VW will make a 1.8-liter, turbocharged direct-injection unit the base engine in the Passat and Beetle, and for now, an option in the Jetta, the executives said.
The engine, to be added during the 2014 model year, will yield significant gains in fuel economy, helping VW meet rising corporate average fuel economy standards, they said.
For a Jetta with an automatic transmission, replacing the current 2.5-liter engine with the 1.8-liter turbo would boost highway fuel economy from 31 mpg into the high 30s, while keeping horsepower flat and increasing torque slightly, they said.
Using the so-called EA888 as a base engine comes with risks, such as a higher price. Volkswagen now charges an extra $3,400 for a Beetle with a turbocharged engine, but that option also includes a different transmission, suspension, steering components, wheels and interior elements.
"Increasingly people see that as a way to meet the fuel economy challenges but also deliver an acceptable level of performance from the customer's point of view," Jonathan Browning, CEO of Volkswagen Group of America, said during an interview last week. "That does drive some cost into the vehicle, so as always there's a trade-off between the cost and benefit, but I'd say many competitors will be following that path."
VW had signaled that it would replace its widely used 2.5-liter five-cylinder engine, but it had not said how or when such a shift would occur.
Ulrich Hackenberg, the Volkswagen AG board member for product development, said that the 1.8-liter turbo, to be built at a plant that opened last week in Silao, Mexico, will be offered in the Jetta about the time 2014 model production begins.
As the engine plant's production ramps up, VW will add the powerplant to the Passat, followed by the Beetle. The shift is scheduled to be complete by year end.
VW sold a combined 316,621 Jettas, Passats and Beetles in the United States in 2012, accounting for 72 percent of the brand's U.S. sales. The $550 million engine plant has annual capacity of 330,000 units. VW still will offer diesel engines, and a 2.0-liter engine without a turbocharger for its base Jetta, but VW executives may still decide to make the 1.8-liter turbo the Jetta's base engine.
Hackenberg said VW may outfit future models with an even smaller engine, such as the 1.4-liter turbocharged engine that made its U.S. debut in December in the Jetta hybrid.
The strategy would challenge the adage that there is no replacement for displacement. Rainer Michel, vice president of product marketing and strategy at Volkswagen of America, said he thinks some customers will be indifferent to the change because they will not see a drop in performance, and others will understand that a turbocharger can make up for a smaller engine.
"Certainly it's a challenge, but the downside is understood by most of the customers," Michel said. "Those technology people, who in former times said, 'displacement, displacement, displacement, cylinder, cylinder, cylinder' -- they know very well what downsizing means."