My best guess would be that the late 1950s Beetle ad campaign appealed to anti-consumerist and heterodox sentiments, which got the ball rolling. The wonderful /u/kieslowskifan writes as much in this thread, gratifyingly:
Helmut Krone's famous advertising campaign for VW certainly helped the Beetle to gain public recognition inside the US. Krone's advertisements were often humorous and thumbed its nose at Detroit's advertising norms. For example, Krone's department created large ads with minimal text and pictures and urged consumers to "think small." This helped cement the Beetle as a individualistic car that was counter to the conformist norms of American automobiles of this era (e.g. more horsepower, more tailfins, etc.). For the emerging counter-culture, the apparent anti-consumerist symbolism of the VW made it an attractive choice.
...but that does not explain how the VW-hippy pairing was cemented, just how circumstances permitted it.
Was it the utilitarian design ethos? Period models are renown for their modification potential (Beetle-based racecar and race buggy formula still exist for cost-limited competition) and the Microbus could be configured for many forms of recreation.
Thanks.
It is difficult to parse out exactly why the VW Beetle and bus became associated with the counter-culture movement of the 1960s. It bears mentioning that not all "hippie" cars were Volkswagens. Nor were all VW owners members of the counterculture. The VW advertising campaign certainly helped position the Beetle as an alternative to Detroit's larger and more expensive wares. But there were also a number of quotidian factors at work to build up this association.
For one thing, VW Beetles and buses had already made important inroads into the California beach subculture of the late 1950s and 60s. The VW bus in particular was an ideal vehicle for surfing and beach parties. The bus's cabin could contain any number of surfboards and its side doors allowed for ventilation for overnight lounging. While it was much harder to do the same in a Beetle, the Beetle could be modded to carry surfboards on the roof. The small size of the Beetle meant that it could fit into places larger Detroit cars could not and the VW had decent performance on sand.
California's beach culture helped to develop the modding culture for the Beetle. For the counter-culture, the Beetle would be a ready-made canvas to modify with custom paint jobs and other accoutrements. The circular VW logo could easily be swapped out with a peace sign. Volkswagen's advertising campaign did prime its owners to be more amenable to modding the vehicle. This actually started in the German market as there were multiple prominent examples of German drivers modifying their Beetles with custom paint jobs that were not the dull factory colors. The stereotype of a Beetle painted with flowers does have some validity based on various hippy memoirs.
There was another factor favoring the Beetle: its cheapness. Like the housing in Haight-Ashbury, Beetles were relatively inexpensive in the 1960s. Beach culture on the West Coast as well as the increasing penetration of VW as a second car within the US meant there were a large number of Beetles available for the counter-culture. Hippies' car culture was not a monolith though and there were plenty of other cheap cars available. As one former counter-culture blogger recalled:
From 1964 until the mid-1970s, there were an assortment of unusual cars that came into my life. I think back on these as "hippie cars." They were acquired as part of dope deals, abandonment, and other unorthodox means and never really belonged to anyone in the sense of title, insurance, etc. A major consideration was the amount of unexpired tome on the license. The first was a Saab Station wagon with a 2-cycle engine. One of those Saabs that you poured a quart of oil in the gas tank to make a 2-cycle mix. I think it made about 8 trips from Ohio to San Francisco, northern California, and back. Then came a baby blue Nash Rambler 2-door coupe, a 1954 Hudson Hornet, and a 52 Buick Special. The Hudson had more room in the back seat than any car ever, was green, and of course was called the "Green Hornet." ... It's easy to see what this assortment of vehicles had in common. They were 10+ years old when cars lasted five and were undesirable in a pre-energy crisis, 70mph interstate world. The little Nash and the Saab were the epitome of automotive counter culture. The Beemer's name was "stodgy." The Volkswagen van went to California and back on the interstate and was passed by every other car on the road. The Hudson was in that automotive limbo of being a car that wasn't made anymore and the Buick,- well, it was a Buick.
As the above excerpt noted, there was a certain appeal to this motley assortment of elderly and foreign vehicles for the counter-culture. They could be cheap and reliable, which were assets in this milieu.
For the counter-culture, Germany and the fascist origins of Volkswagen were quite far away and distant. "Fascism" for the American hippies was less about the past and more about the present establishment. Rejecting Detroit's V-8s did have something of a political edge to it in the 1960s. But it was never a straight-line between rejecting Detroit and embracing Wolfsburg; Abbie Hoffman drove a Beetle, but he also won a big-finned Cadillac in a poker game and apparently enjoyed driving it around Brandeis when he could get it running. The Beetle and Microbus were available, cheap, and relatively reliable by the standards of the 1960s. These were solid assets for a subculture that could be short on funds. Volkswagen managed to fulfill this niche despite its less than savory origins.
Sources
Heitmann, John. The Automobile and American Life, 2d Ed.. Jefferson: McFarland Publishers, 2018.
Hiott, Andrea. Thinking Small: The Long, Strange Trip of the Volkswagen Beetle. New York: Random House Publishing Group, 2012.
Rieger, Bernhard. The People's Car: A Global History of the Volkswagen Beetle. Cambridge, Mass: Harvard University Press, 2013.