Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out

used audi cars

VIEWS: 244 PAGES: 4

									The Audi 5000: The Aftermath
of Sudden Acceleration

In July 1989, Audi of America published multiple advertisements in business publications, newspapers, and journals
across the United States declaring the ―case closed‖ on the issue of sudden acceleration that had severely hampered
its sales, stock values, and public relations during the preceding three years.


Company Background
Audi AG traces its history to 1909 when August Horch left his own company, A. Horch & Cie, to form a new firm
called August Horch Automobilwerke GmbH. By 1914, the plant, in Ingolstadt, Germany, was manufacturing a
range of models. In 1925, total production climbed to 1,116 vehicles. From 1912 through 1928, Audi was also
involved in the production of military vehicles for the German army.
     In 1932, because of the depression, Audi merged with Horch, Zschopauer Maschinenfabrik J. S. Rasmussen
(DKW) and the car division of Wanderer Werke to form the Auto Union AG, with Daimler-Benz holding the
majority of shares. Total production of the new company quickly rose to approximately 62,100 cars and 63,500
motorcycles.
     Another year of transition was 1969, when Volkswagenwerk AG purchased Auto Union‘s stock from Daimler-
Benz and merged the firm with the Neckarsulmer Strickmaschinenfabrik (NSU). This action brought together a
conglomeration of expertise in the manufacturing of bicycles, motorcycles, typewriters, automobiles, aircraft, and
submarine parts. The newly formed Audi NSU Auto Union AG experienced an explosive rate of expansion
throughout the 1970s.*
     Throughout the history of the company, Audi cars were known for their performance, durability, and quality.
Awards won by Audi cars include the U.S. Sports Car Club of America PRO Rally Manufacturers‘ Championship
and the championships in the Pikes Peak Hill Climb.


Entry in the United States
Auto Union GmbH had exported to the United States as early as 1940. From 1949 through 1960, Auto Union
exported to the United States a total of 5,801 vehicles. Exports climbed slowly, and by the end of 1970, the newly
formed Audi sold just under 7,770 cars through 138 dealers in the United States. A wholly owned subsidiary, Audi
of America Inc. was established on September 1, 1985, and assumed from the American subsidiary of Volkswagen
AG the functions of sales, service, advertising. merchandising, and public relations for Audi operations. By 1985,
Audi of America‘s sales reached 74,061, capturing over 35 percent of Volkswagen of America‘s total sales in the
United States. Vice President Peter Fischer of Audi of America estimated in 1985 that Audi‘s ―5000 series will be
the ‗backbone‘ of Audi‘s lineup and will represent 64 percent of Audi‘s U.S. sales in 1986.‖


Adverse Media Coverage
In March 1986, the Center for Auto Safety submitted a petition to Audi of America, requesting the recall of all 1978
through 1986 Audi 5000 models because of repeated cases of dangerous malfunction. At the beginning of November
1986, New York‘s attorney general Robert Abrams publicly asked Audi of America to stop selling Audi 5000
automobiles with automatic transmissions. Both parties claimed that hundreds of accidents had been caused by the
improper acceleration of Audi 5000s. Then, on the evening of November 23, 1986, CBS broadcast a 60 Minutes
episode with the Audi 5000 featured as one of its segments.


_______________
Source: This case was written by Michael R. Czinkota and Bao-Nga Tran based on public sources such as Automotive News and Automotive
Litigation Reporter, the videotape ―Unintended Acceleration: The Myth and the Reality,‖ Audi of America, Troy, Michigan, 1989; History of
Progress 1988, Audi AG, Ingolstadt, West Germany, 1988; interviews with executives of Audi of America and Volkswagen of America.




                                                                     1
                                  The Audi 5000: The Aftermath of Sudden Acceleration



    During this broadcast, Audi was accused before 65 million viewers of manufacturing and distributing the Audi
5000 series without warning the public of the possible danger of a phenomenon known as ―sudden acceleration.‖
Sudden acceleration was hypothesized to occur when ―the driver starts the engine and moves the shift lever from
‗park‘ into reverse or drive. The car [at times suddenly] hurtles forward or backward at great speed, with the driver
unable to stop.‖
    During the segment, CBS interviewed several drivers who claimed to have experienced the problem of
unintended sudden acceleration. One man claimed he suffered shin splints because he pressed his foot too hard on
the brake pedal. Another witness broke the car seat while fighting to brake her uncontrollable Audi. The most
dramatic account of all came from Mrs. Brodosky, whose car killed her own son when it suddenly accelerated and
pinned his body against the wall. These interviews quickly placed Audi on the defensive because the drivers were
seen as helpless victims while operating a luxury automobile promised by Audi to be reliable and safe.
    The 60 Minutes broadcast included professional input from an automotive engineer and a representative of the
American Standards Testing Bureau, who speculated on the cause of sudden acceleration. These professional
opinions were both the same: ―The idle stabilizer which keeps gas flowing to the engine may be fooled into sending
too much. This transient malfunction would totally bypass the accelerator system, leaving the driver helpless, and
would not leave any internal engine damage.‖ To test this hypothesis, CBS had an engineer demonstrate how sudden
acceleration could occur. The demonstrating driver shifted into drive with no foot on the brake or the accelerator
pedals, and the car lurched forward.


