the Journal, in the first six months of 2014, Honda has shipped almost 155,000 CR-Vs and Toyota has sold 117,000 RAV4s. On the other hand, VW has sold just 13,000 Tiguans this year, and that figure is down 15.1% from last year.

A History of Questionable Reliability

For much of the past decade, Volkswagen has been plagued with powertrain reliability issues in the high volume four- and five-cylinder engines that power Passat, Jettas, and other VW products, according to Consumer Reports.

In the past few years, the automaker has made significant strides in quality and recieved high marks from reviewers at the publication.

Still, there seems to be a stigma that lingers in the minds of mass-market shoppers who place a premium on reliability. This stigma is further enforced by publications like JD Power's 2014 initial quality and vehicle dependability surveys, where VW scored below industry average in both.

A Crowded Marketplace

The final factor for Volkswagen's slipping sales is a marketplace that is growing more and more crowded with competitive products. A decade ago, VW's mass-market products only had to contend with challengers from the major Japanese manufacturers and a couple of domestic products like the Ford Focus. In the decade since, the market has changed significantly.

Not only are the Japanese brands still riding high; Volkswagen must now also compete with Hyundai and Kia from Korea, and a major resurgence from Detroit's Big 3. Even though total U.S auto sales have done from just under 17 million units in 2004 to more than 21 million in 2013, such growth can not outstrip the growing intrusion of new competitors.

How Volkswagen Can Come Back

The potential fixes are many, but one thing the brand can do is simply embrace the image their consumers already have of them, says Gutierrez.

Instead of forcing their way into mass-market segment, VW could change course and become near-luxury manufacturer.

This may be difficult and risky for Volkswagen, because moving into a higher price point could potentially cannibalize sales of Audi's A3 and A4 models, which sell for between $35,000 and $45,000. And a move up-market would risk the brand becoming reduced to a niche luxury manufacturer, which does not mesh with VW's already successful global presence as a major mass-market brand. It remains to be seen how the company will try to change its image - and sales figures - in the U.S.