Audi of America President Scott Keogh is presiding over a brand with momentum, with U.S. sales up 16 percent through April and a batch of new vehicles launched or on tap.
Keogh, 44, became president of Audi of America in June, a promotion from chief marketing officer. He spoke to Enterprise Editor Dave Guilford at the New York auto show, where Audi previewed the 2015 A3 sedan scheduled to arrive early next year.
Q: Could the Q5 be your best-seller, instead of the A4?
A: It's neck-and-neck. It is very, very close. But I think this is what you see in the marketplace. You see the strengthening power of SUVs. We've had a lot of pent-up demand for SUVs because we were a little late to the SUV market.
Does that change the personality of Audi?
I don't think so. If you look at the core identity of Audi, in my opinion, it's always been anchored around quattro and it's always been anchored around what I call a lifestyle brand, a brand that does things, not a brand that looks like it might do things or a brand that just looks to sit still. We've always been an active brand.
Are you getting any sense that the European recession might slow product development at Audi?
I'm quite glad you raised that. Audi has gone on the record and said we're investing $17 billion over the next five years. So this is one of the most aggressive development budgets in the industry, period. I think that has always been the secret sauce to Audi.
Just to give an example, look at this year: TDI, A8, Q5, A7, A6, all-new RS7, R8, all-new RS5 cabriolet and the SQ5. Next year, all-new A3 sedan, S3 sedan, all-new Q3 SUV -- three entirely new cars, all coming next year. So our portfolio is loaded. This all comes down to that investment.
In the past you have said that because you're doing well in the United States, executives in Germany are much more inclined to send you vehicles.
I think a good example [is] the A3 sedan. If you look at the A3 historically, this is now its third generation. That car in Europe started as a three-door hatch, and they added a five-door sportback. Phenomenal success in Europe, but that's always going to be a niche car here. But they simply made and designed a car for us, which was this sedan on the A3 platform -- something we'd asked them for, something we'd been working with them on for five years now.
The thing I want to press here, because I think it's important for Audi, is that a lot of people get distracted. They say, "Oh, Audi has a tight supply of cars."
But that's right, isn't it?
Yeah, and that sort of becomes the headline. I think what you have to look at is the inherent, fundamental business model. We've changed dealership behavior, and a little bit of consumer behavior, with what we're doing at Audi.
The historical model was a lot of cars, store that inventory in dealerships. The dealer has to pay floorplanning, so he has a high expense structure on all those cars. The consumer then comes in and says, "Wow, that's a lot of cars there." You discount the car, and away you go.
You have higher costs and you don't hold pricing power when you hold high inventory. So we went to our dealers and we said, "Let's turn these cars fast. Turn 'em, turn 'em, turn 'em." So we're staring at what we do now. We have dealers that are turning cars twice a month. They're going through their entire inventory twice a month.
So you're getting these turn rates that are extremely fast. Why is that a good thing?
It's a good thing because dealer profitability goes up because you're not paying the rent, paying the floorplanning on these things. What happens then is you take all of that incentive game and all the discounting and all that stuff out. What we have now is low supply, extremely fast turn rate, extremely low incentives, and all that equals profitability. This is a crucial, crucial thing.
Does that kind of operation require dealers to change the way they run the dealership? Did you have to do anything to support or nurture that?
The answer's yes. I just think it was a lot of education and a lot of trust, because in many regards dealers like to have that comfort factor of having a lot of inventory and the opportunities that come with that.
But to me the little dynamic change is that a lot of people, business executives in the business, say, "Put retail pressure on the dealer." And the definition of retail pressure is stack up more cars to get the dealer more concerned so he'll sell those cars. Translation: Discount the bloody cars so I can stuff you with more. And that's just not a way to go.
What we do is the complete opposite. What we do is we put consumer retail demand pressure on the dealership, because we get consumers coming in begging for the cars, wanting the cars. Then we get the thing heading in the right direction.
Are there any other groups you think you could do better with?
There are two things we could do better with. I think we could do a better job with women, and I think we could do a better job with diversity. We do perfectly fine today, but we're not industry-leading. We're industry-leading compared to our luxury competitors. And I think that's something we will need to continue to work on.
Matrix-beam headlights -- you have a discussion with the National Highway Traffic Safety Administration going on about that. How important are they? Do you think you'll get them on the cars?
I think they're very important, and I am an eternal optimist. I think a new technology will always find a way. I think even the government can't stop good technology.
What about the small luxury segment in general -- you have the A3, A4, Q5. Where do you see that going? Is that your young-person entry portal?
Specifically I'm going to zero in on the A3, why we think that's a big segment opportunity. The simplest way of looking at it is, if you look at what used to be the entry segment, it used to be the A4, 3 series or the 190/C class. What's happened is that buyer has gotten older, that demographic has changed a little bit, and what happened is the car followed the demographic. Basically all of those cars got bigger, more technology and more expensive. You look at today's 3 series. It's basically the size of the 5 series two generations ago. They've all gotten bigger.
What does that leave for Audi?
A massive opportunity for a smaller, more compact sedan. This A3 that we showed is sized roughly where the A4 was three generations ago. It's a price point around $30,000 that we feel is very open. If you look at what Polk and the guys are saying, they're saying this segment is roughly 48,000 cars today, ballpark. It'll grow up to nearly 200,000 units in a few years. This is going to be the next battleground, if you will.
Can that segment be profitable?
The other thing that's crucial is, what brand can execute this thing? The struggle for luxury manufacturers has been, "How do I make money on an entry car?" If you look at what we're able to do, you take our MQB platform, the group small car platform, we build nearly 4.5 million cars a year off that platform. With that economy of scale, what does then Audi do? We load the car to the gills with technology, innovation, craftsmanship. I think what you're going to see from our competitors is a corner-cutting car because they don't have that scale and efficiency.
I think there's a myth that says this segment exists because of the price point. I think the segment exists because there's a customer that wants a great car and wants a great car this size. That's a very different philosophy to go into the thing.
With the recession in Europe, will you get more cars shipped this way?
This year we will get more cars, which is why we’ll break another sales record this year. We’ve gone on record saying we’ll do 150,000-plus units this year.
