Nov. 18 (Bloomberg) -- During an otherwise peaceful family vacation driving along the California coast last August, Audi AG Chief Executive Officer Rupert Stadler was displeased by what he saw -- or more precisely, didn’t see -- on the streets of America’s most affluent neighborhoods.
“I simply see too few vehicles with the four rings when I am driving on the highways there,” Stadler says three months later in his all-glass office overlooking Audi’s sprawling headquarters in the Bavarian city of Ingolstadt, referring to Audi’s iconic logo. “We still have work to do.”
That is a humbling realization for the brand that surpassed Bayerische Motoren Werke AG and Daimler AG’s Mercedes-Benz in luxury sales in western Europe last year. Audi is also the luxury leader in China, where parent Volkswagen AG entered in 1985. Now, nearly two decades after its reputation in the U.S. took a hit over concerns its cars were subject to sudden acceleration, Audi is starting to gain traction in America, Bloomberg Businessweek reports in its Nov. 22 issue.
Even though the automaker’s U.S. sales still trail those of BMW, Mercedes, and Toyota Motor Corp.’s Lexus, Audi will sell more than 100,000 vehicles in the world’s largest market for luxury cars for the first time this year and the automaker aims to double that figure by 2018.
Stadler needs a North American bounce to meet his ambitious goal of leapfrogging his German rivals to become the world’s No. 1 maker of luxury cars by 2015. VW also is counting on Audi to remain a profit driver: The division’s third-quarter return on sales hit 11 percent, besting BMW’s automotive operating margin of 8.1 percent and Mercedes’ 9.5 percent.
Biggest DAX Gainer
Volkswagen’s preferred shares have increased 82 percent this year, the biggest gainer on Germany’s benchmark DAX Index, valuing the Wolfsburg, Germany-based carmaker at 51.3 billion euros ($70 billion). The stock was up 2.4 percent to 118.70 euros as of 1:38 p.m. in Frankfurt trading.
Stadler, who took charge four years ago, is spending 2 billion euros annually to improve technology and introduce new vehicles. Audi will add six new models in the next five years, which could include a small auto, compact sport-utility vehicle and a sports car. The carmaker is also laying out millions to run quirky commercials during blockbuster events like the Super Bowl and Academy Awards to stir up interest.
Some trendsetters have taken notice: Celebrity Audi drivers include New England Patriots quarterback Tom Brady and his supermodel wife Gisele Bundchen, as well as Taylor Lautner from the “Twilight” films and Chace Crawford of TV’s “Gossip Girl.”
“Audi has a young, hip image -- it’s attracting a lot of young Hollywood types,” says Rebecca Lindland, who tracks luxury-car makers at researcher IHS Automotive in Lexington, Massachusetts. “There’s a terrific amount of buzz about the brand.”
To boost Audi’s awareness in the U.S., the carmaker in 2009 sponsored the evening newscasts on ABC, CBS, and NBC on President Barack Obama’s inauguration day by buying out all the commercial time and showing a single ad for its A4 sedan.
Its Super Bowl commercial this year featured the “Green Police,” who arrest people for using plastic bags and Styrofoam cups. In the ad, an Audi A3 driver with a fuel-efficient diesel engine, in turn, zips past environmental roadblocks. Traffic on the brand’s U.S. website for the compact car jumped 300 percent after the spot ran. The carmaker has also taken the unusual tactic of showing rivals in its ads, referring to them as “old luxury” while trumpeting Audi cars as “new luxury.”
“If you want to be a progressive brand, you have to be controversial at times,” says sales and marketing chief Peter Schwarzenbauer, who previously worked for Porsche SE and BMW in North America.
Audi is expanding the model portfolio as well to fill in lucrative niches with new cars such as the A7 Sportback, which takes center stage at the L.A. auto show this week, and Q3 compact SUV. Both hit the U.S. next year.
Still, Audi has a long way to go. Its U.S. sales through October were 81,700 vehicles, less than half those at each of its three main luxury rivals. Audi’s average U.S. selling price in October of $45,185 trailed BMW’s $51,315 and Mercedes $61,340, according to market researcher Edmunds.com.
The luxury carmaker also came in 12th in J.D. Power’s 2010 Initial Quality Study, based on responses from drivers three months after receiving their vehicle, well behind Mercedes-Benz and Lexus, who were third and fourth. BMW was 16th.
“A big challenge for them is just to make the vehicles easier to operate,” said David Sargent, vice president of automotive research at J.D. Power & Associates in Troy, Michigan. “It’s trying to strike a balance between having the advanced technology in the vehicle that consumers are looking for, and Audi has a lot of those people, and then trying to make it intuitive.”
The challenge is also to improve quality, while continuing to grow. Audi is looking at the possibility of adding a compact line between the A1 and A3, another sports car and an SUV smaller than the Q3 as it aims for 1.5 million in sales in 2015. This year Audi forecasts record deliveries of 1.08 million.
Stadler, who says he walks onto the production line and pulls off cars at random to see if they are up to snuff, oversees the quality control department himself. He holds conclaves with board members and other managers to dive into problems that arise. Those sitting at the table are expected to speak up.
“It doesn’t help if one always tells me the good side,” Stadler said. “I want to know what’s not going well and what we can do to make things better.”
Schwarzenbauer says he aims to give buyers the luxury treatment from the moment they set foot in a showroom. The percentage of Audi dealers exclusively selling the brand in the U.S. has increased to 82 percent from 35 percent five years ago. U.S. dealers are also pouring $1 billion of their own money through 2015 into improving and expanding sales floors.
“They’re making tremendous investments in dollars, time and manpower to escalate the brand,” said Stephen Grossman, managing director of an Audi dealership in Manhattan owned by Open Road Auto Group. “It’s been a struggle with inventory. Demand is much higher than supply.”
Audi’s lower rebates and special offers are a testament to that high interest. Audi has chopped U.S. average incentives in half since 2007 to just $995 last month, according to Edmunds.com. Mercedes offered $3,712 in October, BMW $2,706 and Lexus $2,607.
“You can’t be number one in the world without being successful in the U.S.,” says Schwarzenbauer. “Frank Sinatra’s line, ‘If you can make it here, you can make it anywhere,’ is still valid for me.”
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