Yannis

Ambitious Audi needs to crack America.

LE CASTELET, France -- Why don't Americans buy many Audis?

The company, a subsidiary of Germany's Volkswagen, has been fabulously successful in Europe where it threatens the hegemony of Mercedes and BMW. In important emerging markets like China, Audis are lusted after like any other important luxury brand.

But in the U.S. its sales are pitifully small.

"Last year, Audi's volume in (the U.S. and Canada) barely exceeded the volume it sold in the British market, despite the U.S. market being seven times the size of the British market," said Adam Jonas, analyst with investment banker Morgan Stanley in a recent report.

Audi lost about $260 million in North America last year, Jonas said.

According to Walt Madeira, British-based Europe Sales Forecast Manager for CSM Worldwide, Audi's ambitious global sales forecasts of 1 million vehicles by 2008 won't be achieved until 2010, while the 1.4 million global sales target by 2015, will be missed by a year.

Sluggish sales in the U.S. will be an important factor in this scenario, with CSM forecasting U.S. sales of 88,289 in 2006 (market share 0.52 per cent) gradually improving to 109,099 in 2009 (0.63 per cent) before tailing off again to 94,023 (0.53 per cent) in 2012. Meanwhile the likes of BMW, Mercedes, Cadillac and Lexus sell at least three times as much, with BMW sales expected to hit 307,378 by 2012, Mercedes 234,531, Lexus 474,984, and Cadillac 298,346. Maybe Audi's new TT coupe can help to turn around the negativity.

Eye-catching looks

The new TT was launched to the media here in Le Castelet, a village in the mountains behind the French Mediterranean port city of Toulon. The new car is an impressive amalgam of eye-catching looks, terrific performance and the latest technology. The previous TT was a much simpler design; the new one, which is longer, wider and higher, seems to be almost over-designed, all angles and cute little design features.

Performance from the 3.2 litre 250 bhp V6 engine is fabulous, with 0-62 coming up in 5.9 seconds. Four-wheel drive is standard. There is also a 4-cylinder 2.0 litre direct injection petrol 200 bhp powered front-wheel drive version which dashes to 62 mph in 6.6 seconds. Both versions can be ordered with the S tronic automatic gearbox, formerly known as the DSG gearbox and developed by VW, which uses two clutches and prodigious computer power to produce lightening quick changes.

Sales in the U.S. start early in 2007. No word yet on prices.

As you would expect from a company claiming to be at the cutting edge of technology there are some interesting new ideas in the TT. The body is built with a blend of aluminum and steel, cutting the weight by 48 per cent. Audi also introduces an optional suspension called "Magnetic Ride", using oil in the damping system filled with magnetic particles. This stiffens the suspension using an electric charge through the particles and it adapts much faster than conventional systems. This allows the suspension to sense when it needs to stiffen rapidly - in milliseconds says Audi - and protects the occupants from severe bumps or potholes. The driver can also select a stiff suspension setting to make driveability more sporty.

How many pilots are out there?

Dr Peter Wells, research fellow at the Centre for Automotive Industry Research at the Cardiff Business School in Wales, says the TT is not a typical reflection of Audi design.

"The TT always struck me as a car that somehow escaped the normal strictures of the product development system rather than arising from it. Audi remains an awkward combination of great engineering and dull styling. Yes, this has a certain appeal, but how many airline pilots are there out there," Wells said.

Wells also believes that the structure of Audi within the VW empire is a potential problem, because it has to compete for investment funds. He also worries about the quality of management. Audi has only just unveiled its huge new SUV, the Q7, while the market has been full of full-sized SUVs for years, and consumers are starting to look for smaller vehicles.

"It suggests a management seriously off the pace and out of touch with the market, unable to bring the right product to bear in sufficient time," Wells said.

The potential for the China "bubble" to burst was also a worry.

Indian summer

"I wonder whether Audi has been enjoying something of an "Indian summer", that has masked some more fundamental structural issues, notably the high cost of manufacturing in Germany, and while there is quite a good spread of sales around the A3, A4 and A6, it is hard to see where the real growth will come outside theses core segment areas," said Wells.

As part of its plan to raise sales to 1 million by 2008, and 1.4 million by 2015, Audi has announced several new products, including the A5 coupe due in 2007, which will compete with the BMW 6 Series and Mercedes CL, the Q5 small SUV in 2007, which will line-up against the BMW X3 and Land Rover Freelander, and the R8 mid-engined super car due in 2007. The big-selling BMW 3 Series rival the A4 will be renewed in 2008. The little A3 will be redesigned in 2009.

Morgan Stanley's Jonas has no doubts that Audi is in excellent shape, and will be able to raise its profits and sales to at least match management's predictions.

