WSJ article about Audi

[dhowitt@iddis.com]

The Wall Street Journal -- December 29, 1995

 International:  Audi Revs Up on New Models, U.S. Sales
 ---
 Unit Becomes Yardstick For Tough VW Chairman
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 By Brandon Mitchener
 Staff Reporter of The Wall Street Journal

 INGOLSTADT, Germany -- Sequestered behind a cinder-block wall
and locked doors, Audi AG engineers are kicking the tires and
inspecting the welds on the German auto maker's latest and
smallest driving machine to date, the A3.

 The compact A3 and hot-selling, mid-range A4 are part of a
new-model blitz that has caused a sudden acceleration at
Volkswagen AG's luxury division -- this time, a welcome one.
Audi went off course in the early 1990s, as Europe sank into
recession, and Audi's U.S. sales collapsed under the weight of
new Japanese competition, aging models and a lingering image
problem caused by complaints that certain Audis sometimes surged
out of control. Like VW, which owns 99% of Audi's shares, Audi
also suffered from high costs in its German supply and assembly
operations.

 But a turnaround program begun under Ferdinand Piech, now head
of the Volkswagen group, is apparently bearing fruit.

Audi's world-wide sales this year will be up 15% from a year
earlier, propelled by an almost 30% rise in Germany and a 40%
jump in the U.S. Audi is now neck-and-neck in home-market share
with German competitor Bayerische Motoren Werke AG, or BMW.
Pretax profit is expected to more than double from a year ago to
about 375 million marks ($261.5 million), or about 900 marks a
car, on revenue of about 15.5 billion marks, and analysts say
operating profit is rising even faster.

 Because many of the changes taking place at Audi were initiated
by Mr. Piech, Audi has become an unofficial yardstick for the
methods the hard-charging VW chairman is using to shape up
Europe's largest auto maker. Though clearly pleased that Audi
has reversed its slide, Mr. Piech's successor as head of Audi,
Chairman Herbert Demel, is careful not to claim victory yet.

 "We don't want to simply have had a good year," Mr. Demel said
in an interview, "but to show that it was more than an anomaly."

 As competition heats up in Germany and Audi's main export
markets, company officials say Audi still needs more efficient
production, leaner dealerships and a new, younger image.
Analysts add that Audi needs to do more to boost sales of the
costly A8, which so far has failed to take Audi's image, or
profits, upmarket, as well as make greater efforts to strengthen
the company's presencein the U.S. "So far Audi has failed to
crack the premium segment, which is where the margins are," says
Klaus-Juergen Melsner, an analyst at Deutsche Morgan Grenfell.

 The company hopes the A8, which has a higher profit margin than
its smaller cars, will account for 8%-10% of Audi's U.S. sales,
about double their share of Audi sales in Germany. Already, the
debut of the A4 in September and availability of Audi's
continuous four-wheel drive quattro transmission as an option on
its full range of models helped boost U.S. sales to about 18,000
cars this year. About half of all Audis sold in the U.S. this
year will be quattros.

 Mr. Demel says Audi's goal for the next few years in North
America is to climb back to a volume of 30,000 cars a year, well
above the 12,500 average of the past four years but still well
below the 74,000 it sold in 1985. "We don't need to sell 80,000
cars to be successful, but we need to sell more than 12,500, "
he says.

 Things haven't been the same for Audi in North America since
the company's sales peaked at 74,000 cars in 1985. Around that
time, the arrival of low-cost, high-quality Japanese luxury cars
such as Honda's Acura Legend, Toyota's Lexus and Nissan's
Infiniti began pounding all upmarket German brands, including
Audi. Audi also took a body blow from the charges that the Audi
5000 sedan was prone to sudden acceleration. The car was later
exonerated -- the problems were blamed on bad driving -- but the
damage to Audi's image and resale value was severe.

 Aside from ambitious plans for China and a new engine plant in
Hungary, Audi remains one of the most German of German auto
makers. Some 80% to 90% of an Audi's components are either
manufactured in Germany or paid for in marks.

 But the company is taking pains to streamline its development
and production process to become more competitive. The A4 was
designed in a record 27 months and takes 25-to-30 hours of labor
to build, 15%-20% less than its predecessor, the Audi 80. Mr.
Demel says the company's goal is to increase productivity 5%-7%
a year.

 Bjoern Kirchner, an analyst at Sal Oppenheim in Frankfurt, says
Audi has become an unofficial benchmark for the VW group as a
whole. Audi can break even operating at less than 60% of
capacity, while the VW group needs to operate at more than 70%
of capacity to make money. VW, which stands around 65% by
itself, "is aiming toward Audi's figure," he says.

Meanwhile, because of German accounting practices that allow
companies to funnel substantial sums into reserves in good
times, Audi's published earnings also understate its true
performance, Mr. Kirchner adds. "They're doing much better than
they let on."

 Still, Audi has its work cut out if it is to match the best of
its competitors in efficiency and image. For the latter task,
Audi hired an outsider, former Rover Group Ltd. executive Graham
Morris, to lead a marketing makeover that will include pruning
the company's costly European dealer network and boosting
world-wide advertising spending by 20%.

 Audi's image is lopsided toward "German reliability and
technological advances" at the expense of emotions, Mr. Morris
says. He wants Audi to have a " more passionate, more
humanistic" marketing focus.

 The U.S., where new ads tout the A4 as being "rad" and
"gnarly," was one of the first markets to get a look at the new
Audi. Those might not be terms commonly associated with German
engineering, but according to Mr. Morris, they' re getting
people into A4s who are five years younger on average than
Audi's traditional 50-something customers.