Al Ries (wasn't that a Naked Raygun album?) of AdAge takes a stab at why VW's move upmarket with the Phaeton fell on its face flatter than a 3am drunk with a fifth of Evan Williams in his belly. It's all pretty boilerplate until he launches into some meandering stab at management types that never quite hits its mark, summing up in a pithy statement that
seemingly unknowingly
actually nails the VW conundrum:

And what should Volkswagen do?
From a marketing point of view: Go back to what made the brand famous. Small, ugly, reliable cars.
From a management point of view: Build
em in China.

Sure, VW builds cars for export in Mexico, but would a Chinese Volkswagen really fly? Maybe a China-built Polo would work, but that's it (and that's marginal. The Golf and Jetta (or Bora), until the stigma wears off of Chinese-built cars, simply can't come from China and retain whatever shreds of cred the brand is currently clinging to in the face of escalating prices and declining quality. With Passats topping out near the 40k mark, Volkswagen's losing its reason for living. Could small, ugly, reliable cars be VW's salvation? No. The brand's come too far.

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There are scraps of cachet left in the hipster-, post-hipster- and pseudohipsterpheres for Vee Dub to capitalize on, as much as never-were-hipsters like Sweet Peet D. would have us believe otherwise. But it is slipping. Volkswagen's got a small window to get this right before the brand slides into irrelevance. Killing the Phaeton is step one. A lot of people over here would love to see a Polo, which could be step 2
there's room in the semi-premium compact segment for the car and if positioned correctly, it could be a sorely-needed hit for Volkswagen.

We're not so sure about the new Scirocco's marketplace prospects, but as a Hail Mary toss, it's not a bad one. However, the number one thing is that people need to feel that they're getting German engineering, ever-so-slightly-avant styling and low operating costs at a decent price. And right now, they're only getting the engineering
and what with the state of M-B and VW's quality rankings these days, that's not necessarily a strong selling point. Wolfgang
better break out the smock: this one's gonna get messy. [Thanks to CTE for the tip.

Why the Volkswagen Phaeton Failed in the U.S. Market [AdAge]

Related:

Autoextremist on the Fading of the Phaeton [Internal]