Still A Long Way To Go In The U.S.

It would be hard to find a more devoted Audi fan than Mark Fullerton. The CEO of a Cincinnati tech-services company and his wife have owned 27 Audis over the years. Fullerton, 53, has toured Audi's factory in Ingolstadt, Germany, six times, and attended its Austrian driving school four times. "I believed no one could seduce us away from Audi," he says. So why has Fullerton recently been test-driving cars made by Japanese and other German auto makers?

He fears Audi has lost its edge. Not long ago, he says, "Audi was the only game in town" if you wanted a premium performance car with all-wheel drive at lower prices than its rivals. These days, nearly every luxury carmaker offers AWD. And thanks to generous lease terms, Fullerton can lease a $57,620 BMW for $736 per month, about $100 a month less than he'd pay on a comparable $54,770 Audi. "It pains me," he says.

It pains U.S. Audi dealers, too, since leasing accounts for 43% of their sales. Last year, Audi's U.S. sales fell 10% -- their first decline in a decade. Management shake-ups rattled dealers. And even as the new A6 sedan was drawing rave reviews, sales got off to a slow start, with little promotion when it hit showrooms last fall."The good news is that the A8, A6, and new A4 have exceptionally good quality, but in the short term, we're not playing with the full quiver of arrows that the other guys have," says Bill Hoehn, owner of a Carlsbad, Calif., Audi dealership.

Despite a decade on the comeback trail, Audi is still running behind archrivals BMW and Mercedes-Benz in the minds of American consumers. Audi has been diligent in burnishing its upscale image and rebuilding a reputation for quality. But the carmaker still needs to improve its long-term reliability. It also is hampered by a weak dollar, a shaky U.S. dealer network, and a narrow lineup that includes no sport-utility vehicles.

That doesn't mean Audi isn't on the upswing. Audi's U.S. sales jumped 16% in February. Its American executives and engineers are working closely with their German counterparts to eliminate glitches. They're convinced Audi will crack the Top 10 when the latest J.D. Power & Associates' Initial Quality Study is issued this spring. And American executives are counting on those new models. Says Johan de Nysschen, Audi of America chief: "We will have the newest product lineup in the luxury sector." But de Nysschen is also dead set against raising incentives -- and that includes the more generous lease deals that dealers want to offer. Piling on big incentives effectively lowers a car's pricing, which would hurt both Audi's image and the resale value of its cars. Says de Nysschen: "I don't want to undo all the good that has been done."

The problem is the new model that Audi dealers want most -- the $40,000 seven-seater Q7 SUV -- won't be available until spring 2006, eight years after Mercedes launched the M-Class. With no SUVs, Audi's U.S. sales are only 25% to 30% of the number of vehicles sold by rivals. "You only address half the market in the U.S. if you only have cars to sell," de Nysschen admits. Analysts fear that by the time Audi delivers the Q7 and the smaller Q5 in 2007, the trend could be losing momentum. De Nysschen says Audi can sell 50,000 Q7s a year.

It will take more than new models to vault Audi into the top luxury tier in the U.S. Still haunted by memories of the "sudden acceleration" scare of the 1980s, Audi needs to turn out near-perfect cars to build its quality reputation. Audi "has to overcompensate," says Marc Trahan, the company's U.S. quality director. Still, he had to work to convince the Germans to listen to American consumers and move cup holders from the instrument panel, where coffee sloshed onto the stereo controls, to the center console. De Nysschen hopes the efforts will turn customers into "goodwill" ambassadors for the brand. That's essential if Audi continues to lose loyalists like Fullerton.

By Kathleen Kerwin in Detroit, with Gail Edmondson in Ingolstadt

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