SAN FRANCISCO – Volkswagen AG’s efforts to expand the VW brand into the luxury segment may have been a mistake, Audi of America Inc.’s top executive says.

The comments are the latest evidence of a tussle within the VW Group, where executives appear to be second-guessing the launch of the up-market VW Phaeton luxury sedan.

Audi of America Chief Axel Mees

The Phaeton has been a disappointment for the VW brand, with sales this year in the U.S. totaling only 1,433 units through October, according to Ward’s data. The auto maker earlier said it expected to sell upwards of 2,500 units of the luxury sedan in the U.S. in 2004. If October’s total volume of 305 units is a proper barometer, it appears Phaeton sales may reach only the 2,000-unit level. (See related story: Phaeton U.S. Success in Doubt)

Now, one of auto maker’s top U.S. officials is publicly questioning whether the move was too ambitious.

“I think Volkswagen underestimated the weakness of their brand in the luxury segment,” Audi America head Axel Mees tells reporters here during a media rollout of the ’05 A6. “I think they realized the Phaeton…was a step too fast into a direction they wanted to go.

“VW overall isn’t ready to offer successfully cars in that price range, whatever they do,” he adds. “It can be the best car (but) I still will not buy it because it has a VW logo.” Mees says executives in charge of the brand at the time of the Phaeton’s development, most notably CEO Ferdinand Piech, were zeroed in on the wrong aspects of the VW organization when they developed the sedan.

He says the leadership was too focused on the engineering side of the business and the need to develop a top-notch luxury vehicle for the VW brand.

“He (Piech) wanted to prove he could build a good car. He didn’t look at the marketing aspect, the brand aspect,” Mees says.

VW also suffered from a long-standing image that relied on more affordable products, including the Jetta and Golf, the Audi executive says, adding that many VW dealers were ill prepared to meet the needs of luxury-vehicle buyers. They had a history of dealing with customers spending around $20,000 for a vehicle, not those willing to spend upwards of $80,000 or $90,000, he says.

“They overestimated the power of the Volkswagen brand,” Mees says.

It is likely VW will shift its focus in the coming years and return to its roots: building high-quality, affordable cars, and potentially leaving the luxury side of the business to the Audi brand, Mees says.

“The VW model range will be gradually going down (range),” he says. Whether VW now will leave the luxury sector to Audi “is too early to tell,” he adds.