Comeback from a Near-Death Experience

  Near-Death Experience:

    Audi of America

   1992–1997

  In the mid-1980s, Audi was one of the American auto industry’s most attractive franchises, selling more vehicles than BMW. Its cars were stylish and technologically sophisticated, especially the Quattro all-wheel-drive models. Negative media coverage suddenly reversed this trend. A report on CBS’s newsmagazine 60 Minutes claimed that Audi’s hot-selling 5000 sedan could unexpectedly accelerate out of control. Ultimately, government safety agencies in the United States and Germany cleared the 5000, but Audi of America could not recover from the bad publicity and its own mishandling of the situation, and its sales fell precipitously.

The Bad Times Continue

In the beginning of the 1990s, most news coverage of Audi still started with the “unintended acceleration” story, although most writers acknowledged that the company was officially exonerated. However, the safety issue was not the only problem Audi faced. Audi’s quality was seen as lower than the industry average, and repairs were costly. Some dealers lost interest in the slow-selling cars and dropped the Audi franchise. The public perception was that Audi’s products were underpowered and overpriced. Some of Audi’s troubles were self-inflicted. The company insisted on maintaining its high prices, even though the cars no longer carried a premium image. Audi’s Quattro four-wheel-drive system, unique in the luxury passenger class, was available only in the top-of-the-line models. In addition, automotive analysts insisted that Audi of America lacked the marketing muscle it needed to revitalize its image in the United States.

In 1991–1992, Audi offered a new and simplified vehicle lineup, aimed at materializing the company’s claim that it offered “German engineering at Japanese prices.” What had been the 80/90 series in the smaller-car lineup was now simply the 90; the 100/200 series was now the 100 midsize sedan plus an S4 performance version; at the top was the V8 sedan. (The original 90 and 100 lines had replaced the 5000 series in 1988, offering better overall quality at lower prices.) The new 90CS carried a sticker price of about $25,000, or $2,000 less than the comparable BMW 325i. The all-wheel-drive 90CS Quattro Sport was only available with a five-speed manual transmission.

At the end of 1993, Audi again drew attention to the brand with the introduction of the new Cabriolet and a new station wagon. The Cabriolet was likely to attract new customers because of its stylish design; the wagon offered minivan customers a practical and well-designed alternative. To counter the image of low reliability and high maintenance costs, Audi of America started offering the most extensive warranty in the luxury class, featuring free routine maintenance on all new Audis for three years. The company pioneered the short-term lease, which was marketed as “Audi’s three-year test-drive.”

U.S. sales remained disappointing, however. In 1991, when Audi sold a record 448,000 vehicles world-wide, Audi of America sold only 12,283 cars, or 42 percent less than in 1990, and 83 percent less than the 1985 peak. In 1992, sales rebounded to 14,756 cars, but fell again the following year to 12,943. On the other hand, Volkswagen, the parent company, as a whole remained the country’s top-selling European importer.

Audi of America appeared to be at a dead end, and the rumor that Volkswagen was going to pull the brand from the U.S. market seemed well-grounded. However, VW’s new chairman, Ferdinand Piech, insisted that “if you lose America, you lose the world.” Gerd Klauss, the then-new vice president in charge of Audi of America at Volkswagen of America, enjoyed the full support of the parent’s management during those hard times. Chairman Piech, whose previous job was CEO of Audi, was facing similar issues globally at Volkswagen. VW was still financially sound, but without a deep-cutting reorganization its plans to become a major global competitor could be jeopardized.

A New Approach

In 1993, Piech outlined a plan for sweeping reforms, including a “lean manufacturing program” borrowed from the Japanese and a speedup of new-car development. Compared to the Japanese, VW was estimated to take twice as much time to develop a car, and its assembly lines employed four times the amount of labor. Concurrently, Piech started, a multibillion-dollar spending program to finance corporate growth in Europe and North America. In the spring of 1993, a series of management changes were announced at both Volkwagen of America and Audi of America. Klauss, the new chief executive of Audi, came from Mercedes-Benz of North America where he had been responsible for developing and coordinating the overall corporate strategy as well as the strategic positioning within the parent company’s worldwide business. Audi of America also saw new executives appointed to the positions of General Service Manager, Controller, and Director of Marketing and Product Planning. The latter, Ken Moriarty, had served as a senior marketing and promotions manager at Mercedes-Benz of North America.

Audi’s new philosophy reflected what company officials called the three “Ps”—lower prices, an emphasis on higher performance, and a range of new products. Klauss realized two important facts about the Audi brand on the U.S. market: first, the company could not support a price positioning similar to BMW and Mercedes, and second, it was not putting sufficient marketing effort behind the benefits of the Quattro four-wheel-drive system.

