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					Comeback from a Near-Death Experience:
Audi of America 1992–97

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’ 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 rom 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 1991–92, 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 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. 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 worldwide,
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 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 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. 1



_______________
Source: This case was prepared by Michael R. Czinkota and Vlado Loukanov based on public sources such as Advertising Age, Los Angeles
Times, Business Week, USA Today, the New York Times, Chicago Tribune, Adweek Southeast, Medical Economics, Ward’s Auto World,
Investor’s Business Daily, Reuters Financial Service, PR Newswire, and Marketing and Media Decisions. See Audi Web sites at
http://www.audi.com and http://www.audiusa.com




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                            Comeback from a Near-Death Experience: Audi of America 1992–97



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 Volkswagen 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 1995–97.
     The A4 was to take on such tough import competition 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
1.8 T, 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 10 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 each for 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.




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                           Comeback from a Near-Death Experience: Audi of America 1992–97




    Table 1
    Manufacturer suggested retail prices (MSRPs) 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
                                                                                S600 Sedan           $132,250
    The table compares all Audi models to most BMW and Mercedes models in relevant classes. BMW’s M-3
    and the 800 series and Mercedes’ SL and CL classes are not shown. Source: Audi, BMW, and Mercedes-
    Benz.




     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 Porche’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
twenty-four-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 1995–97.
     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.




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                            Comeback from a Near-Death Experience: Audi of America 1992–97



Marketing and Advertising
A 1993 corporate study showed that Audi’s image, although rising among Audi owners, 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, because 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 Audi should do to lure customers back—in essence, to position Audi as “the
single most underrated car in the country.”
     McKinney launched its face makeover campaign in many national publications with a four-page spread 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 simple 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 positioning the 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 Unites
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, dubbed “Tracks,” featured an elderly Inuit (native of Alaska)
coaching his grandson in the ancient art of tracking caribou and bear. When he came to a car track, he picked up a bit
of snow, smelled it, and then exclaimed, “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 sped 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 customer: 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 1994–97 than Japanese imports.
      When in 1992–93 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



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                            Comeback from a Near-Death Experience: Audi of America 1992–97



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 in 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 ’90s?
4.   Will the prepaid maintenance affect the quality of services performed by Audi dealers?




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