Volkswagen seems to have an "irrational" attachment to its $86,000 Phaeton luxury sedan, a model beloved by Chairman Ferdinand Piech that has never hit VW's sales target.

Rather than axing the Phaeton, as analysts advise, VW is reportedly planning an upgraded version of the luxurious money pit. VW has already spent more than 1 billion euros to develop the Phaeton, which launched in 2002 and has since failed to reach the company target of 20,000 in annual sales.

"Economically speaking, it's the most irrational project," London-based Evercore ISI analyst Arndt Ellinghorst told Reuters. "Piech and Winterkorn simply cannot let go of their fondness for luxury products."

From 2002 to 2012, VW lost 28,000 euros on each Phaeton, according to Bernstein Research analyst Max Warburton.

Another plot twist is VW's self-imposed cost cuts-the automaker has vowed to save 5 billion euros by 2017 with a new "efficiency program" to streamline and boost the core Volkswagen brand.

"It's no longer all about bigger, higher, further," CEO Martin Winterkorn said at a December conference. "Now it's about being leaner, faster, more efficient."

The updated Phaeton could be available in 2017 or 2018, competing against the Mercedes-Benz S-Class flagship, sources told Reuters.

The only number that VW will reveal is how many Phaetons were produced in a year; 5,812 Phaetons were built in 2013, but the company doesn't disclose sales figures for individual brands.

IHS Automotive predicts that the new Phaeton will sell no more than 11,900 units annually from 2017 to 2020, which would be up from 6,300 this year.

Volkswagen as a company is at a crucial moment as it threatens to steal the title of world's biggest automaker from Toyota. Boosted by the Chinese market, VW stands to pass the Japanese carmaker when it comes to most vehicles sold.

Toyota has forecast that its global deliveries will fall 1 percent this year to 10.15 million vehicles, according to Bloomberg. That would be only 10,000 units ahead of Volkswagen, which expects to boost production in China to more than 4 million vehicles by 2018.

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