Competitive Positioning

Audi began its new strategy by slashing the prices of its 1995 model year cars on the average by several thousand dollars. (At the same time, the stronger yen began driving up prices on Japanese luxury imports.) Audi also strengthened the performance of its automobiles by introducing a range of more powerful engines. Essential in the brand’s repositioning, according to marketing director Moriarty, was the new emphasis on all-wheel drive. To make the Quattro more accessible to a wider range of customers, Audi dropped it as standard equipment on the high-end models and offered it as a $1,500 option on its entire product line. The move reduced the effective transaction price of an average Audi car with the system by $5,000. Within one year, the percentage of buyers ordering the Quattro jumped from 2 percent to 50 percent. This pricing strategy provided some momentum for Audi so it could add a third “P” to performance and pricing with the introduction of the all-new A line of products in 1995–1997.

The A4 was to take on such tough import competitors as the Mercedes C-Class, BMW’s 3-series, and the Lexus ES300. Audi officials admitted they faced a challenge in attempting to seize share from the better-established nameplates. However, they hoped the new compact sedan would win over buyers with its radically new design and a blend of features, including a new five-speed automatic transmission and a revised four-wheel-drive system. The new 1.8-liter Turbo engine won several “ten best engines of the year” awards. With a base price at about $23,000, the A4 1.8T, introduced in 1996, became the lowest priced luxury sedan sold in the United States (see Table 1). The A4, with the more powerful 2.8-liter, six-cylinder engine, had been launched the previous year. Audi was luring a new generation of buyers, many of them unaware of the problems the car manufacturer faced ten years earlier. As one automotive analyst on Wall Street put it, “the passage of time has also helped. People have forgotten about the ‘unintended acceleration’ scare.” The aggressive pricing and bold new design of the A4 made it a big hit throughout North America, especially in areas where the company had never been very strong, such as Southern California.

A Product Breakthrough

The true revolutionary newcomer, however, was the A8, the all-aluminum challenge to the BMW 7-series and the Mercedes S-Class. The A8 was about one-third lighter than comparable steel units and was the first car in the world to offer six airbags—two for each the driver and the front-seat passenger (front and side impact) and one for each rear-seat passenger. The lighter car offered better fuel economy, livelier engine power, and more responsiveness because there was less mass to shift. Audi had achieved lightness without sacrificing strength, rigidity, or crash performance. One automotive writer called the A8 a “rolling testbed for technology.” The downside for customers was that aluminum frame repairs and insurance policies were more expensive. Audi’s new flagship, which replaced the previous V8 saloon, was also priced significantly lower than its German competitors.

Audi kept surprising its customers and the industry with continuous innovation. When the redesigned A6 sedan came to market in the fall of 1997, industry experts predicted it would duplicate the success of the A4. The A6 featured striking design, a longer wheelbase, and substantial improvements in technology, safety, and equipment levels, including a five-speed automatic transmission with Porsche’s “Tiptronic” technology, which allowed the driver to choose between automatic and manual mode. The new luxury touring car introduced a new interior concept with three different environments called “atmospheres,” which customers could choose from at no extra cost. The A6 was aggressively positioned in the $35,000 price range and compared very favorably to the BMW 528i, which started at around $40,000.

Customer Satisfaction

All cars in the A line came standard with the “Audi Advantage” warranty package, including the luxury market’s customary three-year/50,000 mile limited warranty, ten-year limited warranty against corrosion perforation, and 24-hour roadside assistance for three years. The three-year/50,000 miles free scheduled maintenance, however, continued to distinguish Audi from other luxury imports. This feature significantly improved customer satisfaction with dealers, a longtime weak point for Audi. Customer satisfaction rates outranked those of BMW and Mercedes in 1995–1997.

In October 1997, the company established Audi Financial Services (AFS), a division of VW Credit, Inc., to serve Audi customers and the 270 dealers throughout the United States. By establishing the new division, corporate management was aiming at better customer satisfaction and higher customer retention rates. A 1997 Consumer Satisfaction Study by J.D. Power and Associates had found that customer retention is 20 percent higher when financing is placed with a captive provider, compared to when financing is placed with a bank.

Marketing and Advertising

A 1993 corporate study showed that, while rising among Audi owners, Audi’s image continued to worsen among U.S. consumers overall. The company fired its longtime advertising agency, DDB Needham, and hired McKinney & Silver to take over the $30 million account. One Audi dealer characterized DDB Needham’s work as inconsistent, but added that the blame lay with both the agency and the marketer. Ending the relationship with DDB was a difficult decision for Gerd Klauss, the new chief executive of Audi of America, since the agency was handling VW’s and Audi’s global accounts. According to some accounts, McKinney & Silver won the account because it convinced company officials that it knew what the Audi should do to lure customers back—in essence, to position Audi as “the single most underrated car in the

McKinney launched its face makeover campaign with a four-page spread in many national publications titled, “What Is Audi.” Rather than focusing on image, as previous advertising did (DDB’s last campaign was carried under the slogan “Take Control”), new ads touted product attributes and value and claimed that Audi gives customers more—for less. An ad by DDB Needham, “Welcome to the ’90s,” featured a sophisticated-looking working mother. She takes her kids to school, goes to work, and has an exciting nightlife—all on jazzy background music. The new McKinney ad contained a simply laundry list of safety and performance features, including “the safety and traction of the Quattro all-wheel drive [and] child safety seat locks.” Unusual for the luxury category, some ads even mentioned rivals BMW and Mercedes and pointed out that the Audi offered better value.

