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Adolf Hitler, who had a keen interest in cars even though he did not drive, demanded that Ferdinand Porsche make changes to his original 1931 design to make it more suited for the working man. Hans Ledwinka discussed his ideas with Ferdinand Porsche who used many Tatra design features in the 1938 Kdf-Wagen, later known as the VW Käfer - or Beetle. This is particularly evident when compared with the smaller T97 model which had a rear-mounted, air-cooled, flat-4 engine and rounded body styling. Tatra immediately started legal action, but the matter was not resolved until 1961 when Volkswagen was ordered to pay DM 3,000,000 in damages.

Changes included better fuel efficiency, reliability, ease of use, and economically efficient repairs and parts. The intention was that ordinary Germans would buy the car by means of a savings scheme ("Fünf Mark die Woche musst Du sparen, willst Du im eigenen Wagen fahren" — "Save five Marks a week, if you want to drive your own car") which around 336,000 people eventually paid into. Volkswagen honoured its savings agreements after World War II; Ford, which had a similar "coupon" savings system, reportedly did not. Prototypes of the car called the "Kdf-Wagen" (German: Kraft durch Freude = "strength through joy"), appeared from 1936 onwards (the first cars had been produced in Stuttgart). The car already had its distinctive round shape and air-cooled, flat-four, rear-mounted engine, features similar to the Tatra. The VW car was just one of many KdF programmes which included things such as tours and outings.

Erwin Komenda, the longstanding Porsche chief designer, developed the car body of the prototype, which was recognizably the Beetle we know today. It was one of the first to be designed with the aid of a wind tunnel; unlike the Chrysler Airflow, it would be a success.

The new factory in the new town of KdF-Stadt, now called Wolfsburg, purpose-built for the factory workers, only produced a handful of cars by the time war started in 1939. None were actually delivered to holders of the completed saving stamp books, though one Type 1 Cabriolet was presented to Hitler on his birthday in 1938.

War meant production changed to military vehicles, the Type 81 Kübelwagen (Bucket car) utility vehicle (VW's most common wartime model) and the amphibious Schwimmwagen.

1945: British Army and Ivan Hirst, unclear future

The company owes its postwar existence largely to one man, British Army officer Major Ivan Hirst. In April 1945, KdF-Stadt and its heavily bombed factory were captured by the Americans, and subsequently handed over to the British, within whose occupation zone the town and factory fell. The factory was placed under the control of Oldham-born Hirst. At first, the plan was to use it for military vehicle maintenance. Since it had been used for military production, and had been in Hirst's words a "political animal" rather than a commercial enterprise, the equipment was in time intended to be salvaged as war reparations.

Hirst painted one of the factory's cars green and demonstrated it to British Army headquarters. Short of light transport, in September 1945 the British Army was persuaded to place a vital order for 20,000. The first few hundred cars went to personnel from the occupying forces, and to the German Post Office.

Some UK service personnel were allowed to take their Beetles back to the UK when they were demobilized, and one of the very first Beetles brought back in that way (UK registration index JLT 420) is still owned by the original proprietor of the UK's first official VW Importer, Colborne Carages of Ripley in Surrey. By 1946 the factory was producing 1,000 cars a month, a remarkable feat considering the factory was still in disrepair: the damaged roof and windows meant rain stopped production; the steel to make the cars had to be bartered for new vehicles.

The car and its town changed their Second World War-era names to Volkswagen and Wolfsburg respectively, and production was increasing. It was still unclear what was to become of the factory. It was offered to representatives from the British, American and French motor industries. Famously, all rejected it. After an inspection of the plant, Sir William Rootes, head of the British Rootes Group, told Hirst the project would fail within two years, and that the car "is quite unattractive to the average motorcar buyer, is too ugly and too noisy ... If you think you're going to build cars in this place, you're a bloody fool, young man." VW later bought British car makers Bentleys and Rolls Royce. (In a bizarre twist of fate, Volkswagen would manufacture a locally built version of Rootes' Hillman Avenger in Argentina in the 1980s, long after Rootes went bust at the hands of Chrysler in 1978—the Beetle outliving the Avenger by over 30 years)

Ford representatives were equally critical: the car was "not worth a damn." Henry Ford II, the son of Edsel Ford, did reportedly look at the possibility of taking over the VW factory but dismissed the idea as soon as he looked up Wolfsburg on the map. . . and found it to be too close for comfort to the East German border. In France, Citroën started the 2CV on a similar marketing concept. In Italy, it was the Fiat 500.

1948–1974: Icon For German Regeneration

From 1948, Volkswagen became a very important element, symbolically and economically, of West German regeneration. Heinrich Nordhoff (1899–1968), a former senior manager at Opel who had overseen civilian and military vehicle production in the 1930s and 1940s, was recruited to run the factory in 1948. In 1949 Hirst left the company, now re-formed as a trust controlled by the West German government. Apart from the introduction of the Type 2 commercial vehicle (van, pickup and camper) and the Karmann Ghia sports car, Nordhoff pursued the one-model policy until shortly before his death in 1968.