"Audi is in the initial stages of a strategic transformation as it enters a period of super-normal growth, higher margins and improved asset efficiency," said Jonas in the report.

Jonas reckons that Audi has been so successful, if it were valued separately from its owner VW, it would account for more than 100 per cent of VW's stock market value.

Worth more than VW

"Our fair valuation of Audi represents over 100 per cent of Volkswagen Group's current stock market value. We now assume that 6 per cent (profit) margins are sustainable at Audi versus 5 per cent previously. We also believe Audi's target of 1 million sales by 2008 is conservative," said Jonas.

The 1.4 million sales by 2015 will be met, according to Jonas. The new models will improve the profitability of the loss-making North American operation. Jonas wonders if Audi could eventually split from VW and become an independent car maker.

"Audi remains remarkably independent from VW group in terms of manufacturing, engineering and distribution. Apart from (China) the limited A3 assembly in Belgium and Q7 production in Bratislava (Slovakia), there are no other instances of VW and Audi making cars in the same factory. VW offers Audi cost advantages, but brings revenue and strategic disadvantages," said Jonas.

Jonas acknowledges the problems posed by an under-performing U.S. market, where the Audi dealer network suffers from below-average profitability. Audi is trying to recruit more exclusive dealers. The dollar's weakness has also dragged down profits in the U.S., while Lexus and Infiniti, both big players in the U.S. but bit players here, are planning to crank up sales in Europe to threaten the incumbents like BMW, Mercedes and Audi.

VW link

CSM Worldwide's Madeira agrees that China and the U.S. are the keys to Audi long-term success. In the U.S. Audi's link with down-market VW is also a sales inhibitor, and this has made it difficult for Audi to raise its brand perception.

"At the moment, BMW and Mercedes generate more enthusiasm in North America. Mercedes is the ultimate in luxury and BMW is the ultimate driving machine. Lexus is refinement. The Audi North American slogan is "Never Follow". But the fact is that new Audi product initiatives usually follow what the competition already offers," said Madeira.

"Audi must distance itself more from the VW brand in the U.S. and stop being perceived as a glorified VW and stand up to its own value creation. The luxuriously priced VW Touareg and Phaeton overshadow the Audi Q7 and A8 (luxury sedan). The distance in brand perception has been achieved in Europe and China," he said.

There is another historical issue - the unintended acceleration controversy - which may still be undermining Audi in the U.S. In the 1980s some 1,200 Audi 5000s were involved in accidents which were claimed to have been cause by the cars surging forward suddenly and inexplicably. The issue was taken up by the current affairs programme "60 Minutes" on CBS TV, and Audi sales crashed from around 75,000 in 1985, to about 14,000. Later investigations failed to find any fault with the cars.

A word in your ear

According to Madeira, the opinion of dealers in the U.S. have much more impact than those in Europe.

It wouldn't be impossible to imagine an unscrupulous dealer quietly reminding customers of rival brands of the "unintended acceleration" incident.

Madeira said the Audi TT is likely to be a success because of its cult status globally, but peak demand is only likely to be around 60,000.

"The Audi TT is unique and shouts out quality vehicle and generates enthusiasm. Audi is moving in the right direction, but it still trails Mercedes and BMW on brand value and image. Sales must rise in North America to accompany the success in Europe," Madeira said.

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Curb Zone

 

klier

The question is answered already in the first line they make. Audi's are fancy VWs with tons of shared parts. People don't dig that, and they shouldn't.

Yannis

Yes and VW is a subsidiary of Porsche so Audi=VW=Porsche.

Now back to topic please.

klier

LOL, that's most certainly not the case.

My point is that BMW and Mercedes make totally one of a kind unique cars. Audi doesn't.

Mirage77

The luxuriously priced VW Touareg and Phaeton overshadow the Audi Q7 and A8 (luxury sedan).

Well, they are starting to correct this... The Phaeton has been phased out permanently from the VW US lineup.

This report is down-to-earth and balanced, and it states Audi's main problem in America - the poor image it has there. How does Audi fit into this mix - MB for luxury, BMW for sport - will America want a sporty luxurious sedan that compromises both sides?

Yannis

You mean A6 or A4 (for example) are not unique? If you believe otherwise you better start reading car magazines cause you don't know what you are talking about.

Furthermore this is a thread about Audi in US so this is way off topic.

kovachian

If a reinvigorated design language, renewed marketing efforts and consequent booming sales aren't in indication of Audi's desire to "crack America", then I don't know what is.
If ties with a downscale brand were that detrimental, then Lexus' sales wouldn't be any better than Audi's. But since Lexus has reliability to make up for that, then it's indisputable proof that ties with a lesser brand isn't always a pitfall provided that there's some other attribute to rely on. Audi's problem for the longest time was the complete lack of a North American marketing campaign. Like they say, better late than never.

Curb Zone