http://www.businessweek.com/stories/2007-02-28/audi-aims-even-higherbusinessweek-business-news-stock-market-and-financial-advice

Global Economics

Audi Aims Even Higher


The German automaker's 63% profit jump for 2006 came on global sales growth and better revenues per car. Its CEO predicts a 50% rise in sales by 2015

The driver of the silver, $100,000 Audi A8 cruised gracefully into Audi's headquarters plaza in Ingolstadt, Germany, passing an arc of gleaming models ranging from the sassy new TT coupe to the $130,000 R8 super sports car. For visitors arriving one by one in a continuous stream of identical, chauffeur-driven A8 sedans, the corporate choreography carried one loud message: Audi has made it.

The Bavarian automaker's profits and sales are surging, and its cars continue to win best-in-class accolades. On Feb. 28, Audi's new chief executive, Rupert Stadler, delivered 2006 financial results that matched the high-octane model lineup. Group revenues rose 17.1%, to $40.7 billion, powered by strong sales growth in Europe, the U.S., and Asia. Net profits jumped 63%, to $1.75 billion.

"By 2015, Audi will be No. 1," vowed Stadler, Audi's former finance chief, who became CEO on Jan. 1 after former chief Martin Winterkorn was kicked upstairs to become CEO of parent company Volkswagen.

Bottom-Line Bonanza

Though Audi's revenues and vehicle sales still lag behind those of German premium-car rivals BMW and Mercedes (DCX), its engineering edge and design savvy have polished Audi's premium-brand image to a high sheen. Now, global market-share gains and profit improvement are narrowing the gap and transforming Audi into an ever more powerful rival. Stadler forecasts Audi's sales will sprint from 924,085 cars in 2006 to 1.5 million by 2015.

The most telling shift was Audi's bottom line. The carmaker's 6.2% operating margin, up from 4.9% in 2005, reflected the rising number of high-priced models in Audi's overall lineup—and an increase in sales of pricey options. The 2005 launch of the $40,000 Q7 luxury sport-utility vehicle also helped boost the mix, as did sales of the spaceship-like R8 sports car.

Average revenues per car for the A6 sedan, one of Audi's most important models, have risen 70% over the past five years as well-heeled buyers outfit their cars with expensive options such as high-end audio systems, leather seats, and more powerful engines. The increase in average revenues per model helped Audi match Mercedes' 2006 operating margin and edge closer to BMW's vaunted 8% return on sales. Audi's return on investment, meanwhile, hit a record 14.2%.

Lineup Expansion

Stadler isn't bent on topping Mercedes or BMW in vehicle sales, but rather a combination of metrics such as quality, customer satisfaction, innovation, brand image, and financial performance. "If one of our competitors is selling more [than Audi] in 2015, I wouldn't worry about it," he says. "This is not a volume-based strategy alone."

Even so, Audi carried out a blistering sprint for volume in 2006, bringing new models to market nearly every month, adding sportier cars such as the $130,000, 480-horsepower R8, and new niche models like the plush, seven-seat Q7 SUV, which goes head-to-head with Mercedes' M-Class and BMW's X5.

At the Geneva Auto Show on Mar. 6, Audi will expand its lineup further with the A5 coupe, followed by a new A4 small sedan late this year. In 2008, the company will launch a baby SUV dubbed the Q5. Stadler also announced that Audi is developing a sporty small car, likely to rival BMW's hot-selling Mini.

Serious Challenger

Audi's widening product palate and huge global marketing push is finally giving it traction in the U.S., where sales are much weaker than those of BMW and Mercedes. In 2006, Audi's U.S. sales rose to 90,000 cars, up 8.5%, including 10,000 Q7 SUVs. Marketing chief Ralph Weyler says Audi will reach the 100,000-car milestone in the U.S. in 2007 and top 1 million in sales globally. In January, Audi's global sales rose 8% over the same period.

China is the real jewel in Audi's global crown. Last year, Audi sold 81,700 cars there, up 39%, defending its position as market leader among premium automakers in one of the world's fastest-growing markets. "We feel like China is our second home market," Stadler says.

It has now been 17 years since Audi launched its audacious quest to equal global luxury kingpins BMW and Mercedes. Few believed back in 1990 that Volkswagen's mid-market unit would make the premium grade. Until recently, both BMW and Mercedes dismissed Audi as a serious global rival, citing its weakness in the U.S. and smaller share of expensive models among overall sales. But Audi's gains in 2006 have proven its competitors naive.

Carbon Concerns

True, Audi was relatively late to the market with an SUV, but first-year sales of the Q7 showed its adeptness at designing models that hit a consumer nerve. Worldwide, Audi sold 52,000 Q7s in 2007, overshooting its initial forecast despite the trend toward shrinking sales of large SUVs. To address concerns about fuel consumption and emissions, the automaker recently unveiled a clean-diesel V-12, 500-horsepower version of the monster Q7, which gets better mileage than gasoline while still offering serious horsepower and torque. The diesel version sprints from zero to 100 kilometers per hour in 5.5 seconds.

The only cloud hanging over the ambitious Bavarians in Ingolstadt is the growing alarm over global warming and the threat of government regulation to force drastic cuts in emission levels. For high-performance cars such as those made by Audi, BMW, and Mercedes, the challenge of meeting cuts in carbon dioxide levels is nearly impossible, Stadler said.

For now, Audi is proffering smaller models such as the A3, which has carbon dioxide emissions below the restricted levels being debated by the European Union. It also has launched a pilot project to synchronize traffic flows with traffic lights, minimizing start-stop patterns that exacerbate emissions. But if the climate-change debate heats up, Audi's new management may have to change gears and delve rapidly into new technologies—just when the race was starting to get really fun.

Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau .

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