The "Peoples' Car" brand simply couldn't get away with a full-blown luxury sedan.
Before you get yourself into an uproar, keep in mind that this is not a series about bad cars, these are cars which failed to judge the market correctly. The Volkswagen Phaeton is a fantastic car, a technological marvel of over-engineering excellence which completely failed to take off commercially. The poor sales of the Phaeton serve as an important lesson in brand identity, particularly in the North American market, and it disproves the theory that a good product will sell itself.
The Volkswagen brand had been in a state of flux for several decades. The company which had started off building the "people's car" Beetle had long ago branched off into building more and more expensive vehicles. An increased need for expensive safety features like airbags, as well as emissions controls and electronics, drove prices ever upwards. Volkswagen was beginning to find themselves competing with supposedly more premium brands like Mercedes-Benz in certain segments, particularly once Mercedes debuted the small A-Class for Europe in 1997.
An often-overlooked contributing factor in the history of the Phaeton was Volkswagen's acquisition of the Czech brand Skoda in 2000. VW had had a controlling interest in the company since the fall of communism in what is now the Czech Republic, but full ownership meant that VW had nobody to answer to in expanding the range of models. Skoda now occupies the position once held by the Volkswagen brand in VW Group's corporate hierarchy, essentially, at the bottom. By expanding this bottom-rung brand, VW was able to better justify the relatively high prices on their Volkswagen-brand models.
It didn't take long for this to lead Volkswagen to see just how far they could take it, and the decision was made to build a proper luxury car. They were already competing with models at the bottom of the Mercedes lineup, so why not try for the top and the S-Class? The answer is that Volkswagen is not a luxury brand, simple as that. The car was incredible, some people believed at the time that it was simply a rebadged Audi A8, but it actually had much more in common with the Bentley Continental, and was even built in the same factory as the Continental Flying Spur for several years.
The story goes that VW's then boss, Ferdinand Piech, gave his engineers a list of ten characteristics which the Phaeton absolutely had to possess before it could go to production. These were incredibly lofty goals, and they included the ability of the car to travel at 186mph all day long while maintaining an interior temperature of 72 degrees, even when exterior temperatures reached as much as 122 degrees. This was which had to be met even though the top speed would be electronically limited to 155mph. Goals like these say a lot about what Piech had in mind for the car. He wanted something that was far and away better than the S-Class, 7-Series or even the A8.
But there was no getting away from the fact that it looked like a big Passat, even if you had opted for the W12 engine. Sales weren't great, even in Germany, which is far and away the Phaeton's biggest market. They averaged about 6,000 units per year, and although VW didn't say exactly what their goal was, it was hinted at when they said that the factory had the capacity to produce 20,000 units annually. The Phaeton is still sold in Europe, but VW gave up on the US market at the end of the 2006 model year. It is said that with the next generation of the Phaeton, it might make a return to US shores, but that's one which we'll believe when we see it.
It seems odd that VW, famously so stingy with which models it chooses to bring over, would have brought the Phaeton over in the first place, but they did. Americans known for being fairly brand conscious, this is not to say that Europeans aren't, but at least in the case of Europeans, the Phaeton was competing on its home turf. The brand issue was something which VW themselves had made even worse than it needed to be. By being so stingy with the models they shipped over, Americans tend to have a much narrower view of what a Volkswagen is than those in the company's home market.
The Phaeton stretched the limits of the brand's identity even in Germany, but the US was always going to be a tougher sell. Volkswagen likes to call the Phaeton "a luxury car for people who don't like to show off". This makes it sound like a sad commentary on our society that we didn't buy more of them, that we can't enjoy what we have without rubbing it in other people's faces. But maybe VW just made a bad call, and it's easier for them to make us suffer the pain of introspection than it is for them to endure it themselves.