Audi Shifts into Overdrive

Germany's No. 3 luxury carmaker, after BMW and Mercedes, is on a tear, with new luxury models and older models that retain their cachet

Audi's (NSUG.DE) hungry-looking front grille is looming ever larger in the rearview mirrors of BMW (BMWG.DE) and Mercedes (DCX). Audi's sporty new models not only are powering faster global sales growth than German rivals but are also rapidly narrowing the profit gap with Bimmers and Benzes, according to results released by the company on July 3.

If the trend continues, by 2010 Audi's operating profit is likely to exceed that of BMW, and two years after that it may well overtake BMW in revenues, says Adam Jonas, London-based auto analyst at Morgan Stanley (MS). "It's all driven by new models," says Jonas, who expects Audi's vehicle sales to grow at an annual clip of 10% over the next three years—roughly triple the rate of BMW.

The recent crop of Audis clearly is surpassing expectations. The company, a division of Volkswagen, has dazzled car buyers with upmarket sporty cars and cutting-edge design ever since the 1998 launch of the iconic TT roadster. But few counted on Audi ever catching or overtaking its larger German rivals. Fast-forward nearly a decade and Audi is successfully wielding the same growth strategy premium-market leader BMW deployed in 2000 to outsell Mercedes. Audi, Germany's No. 3 premium automaker, is on a tear to expand its lineup of high-performance cars such as the posh Q7 SUV and the A5 coupe, and it's employing head-turning design to steal customers from the competition.

Respect for Their Elders

The numbers tell the story. In the first half of 2007, Audi's worldwide car sales rose 9.8%, to 509,079, as revenues rose 12.4%, to $24 billion. Global sales at BMW were up 4.5%, to 730,285, by comparison, while Mercedes' fell 3%, to 591,200. First-half revenues at Audi rose 12.4%, to $24 billion. Mercedes edged up 1%, to $34 billion. BMW releases first-half financial results on Aug. 1.

In a sign of brand edginess, Audi has been able to match a marketing feat that only BMW had been able to achieve. Sales of Audi's older models, such as the A4 and A6 midsize sedans, have continued to grow despite younger competition. Both BMW and Audi defy industry statistics in that regard. Aging car models normally succumb to sharply declining sales after three to four years. You'd expect that to be the case with the current Audi A4, which is already six years old and starts at about $28,000.

Yet Audi managed to sell 162,900 A4 sedans in the first half of this year, up 1.5% over the same period a year ago. And now it is planning to unveil a new-generation A4 in September, which should give it yet more room to run. "It's impressive. Audi has fine-tuned its sales organization," says Commerzbank analyst Albrecht Denninghoff.

Dealerships Go Luxury

In the U.S. market, Audi still trails well behind BMW, Lexus (TM), and Mercedes, but is finally starting to outpace the growth of rivals there too. In the first half, Audi's U.S. sales rose 13%. Audi sales and marketing chief Ralph Weyler says new dealerships there are helping to transform Audi's once-lackluster image in the U.S.

Until recently Audi sold its cars in the U.S. through Volkswagen (VOW) dealerships, which muddled its image by association with a mass-market brand. In markets such as Miami, Los Angeles, and New York, upscale glass-and-steel dealerships have opened, helping to lure buyers with higher incomes. The edgy, minimalist design of the new dealerships exudes upmarket ambience. "The floors are dark gray, setting off the cars like diamonds," says Weyler.

On Course to Be the Best

Audi is not just selling more cars, it's making more money on those cars. First-half earnings zoomed ahead as more expensive models and an increasingly tony brand image reaped higher margins per car. In the first half, operating profit increased 39.5%, to $1.38 billion, and net profit rose 67%, to $937 million. That puts Audi's 6.4% operating margins on a par with Mercedes' long-term returns and very close to BMW margins. Audi's management vowed two years ago to be the world's most successful premium car manufacturer by 2015.

"We are on course," says Audi Chief Executive Rupert Stadler. Stadler, previously the company's chief financial officer, became chief executive when Martin Winterkorn moved in January to head Volkswagen. Now Stadler must show he can ensure an unbroken streak of hot models that make good on the promise.

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