Volkswagens were first exhibited and sold in the United States in 1949. It only sold two units in America that first year. On its entry to the U.S. market, the VW was briefly sold as a "Victory Wagon". Volkswagen of America was formed in April 1955 to standardize sales and service in the U.S. Production of the Type 1 Volkswagen Beetle (German: "Käfer"; US: "Bug"; Mexican: "Vocho"; "Vochito"; French: "Coccinelle"; Italian: "Maggiolino"; Portuguese: "Carocha"; Brazilian: "Fusca"; Colombian and Venezuelan: "Escarabajo"; Guatemalan: "Cucaracha"; "Cucarachita"; Danish: "Boble Folkevogn"; Hungarian "Bogár"; Polish: "Garbus"; Serbian/Croatian: "Buba"; Swedish: "Bubbla Folka": Dutch: "Kever"; Finnish: "Kupla"; Indonesian:"Kodok"; Romanian:"Broscuţă") increased dramatically over the years, the total reaching one million in 1955.

Sales soared — due in part to the famous advertising campaigns by New York advertising agency, Doyle, Dane and Bernbach. Led by art director Helmut Krone and copywriters Julian Koenig and Bob Levinson, Volkswagen ads became as popular as the car, using crisp layouts and witty copy to lure the younger, sophisticated consumers with whom the car became associated. Despite the fact it was almost universally known as the Beetle, it was never officially labeled as such, instead referred to as the Type 1. The first reference to the name Beetle occurred in U.S. advertising in 1968, but not until 1998 and the Golf-based New Beetle would the name be adopted by Wolfsburg.

During the 1960s and early 1970s, although the car was becoming outdated, American exports, innovative advertising and a growing reputation for reliability helped production figures to surpass the levels of the previous record holder, the Ford Model T. By 1973, total production was over 16 million.

VW expanded their product line in 1961 with the introduction of several Type 3 models, which were essentially body style variations (Fastback, Notchback, Squareback) based on Type 1 mechanical underpinnings, and again in 1969 with the relatively unpopular Type 4 (also known as the 411 and 412) models, which differed substantially from previous models with the notable introduction of unibody construction, a fully automatic transmission, electronic fuel injection, and a sturdier powerplant. Volkswagen added a "Super Beetle" (the Type 113) to its lineup in 1971. The Type 113 differed from the standard Beetle in its use of McPherson strut front suspension instead of torsion bars. The McPherson suspension added valuable trunk space and widened the front end. Despite the Super Beetle's popularity with Volkswagen customers, purists preferred the standard Beetle with its less pronounced nose and its original torsion bar suspension. In 1973, Volkswagen introduced the military-themed Thing (Type 181) in America, recalling the wartime Type 81. The military version was produced for the NATO-era German army (Bundeswehr) during the cold war years of 1970 to 1979. The US Thing version only lasted two years, 1973 and 1974, due at least in part to Ralph Nader's automobile safety campaigns.

1974: From Beetle to Rabbit

Volkswagen was in serious trouble by the end of the 1960s. The Type 3 and Type 4 models had been comparative flops, and the NSU-based K70 also failed to woo buyers. The company knew that Beetle production had to end one day, but the conundrum of replacing it had been a never-ending nightmare. The key to the solution was the 1964 acquisition of Audi/Auto Union. The Ingolstadt-based firm had the necessary expertise in front wheel drive and water-cooled engines that Volkswagen so desperately needed to produce a credible Beetle successor. Audi influences paved the way for this new generation of Volkswagens, known as the Polo, Golf and Passat.

The VW Polo was in fact simply a re-badging of the short-lived Audi 50, which had been hastily developed from a saloon design, the Audi 60, which never reached production as an Audi vehicle. However, VW produced it shortly after the introduction of the Polo as the VW Derby. In the rear of the car can plainly be seen that panels are added to the Polo structure to make a "three-box" design of saloon or sedan with a boot or trunk.

The Passat (Dasher in the U.S.), introduced in 1973, was again simply a fastback (available as either a hatchback or with separate boot) version of the Audi 80, using identical body and mechanical parts, and the Audi 80 was later produced on the same line in Wolfsburg as the VW Passat. Wagon versions were offered for overseas markets, however, for two years, if European customers wanted an estate or wagon version, they had to go considerably up-market and buy the Audi 80GL estate.

Production of the Beetle at the Wolfsburg factory switched to the VW Golf in 1974, marketed in the United States and Canada as the Volkswagen Rabbit until 1985 and as the Golf until 2006, when the Rabbit name was re-introduced. This was a car unlike its predecessor in most significant ways, both mechanically as well as visually (its angular styling was designed by the Italian Giorgetto Giugiaro). Its design followed trends for small family cars set by the 1959 Mini and 1972 Renault 5—the Golf had a transversely mounted, water-cooled engine in the front, driving the front wheels, and had a hatchback, a format that has dominated the market segment ever since. Beetle production continued in smaller numbers at other German factories (Essen and Emden) until 1978, but mainstream production shifted to Brazil and Mexico.