“We are ppositioning tthe A-6 midsize sedan as excellent German engineering for a more affordable price.” said McKinney’s Cameron McNaughton. The 1996 campaign for the A4 sedan, in the words of Ken Moriarty, the marketing director for Audi of America, used more of a human touch. With its A8 luxury sedan, Audi pioneered lending cars to Hollywood celebrities. The company gave free loaners to two dozen entertainment personalities “with active social lives,” including Jay Leno, Jerry Seinfeld, and Quincy Jones. “They are extroverted movers and shakers who go out a lot,” Moriarty said. “And when they do, they take the car with them.” (Seinfeld did actually end up buying an A8.) Following a long sponsoring tradition in Europe, Audi began contributing to the arts in the United States in 1996, when it sponsored the Three Tenors Concert at Giant Stadium. The following year, the company contributed $100,000 to the San Diego opera.

As demand for luxury sport-utility vehicles soared in the mid-1990s, Audi’s marketing strengthened its emphasis on the benefits of the Quattro four-wheel-drive system. In 1996, Audi launched a $10 million TV and print advertising campaign based on the “un-SUV” theme. One spot showed a woman struggling to climb down from a towering SUV as another woman drove up in an A6 Quattro wagon and easily got out. The announcer claimed that the Audi is also easy to get in, obviously referring to the price difference with luxury SUVs, such as Lexus and Lincoln-Mercury. The Quattro ad for the 1998 model year, dubbed “Tracks,” features an elderly Inuit (native of Alaska) coaching his grandson in the ancient art of tracking caribou and bear. When he comes to a car track, he picks up a bit of snow, smells it and then exclaims, “Quattro.” The A6 spot claimed that the model could not be compared to other cars like “apples to apples” because “the A6 is not an apple.” The car then speeds up through a discord chorus of apples.

The Market’s Response

Audi’s U.S. sales went up by 44 percent in 1995, up again by 52 percent in 1996, and up by 33 percent in the first half of 1997. With these increases, Audi achieved the fastest growth of any brand in the luxury passenger-car market. Sales were so brisk that dealers had to ask customers to wait for weeks and sometimes months to fulfill orders. About half of new Audi buyers had previously owned Japanese brands. Still, the 27,400 vehicles sold in 1996 represented a little more than one-third of the 1985 peak level.

The company hoped that this level would be eclipsed by the year 2000. The A-line clearly identified what Audi represented to the consumer: a provider of boldly styled performance and cars that offer substantial value. With consumer tastes evolving in the direction of its renovated product portfolio, Audi appeared poised for success in the U.S. market. Audi growth reflected in part the gains achieved by European luxury imports in the mid-1990s, largely at the expense of the Japanese. The resurgence of the former came as they lowered costs and prices, improved customer service and introduced stylish products with more features that affluent Americans wanted. On the average, European luxury car sales grew about 50 percent faster in 1994–1997 than Japanese imports.

When in 1992–1993 both BMW and Mercedes-Benz announced they were going to open production lines in the United States, Gerd Klauss declared that Audi would follow suit. One of the Audi board members reasoned in the fall of 1995, after the German competitors had built their U.S. plants, that the company “needed to be involved in a dollar base” in order to offset the strong D-mark. Another senior executive noted in early 1996 that a dollar base did not necessarily mean producing in the United States. Gerd Klauss insisted that the company needed a U.S. plant to produce cars geared specifically to the American customers, more interested in safety and comfort than speed like the Germans. If the Audi board said “yes,” such a huge investment—likely to top $500 million—had to be approved by Volkswagen. In the spring of 1997, the company leadership was considering possible plant locations in the Sunbelt region of the United States.

Questions For discussion

1. What were the problems in the beginning of the ’90s that kept Audi of America from regaining its market position of the mid-1980s?

2. How did the new management reposition the company on the U.S. market after 1993 and why?

3. What are the major factors that contributed to Audi’s increasing sales in the second half of the 1990s?

4. Will the prepaid maintenance affect the quality of services performed by Audi dealers?
Table 1

Manufacturer Suggested Retail Prices (MSRP) for the 1998 Model Year

Audi MSRP BMW MSRP Mercedes MSRP

318ti Coupe $21,960

A4 1.8T $23,790 318i Sedan $26,720

323is Coupe $29,270 C230 Sedan $30,450

A4 2.8 $28,390 328i Sedan $33,670 C280 Sedan $35,400

328is Coupe $33,770

A4 Avant $30,465

Cabriolet $34,600 323i Convertible $35,270 SLK230 $39,700

328i Convertible $42,070 CLK320 $39,850

A6 $33,750 528i Sedan $39,470 E300 TD Sedan $41,800

540i (automatic) $51,070 E320 Sedan $45,500

A6 Wagon $34,600 E320 Wagon $46,500

A8 3.7 $57,400 S320 Sedan $64,000

740i Sedan $62,070

A8 4.2 $65,000 740iL Sedan $66,070 S420 Sedan $73,900

750iL Sedan $92,100 S500 Sedan $87,500