Asia: Audi Needs To Burn Rubber

Audi is winning plaudits in Europe and the U.S. as it launches hit model after hit model in the luxury-auto segment. Asian car enthusiasts love the brand, too. Yet Audi Chief Executive Martin Winterkorn ought to cast a gimlet eye out toward Asia. In two critical markets, the white-hot Chinese economy and the stagnant but still vast Japanese one, Audi has to redouble its efforts. You still see plenty of $50,000, high-performance A4 Audi sedans cruising the Bund in Shanghai or the Ginza strip in Tokyo. Trouble is, you also see plenty of C-Class Mercedes (DCX ) and 3-Series BMWs, not to mention Ferraris (FIA ) and Jags (F ).

Consider China, the world's fourth-biggest auto market and one that has long made auto execs salivate. No more. Last year the overall market there only grew 15.5%, to 5.07 million vehicles, vs. a blistering 34.2% in 2003. There was barely any growth among luxury cars, thanks to efforts by Beijing to slow down investment and cool the economy. Audi started producing the A6 sedan in China in 1999, and since then has had a lock on the country's luxury market. It still enjoys a dominant 65% share, but Audi sold only 64,018 cars last year, up 0.8% from 2003, and well below its target of 80,000. BMW and Mercedes had tough years, too, but Audi stumbled by delaying the critical launch of the new A6. "They are facing lots of challenges and upcoming competition," says auto analyst Yale Zhang of CSM Worldwide in Shanghai.

General Motors Corp., (GM ) second to Audi parent Volkswagen in total China sales, is aiming to grab share in the luxury arena. It began selling the Cadillac CTS sedan last October, and on Feb. 28 added the $91,000 Cadillac SRX sport-utility vehicle. And the ferocious cost-cutting that has dominated the passenger-car market is starting to become a fact of life for super-elite brands. In January, BMW announced a 14% price cut on the cars it produces and sells in China. Audi sold some cars at a discount last year, but has since returned to full prices, hoping that the new A6 will juice sales.

It might work: Chinese still adore the brand, especially in Hong Kong, where the A4 has been popular since its January debut. "That the new A4s were sold without people taking a test drive proves they have confidence in the brand," says Jacky Raenisch, a marketing manager at Hong Kong dealer Premium Motors Ltd.

Audi also faces an array of challenges in Japan, which is about twice the size of China's market. There, BMW and Mercedes are the dominant foreign luxury brands. Last year, Audi only represented 5.8% of the imported car market there, and its share of the total Japanese market is less than 1%. Toyota Motor Corp (TM ). has plans to introduce its Lexus luxury brand to Japan later this year, and Nissan Motor Co. (NSANY ) is likely to follow suit with Infiniti. Audi has great street cred with the Japanese, but the arrival of Lexus will complicate things. "Toyota says their Lexus is competing with Mercedes, but I should think Audi is also a competitor," says Ryugo Arai, an Audi dealer in Tokyo. Memo to Winterkorn: It is time to take the game up another level in Asia.

By Brian Bremner in Tokyo, with Dexter Roberts in Beijing and Frederik Balfour in Hong Kong

— With assistance by Dexter Roberts, and Frederik Balfour

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