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Audi Bets Chinese Love Small Cars Too After Seeking Legroom

Audi A3 Produced in Germany
A row of Audi A3 automobiles, produced by Volkswagen AG's Audi brand, wait for their final inspection as they move along the production line at the company's plant in Ingolstadt, Germany. Photographer: Guenter Schiffmann/Bloomberg

Nov. 20 (Bloomberg) -- Audi AG gave China’s chauffeur-driven bureaucrats and businessmen the legroom they wanted by stretching its flagship sedans. Now the German automaker is betting there’s also demand for small luxury cars.

The Volkswagen AG unit will begin producing two versions of its A3 compact this year at its new factory in Foshan, China, with the first cars reaching dealerships in the first half of 2014, according to Audi China President Dietmar Voggenreiter. By manufacturing the A3 locally, Audi can reach Chinese consumers with a smaller budget by offering a cheaper model than Bayerische Motoren Werke AG and Daimler AG’s Mercedes-Benz.

“With the compact cars, we bring new customers to the brand and hopefully we can keep them over their lifetime,” Voggenreiter said in an interview in Shanghai last week. “In the long run we will see higher growth rates in the premium market and one factor will be especially the compact segment.”

So far, consumers appear to agree. Audi will show the A3 at the Guangzhou Auto Show this week, targeting the market for premium compacts that IHS Automotive forecasts will expand by 50 percent next year, five times the pace of mid-market brands. China will overtake the U.S. to become the top market for luxury vehicles by 2016, according to McKinsey & Co.

Premium Buyers

“Step-by-step, you’d want to capture all of the premium customer segments, that’s why they’re going into smaller models and niches,” said Andreas Graef, a Shanghai-based consultant at A.T. Kearney, which advises automakers in China. “There’s still a significant portion of people that want to go premium and they might not only want big premium cars.”

The move to go small follows Audi’s local production of sport utility vehicles in 2010 and introduction of sports cars like the TT and R8. The Ingolstadt, Germany-based automaker is expanding its lineup of products to appeal to Chinese buyers seeking options beyond the standard business sedan as the market matures and growth rate slows.

China’s premium vehicle segment is skewed toward larger models, according to Audi’s research.

Larger sedans and SUVs accounted for 42 percent of the total premium market in China, compared with 22 percent in Europe, according to Audi. Compact cars made up 10 percent of sales versus 28 percent in Europe.

Audi sells more of its stretched A6L sedan than other models in China, according to spokeswoman Johanna Barth. In the first 10 months, the A6 and A6L accounted for 31 percent of the carmaker’s total sales in China and Hong Kong.

The automaker’s sales growth in China, including Hong Kong, has slowed to 20 percent in the first 10 months of this year. That compares with the 31 percent growth in the same period last year and 32 percent in 2011, according to data from the company.

To be sure, Audi runs the risk of diluting its brand by going into smaller cars in China, said Janet Lewis, a Hong Kong-based analyst at Macquarie Group Ltd.

Brand Dilution

“If they lose their ability to be viewed as a luxury carmaker, and people back off from the brand in China, then obviously they would’ve made the wrong decision,” Lewis said. “But it’s very early in this market, so I wouldn’t be saying a company has made the right strategy or the wrong strategy because they’ve decided to go down market.”

The China-made A3 would cost less -- Audi hasn’t announced the price -- than the 255,000 yuan ($42,000) imported model because of the exemption of a 25 percent customs duty. By comparison, BMW’s locally produced 3-series and Mercedes-Benz’s C-class sedans start from 283,000 yuan and 315,000 yuan, respectively. Mass-market models such as the Buick Regal, Ford Mondeo and Toyota Camry start from about 180,000 yuan, according to prices on the companies’ websites.

BMW declined to comment on its plans for local production of compact cars, while Mercedes-Benz didn’t respond to e-mailed questions.

Audi’s target customers for the A3 are younger middle-class consumers who want to own a smaller premium vehicle, owners of mass-market brands looking to upgrade to a luxury marque, and families in the market for a second car, Voggenreiter said. He declined to give a sales target for the model.

“Everybody thought a premium car must be a big car, but when the market gets more experienced and mature, the customer knows for different purposes, you have different cars,” said Voggenreiter, who predicts the automaker will probably outpace the industry in sales next year. “You also have two bags, you have an expensive shopping bag and one for the opera.”

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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