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Just when investors had started to believe Volkswagen had foresworn ego-driven projects in favor of the bottom line, come reports that the ill-fated Phaeton project will be extended.

The Phaeton is the Mercedes-matching upmarket limousine which cost fortunes to build and sold in such small numbers that the car managed third place in the Bernstein Research all-time money losers survey. Mercedes’ little Smart car was the winner of this unwanted award, losing a total of about $4.6 billion over the lifetime of the project, the equivalent of $6,100 per car. The Mark II smart is now on the road, but made in partnership with Renault of France to cut costs.

After the Smart came the Fiat Stilo, now long gone, which lost $2.9 billion and $3,700 each time one was sold. In third place was the Phaeton, which lost $2.7 billion or $38,000 a car since it was launched in 2002, according to Bernstein. The buying public couldn’t see past the Volkswagen badge, even though it undoubtedly matched the technology and quality of BMW, Mercedes, and VW’s own premium brand, Audi. A few lucky taxi drivers across Europe bought them second-hand for knock-down prices and can expect maybe 500,000 miles of luxury, fault-free motoring.

Investment bank Evercore ISI said VW plans to launch the Phaeton II late next year at a cost of $770 million. VW won’t say exactly when the replacement will appear, but seems determined to go ahead with the plan.

Volkswagen, Europe’s biggest car maker, has earned the ire of investors by increasing sales by 30 per cent in five years while profits remained stubbornly flat. Recently though it has appeared to eschew sales growth and corporate takeovers at the expense of profits, and announced long-term cost reduction plans totaling $11.8 billion.

Critics point to the example of Toyota of Japan, which VW plans to supplant as the world’s biggest. Toyota sells roughly the same amount of vehicles but generates close to a 10 per cent profit margin while spending roughly half as much on research and development as VW. VW’s long-term profit goal is close to eight per cent.

VW has set itself some big targets. It plans to overtake General Motors and Toyota to be the biggest in the world by 2018 in terms of sales. By 2018, VW’s group pre-tax profit goal is at least eight per cent, and six per cent for its own troubled VW name-sake brand, which is currently struggling to stay in the black.

Evercore ISI reckons Phaeton II undermines VW’s credibility.

“We are hugely skeptical regarding the industrial and financial logic to invest 650 million euros ($770 million) for a new Phaeton. It raises questions regarding management’s seriousness to address the VW brand’s profitability problems and its efficiency program,” said Evercore ISI analyst Arndt Ellinghorst.

Ellinghorst says VW has three reasons for wanting a new Phaeton – it raises the VW brand image, makes technology available to the VW group, and will appeal to Chinese luxury customers.

This make no sense, according to Ellinghorst, because –

• With Audi, Porsche and Bentley, VW has enough premium exposure.

• VW risks duplicating technology investment.

• The market for luxury limousines, excluding China, is shrinking.

• VW is launching the Phaeton in the midst of a big cost cutting program seeking to reduce complexity, and this undermines management’s efficiency commitment.

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