Audi of America sees a year of 2 halves: Good and better
AUTOMOTIVE NEWS: Why is it important for Audi to expand its high-performance S and RS lines in the United States?
JOHAN DE NYSSCHEN: Audi is not only a luxury brand, it’s an aspirational brand. So it has great emotion as part of the brand character. And these cars really do drive emotion like nothing else. It creates an affinity. It creates not only that aspirational character, it bolds the appeal of the entire range.
Since taking the helm seven years ago, Audi of America President Johan de Nysschen has led the luxury brand through an unprecedented growth period.
Just two years ago, Audi's U.S. sales topped 100,000 for the first time. Its share of the luxury market has climbed from 5.3 percent in 2004 to 9.5 percent last year, and the Volkswagen Group-owned brand is quickly gaining on its key competitors, BMW and Mercedes-Benz. Last year, it sold 117,561 vehicles in the United States, a 16 percent increase over 2010.
This year is off to a good start and Audi is gearing up for another record sales year, said de Nysschen, a native of South Africa who led Audi of Japan for five years before taking charge of Audi of America.
De Nysschen, 52, spoke at Audi of America's headquarters with Staff Reporter Christina Rogers about the challenges and opportunities the brand faces as it continues its U.S. expansion.
Q: How's the year going so far? What's your outlook for 2012?
A: For us at Audi, it has been a satisfying year coming off a really strong 2011. We've been able to maintain that momentum into this year with our 16th consecutive all-time monthly sales record in April.
The first quarter is good. This year, for us, will be a year of two halves. The first half is going to be good. The second half is going to be very good. And the reason for that is we've been going into the year with very tight inventories. The matter is somewhat compounded by the reality that both our A4 and A5 models are at the point of a model year changeover, receiving mid-life-cycle refreshes. And so we weren't really in a position to build up large inventories of these cars with the product change. So we were very tight on inventory on those cars.
The colleagues in Germany have taken some steps to ensure they can assist us to bring supply and demand into better balance in the United States, as we ramp up production of the refreshed A4s and A5s, followed a little bit later this year with the refreshed Q5.
We've got three volume models that will be really fresh with significantly increased production in the second half of the year. That is why the second half performance is going to be far stronger than the first half. Nevertheless, sales for us are up 15.8 percent year to date. Our market share growth continues unabated. April we hit 10.5 percent of the luxury sector. Year to date it's around 10 percent.
How will you finish this year compared with last year?
We'll certainly exceed last year's performance. We did just shy of 120,000 units in 2011. Our budgeted increase was to take that up around 10,000 units. I think we'll exceed our budget handsomely.
Frankly, I think sales will finish this year somewhere between 135,000 and 140,000, and that is going to depend largely on supply. December is always a seasonally strong [part of] the year. If we can get a lot of product in early in December that will make a difference whether the number is closer to 135,000 or 140,000.
How is Audi doing regarding its goal of 200,000 annual U.S. sales by 2018?
If you think about it, we celebrated a goal that had eluded us for so many years of breaking the 100,000 mark in 2010. You and I are sitting here today speaking of beginning to test 140,000 this year. And 2010 was just the other day. What is really important is that the 200,000 goal is not, for us, something we have to reach within a defined time frame, and neither is it, for us, a measure of success.
The 200,000 target will be attained as a consequence of getting a lot of things in our business right and this has really been my philosophy for all the years I've been head of Audi in the United States.
This is a long-cycle business. Establishing Audi as a powerhouse luxury brand in the U.S. in the same way the brand is perceived in Europe and Asia is a long-term project.
What does Audi expect of its dealers?
One of the great progress points we've achieved in the United States, along with market share growth and profitability, has been to establish a really, really solid working relationship with our dealer partners.
Relations between Audi of America and its dealers have never been stronger. We just received a week ago the results of the latest [National Automobile Dealers Association] dealer attitude survey.
Audi continues to make progress. We've further reinforced our position as being the luxury brand which dealers expect will most increase in value in the future. And through that they express their confidence in the brand and their willingness to invest.
This all goes back to 2009 when the financial crisis hit us. We had 42 dealer development projects under way. Not a single one was canceled despite the economic turmoil.
I think that says a lot.
We see now our exclusive network already represents over 80 percent of new-car sales. And we are currently in discussion with our dealers because we have to expand capacity to provide for our future growth.
We will be further expanding and upgrading facilities in the next 24 months, perhaps 30 months -- some projects take long -- at 110 stores. That's about one-third of our network that will be renewed and expanded in the next 24 to 30 months.
Will Audi add stores?
We're not actively embarking on increasing the number of stores. We've long made a commitment to our dealers that we wish to grow with them.
The general philosophy we have at Audi, as our market share grows, a market territory that might be handled by a single point begins to justify the addition of a second point on the assumption we have a good dealer partner. Then, we'd like to discuss an expansion into a second point with that partner. It's only in exceptional cases that we will not follow this.
By and large, we think our footprint as it exists today is adequate to cover our intermediate needs. There may be a handful of cases. They are related to demographic shifts and development of the market predominantly in the South.
Texas is an area we might add a few more points. But this is not a major driver for us.
Audi plans to build the next-generation Q5 at a new plant in Mexico starting in 2016, but Q5 inventory already is constrained. How do you plan to boost supplies in the meantime?
We're certainly looking at the overall global market development very carefully right now. There is this threat of some economic contraction in Europe. We are in a position that if any surplus capacity becomes available through a reduction in demand in Europe, the U.S. could certainly take that over.
We are at this critical stage with the midcycle refresh of the current Q5. With the potential for weakening demand in Europe, the question is whether now is the time to invest in a third shift to increase the supply.
The U.S. represents a very substantial market for this car. Our dealers have seen supply now consistently above 2,000 a month. However, we're still struggling to build inventories. I don't think we have yet tested the full potential for the car in this market.
We're asking ourselves the question. We haven't found the answer yet. What steps do we need to take to bring the supply to a level between 2,500 and 3,000 a month?
How will the Mexico plant change Audi's situation in North America?
It brings so many benefits I wonder if I can list them all. The Q5, A5 and the A4 -- all three are built in our Ingolstadt assembly plant. The immediate benefit of moving the next generation Q5 out of that factory means we can rebalance the lines and reallocate that freed-up capacity to build more A4s and A5s.
Then, as far as the Q5 is concerned, by setting up global manufacturing of the car in Mexico, we'll have a pretty high degree of local content with existing suppliers in the North American dollar zone. It allows us to develop a natural currency hedge.
That means we can focus our efforts on optimizing our business model here and not getting in the trap where exchange rates dictate what you can do. That means we can grow uninhibitedly.
Now when it comes to improving supply of the Q5 in the U.S., we have to bear in mind that suddenly we'll have a whole factory dedicated to a single product. So the overall production capacity for Audi globally of Q5 is significantly increased.
Then, we have much shorter supply lines for cars from Mexico, and so not only do we get more cars, but we get them more quickly.
As far as SUVs, what are the plans for the Q3?
We had announced previously that the Q3 is coming to the United States. The regulatory environment with regard to classifying the vehicle as a truck requires some design changes to the car, which is the reason why we're not able to introduce the car in the immediate future.
We are busy working with our designers in Ingolstadt to bring it into compliance with U.S. regulations. And we'll probably introduce that car when the European version gets its mid-life-cycle product refresh.
When is that?