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Audi Nixes U.S. Plant for Now

Audi of America will need to broaden its product lineup and double sales to justify local production, a top U.S. executive says.

NEW YORK – Audi AG must double its U.S. sales volume from projected 2009 levels in order to justify building a plant here, Johan de Nysschen, president of American operations, says in an interview with Ward’s.

Unless an extended cash-for-clunkers incentive triggers a surprising sales surge in the second half, Audi of America Inc.’s U.S. volume will reach only about 74,000 vehicles in 2009, 16% below year-ago’s 87,000.

Audi’s sales through July totaled 44,213, down 14.6% from like-2008. But it says its penetration of the luxury-vehicle market to date is 8.1%, suggesting the German importer is on its way to a third-straight market-share increase.

“We need sales in the 150,000-200,000 range to (justify) a factory here,” de Nysschen says. “With our current strategy and (imported) portfolio, we could grow to 130,000 units.”

That suggests an expanded model lineup is needed to reach the volumes required for U.S. production.

In January, Audi said it would decide by the middle of this year whether to go ahead with plans for North American capacity. De Nysschen said Audi would build a new plant, jointly produce vehicles with Volkswagen AG in Tennessee or acquire an existing facility from another auto maker, if a proposal to add local production were green-lighted.

“I don't feel confident that there will be a massive resurgence (of sales) in the second half,” de Nysschen says, though he predicts the brand still will achieve its third-straight annual profit this year.

Some of Audi's problems derive from supply constraints for some models. That's why the auto maker is pulling the launch of some ’10 models ahead by about 30 days, he says. The ʼ10 R8 supercar, A5 sedan and Q5 cross/utility vehicle all go on sale this month because the ʼ09 models have sold out. Supplies of the Q7 CUV, A5 and S5 sports coupe also are tight.

Although still the brand’s best seller, A4 sedan deliveries are down nearly 20% this year.

“We've done rather well, considering the luxury market is down 32% in 2009,” de Nysschen says. “We could sell more cars, but financial performance is really paramount.”

Audi models cost 4.9% less than rival BMWs on a weighted average in the U.S. market, while the gap is just 1% in Europe. But de Nysschen says Audi is spending less on incentives in the U.S. this year than in 2008.

“We are the only luxury-car company that has spent less on incentives this year,” he says, citing independent data that shows Audi spiffs down 1% to $3,508 per unit.

Audi is piggybacking on the wildly popular Cars Allowance Rebate System that provides up to $4,500 in rebates on older-model trade-ins, offering an additional $1,000 to qualified customers through Aug. 31 on a range of models from the TT sports car to the Q5 CUV.

Audi's 270 U.S. dealers are in good shape, de Nysschen contends. “Only three dealers are in financial trouble.”

The auto maker is assisting retailers with inventory control by holding some slower-selling models at U.S. ports, he adds.

The new Q5 has done exceptionally well this year, with average transaction prices in the low-$40,000 range and leases of $660 per month for the typically equipped model, the Audi chief says. Sales totaled 1,023 units in July.

Diesels also have done well, accounting for an astonishing 35% of overall Q7 sales in 2009. The Q7 is the only Audi available with a diesel engine in the U.S., but a TDI-equipped A3 hatchback will be added to the lineup by year’s end. Audi says up to 40% of A3 sales could be diesels. There will be no lease deals offered on the model.

Audi plans a step-by-step increase in diesels for the U.S. market.

“We see diesel (penetration) at 15% nationally eventually,” de Nysschen says, adding clean diesels will account for more of Audi’s sales than hybrids. Only one hybrid model is currently planned for Audi.

Although Audi of America expects to land in the black again in 2009, it won’t be by much.

“We will manage to scrape over the (profit) barrier again this year, but our share holders won't applaud us,” de Nysschen says.

Audi AG reported an operating profit of E823 million ($1.2 billion) for the year’s first half. Revenues reached E14.5 billion ($20.9 billion), down 16.4% from like-2008.

“We're keeping to our target of recording a significant operating profit in 2009, even if there are still several challenges to be faced in the second half of the year,” says Chief Financial Officer Axel Strotbek.

Strotbek predicts Audi will sell 900,000 vehicles in 2009. He says the auto maker will invest about E2 billion ($2.9 billion) in product development annually as it looks to offer 42 models globally by 2015.

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