Audi: Revving to New Gains

Toyota is seeking to remake the European car map. But Audi's recent success shows a commitment to change that is paying off against rivals

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Audi boss Martin Winterkorn loves to push the accelerator up to 180 mph in Audi's high-performance models whenever the German autobahn is empty. But along with building fast, eye-catching, premium cars that rival those of BMW and Mercedes-Benz, he is determined to match Toyota's (TM) famous quality and reliability.

So the latest J.D. Power & Associates customer satisfaction survey for Germany is a coup for the 58-year-old CEO. Audi was one of the biggest gainers in 2006, tying with BMW and rated No. 7, the highest-ranking non-Japanese brand in the survey, which was led for the fifth year running by Toyota.

The annual J.D. Power report, released July 5, shows Audi made big gains in vehicle quality and customer service, and scored high in vehicle appeal (J.D. Power is a division of The McGraw-Hill Companies (MHP), which also owns Audi's quality ranking alone jumped 21 points in Germany from 2005, while the industry as a whole improved by only 6 points. "In most areas Audi now goes head-to-head with BMW," says David Sargent, head of operations for J.D. Power in London, noting Audi's quality parameter in 2006 was three points higher than BMW's on a scale of 1,000.


 These figures are based solely on the opinions of current car owners. But when Germans—the most demanding drivers in the world—are asked to vote on which brand they like the most regardless of what they drive now, Audi fares even better.

In the 2006 reader survey by German magazine Auto Motor & Sport, Audi swept the rankings, overtaking both BMW and Mercedes for best car in the compact (A3), executive sedan (A6), and luxury sedan (A8) categories. "Audi has had to overachieve," to win its place in the premium market says Karl Ludvigsen, president of Euromotor Consultants in North Hampton, U.K.

It's not just in Germany where Audi is on the upswing. In J.D. Power's 2006 French survey, BMW and Audi scored higher than they did among German owners, ranking No. 2 and No. 5 respectively, with Honda (HMC) taking first place. The annual survey measures cars on quality and reliability, vehicle appeal, service satisfaction, and ownership costs.


 BMW's Mini was the most-improved European brand in the J.D. Power 2006 German ranking, also scoring gains in quality, reliability, and service satisfaction.

All this positive buzz is helping Audi notch big revenue gains. In the first half of this year, Audi's sales climbed 9.8%, to 463,500 units, compared with 8% for BMW. Winterkorn aims to reach sales of 880,000 this year and double sales to 1.4 million by 2015. But Audi still has to step on the gas to catch its German rivals. The $34 billion Bavarian auto maker sold 829,000 cars worldwide last year, compared with 1.1 million for both BMW and Mercedes.

In the U.S., where Audi is bent on clawing market share from luxury competitors, first-half sales rose 7.3%, helped by the introduction of the new A3 sportback, the A6 sedan, and the Q7 SUV. Strong global demand for the huge Q7, which was designed for the U.S. market, has prompted Audi to raise its worldwide Q7 sales forecast by 10,000 cars to 70,000, and to expand production.


 Sales and marketing chief Ralph Weyler forecasts Audi will reach sales of 90,000 units in the U.S. this year. "Until now, we only had cars that addressed 50% of the U.S. market, since 50% of sales in America are SUVs," says Weyler. In China, Audi's sales nearly doubled to 38,838 in the first half, defending its position as market leader in luxury cars.

But Winterkorn has only just begun to rev Audi's motor. The CEO is planning an ambitious model expansion over the next five years, reminiscent of BMW's successful sprint since 2000 to dramatically expand its model lineup. Next year, Audi will unveil the A5, a large two-door coupe aimed at Mercedes-Benz CLK buyers.

In 2008, Audi plans to roll out an A3 (compact) convertible, the Q5 baby SUV, and the R8 sports car—Winterkorn's obsession and a direct challenger to Porsche. "Audi is throwing a lot of product on the market, and its new models are pleasing a lot of people," says Euromotor's Ludvigsen.


 By 2009, Audi will also launch a Mini-killer called the A1, entering the small-car segment with a premium model priced between €16,000 and €20,000 ($20,480 and $25,600), insiders say. Photos of an early version appearing in Auto Motor & Sport reveal a car that has no small resemblance to BMW's hot-selling 1 Series. Another model not yet announced: A four-door coupe called the A7 to compete against the BMW 6 series.

All in all, Audi plans to expand its lineup to 40 models by 2015, up from 22 today, relying on a modular platform strategy that allows sharing of key components across sedans, station wagons, coupes, and crossovers. At the same time, Winterkorn is targeting 10% annual gains in productivity—and, of course, the ever-elusive goal of a No. 1 quality ranking.

In the fiercely competitive European market for luxury cars, technology-driven German brands have long dominated. But quality is likely to play an increasing role sorting winners from losers. After years of neglecting the European market, Toyota is now pushing its Lexus brand with new determination, stoking sales growth of 96% this year. Mercedes-Benz, plagued by quality problems over the past four years, continues to trail BMW and Audi, providing opportunity for all three to chisel away at Mercedes' once-loyal consumer base.


 In J.D. Power's 2006 German consumer satisfaction survey, Mercedes ranked only slightly above the industry average. Its Smart micro-car fell to second-to-last place, beneath Fiat and Chrysler (DCX), and only a notch above the lowest-ranking brand, Daewoo.

Japanese brands have gained only a sliver of market share in Europe to date. But the more cars Toyota sells, the more its reputation for quality will become a benchmark. J.D. Power's survey, for example, measures only whether or not car owners are satisfied with the cars they own. It is not a brand "beauty contest," says Sargent.

That explains why German brands top the Auto Motor & Sport survey but still lag behind Toyota and others in the J.D. Power rankings. These are good times for Audi, but Winterkorn still has work to do.

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