Audi’s Response
Following the CBS broadcast, Audi AG and Volkswagen of America denied the allegations, stating that sudden
acceleration results from the negligence of the drivers. Through letters to Audi dealers and owners, both Audi and
Volkswagen attempted ―not only to counteract the (60 Minutes) report, but really more to educate (consumers) as to
the issue and assure them [they] are building safe cars.‖ Audi, in addition, spent over $1 million in December 1986
placing ads in The Wall Street Journal, USA Today, and over 100 newspapers in 33 major cities, highlighting the
fact that other manufacturers such as Nissan, Mercedes-Benz, and Volvo had received similar complaints.
     By January 1987, Audi was forced to take more decisive action and recalled 25,000 of the 5000 series to install
an idle stabilizer that required the driver to place a foot on the brake pedal before shifting gears. Further, Audi
publicly denounced the CBS 60 Minutes news team for news manipulation. In their opinion, CBS was unethical in
not revealing to the public that the engineer interviewed on the program had to ―dismantle three internal pressure
relief valves, drill a hole into the transmission housing, and introduce artificial pressure from outside, pressure far
greater than could ever occur in normal operation of the vehicle‖ in order to accelerate without pressing on the gas
pedal. Audi executives believed that had this been revealed, the impact of the CBS theory would have been lessened.


The Market Response
Within a year and a half following the CBS broadcast, Audi was beset with huge financial losses and faced hundreds
of court cases from its customers and dealers.
     In the four-year period from 1985 to 1988, the company‘s sales dropped from 74,061 to 22,943, as shown in
Table 1. According to Audi AG Chairman Ferdinand Piech, the impact of falling sales resulted in a loss of $120



    Table 1
    Audi sales in the United States, 1985–1988
                                                                     Percent of Sales               Loss in Sales
    Year                        Number of Sales                     Total Import Sales               since 1985
    1985                            74,061                                 2.61                         —
    1986                            59,797                                 1.84                        19.3%
    1987                            41,322                                 1.31                        44.2
    1988                            22,943                                 0.75                        69.0




                                                          2
                                          The Audi 5000: The Aftermath of Sudden Acceleration



million in 1987 alone. In addition, Volkswagen‘s stocks, which closed on July 30, 1986, at 454.0, plummeted to a
low of 248.5 by the close of July 29, 1988. A loss of public faith and interest is reflected in decreasing resale values
of Audi 5000s in comparison to the Volvo 740 GLE and the BMW 325i 6, as highlighted in Table 2.
     Along with the financial losses, Audi of America and Volkswagen of America faced court suits for injuries
suffered due to sudden acceleration and the loss of resale car value. For example, in the case of Paul Perona et al. v.
Audi AG et al., the plaintiffs list the following points of redress:1
             •   Breach of implied warranty of merchantability under the Uniform Commercial Code
             •   Violation of Consumer Fraud and Deceptive Trade Business Practice Act
             •   Breach of express warranties under the Uniform Commercial Code
             •   Breach of implied covenant of good faith and fair dealing
             •   Willful and wanton violation of Consumer Fraud and Deceptive Trade Business Practice Act
             •   Breach of contract
     In addition, many owners filed independent suits against Audi and Volkswagen. By 1988, court fees alone were
estimated to have cost Audi over $10 million. More than $4.6 million in payments have been awarded to injured
parties throughout the United States, but Audi and Volkswagen continue to face a multitude of unsettled individual
lawsuits involving sudden acceleration.


Audi’s Repositioning
With increasingly declining sales and bulging inventories, Audi once again was forced to take drastic action. In the
spring of 1988, the firm began to offer $4,000 rebates to previous Audi owners toward the purchase of a new Audi
5000 model. In addition, to control costs, Audi of America reduced its work force by several hundred in response to
the shutdown of an Audi assembly plant in Westmoreland, Pennsylvania. Concurrently, Audi‘s parent company,
Volkswagen of America, executed four major shake-ups in Audi‘s top management.
      Audi continued to run full one- and two-page advertisements directly addressing the issue of sudden
acceleration. According to Automotive News, ―ads captioned, ‗It‘s Time We Talked‘ . . . suggest that Audi erred at
first when it decided to let the facts speak for themselves.‖2 In February 1989, Audi kicked off the advertising year




        Table 2
        New versus used car prices, 1985–1988
                                                   1985                     1986                         1987    1988
        New Prices
        Audi 5000                                $18,160                  $19,575                  $20,460      $22,850
        BMW 325i 6                                21,105                   20,455                   22,850       25,150
        Volvo 740 GLE                             18,585                   18,980                   20,610       21,850
        Used Car Wholesale Prices in 1989
        Audi 5000                        $5,400                             $7,650                 $11,175      $14,550
        BMW 325i 6                       11,300                             10,300                  16,600       24,500
        Volvo 740 GLE                    10,325                             11,000                  13,100       15,850
        Source: Official Used Car Guide (McLean, VA: National Auto Dealers Association, 1989).
        Note: Figures effective for four-door sedans with automatic transmission.




_______________
1
    American Litigation Reporter, April 7, 1987, 8, 449–457.
2
    David Versical, ―Audi Reports U.S. Loss, Beefs Up Ad Campaign,‖ Automotive News, April 4, 1988, 3.




                                                                      3
                                   The Audi 5000: The Aftermath of Sudden Acceleration



with the theme ―The Alternate Route.‖ Promotions during the year highlighted Audi‘s longer warranties and four-
wheel-drive system as standard features in its newest lines. The new marketing approach was budgeted by Audi of
America at approximately $60 million, almost twice the amount of previous years‘ promotional budgets.
     In 1989, Audi discontinued the 5000 models and introduced a new 100/200 line to divorce itself from the issues
that plagued the 5000 series. The new line represents ―a major step in Audi‘s recovery program, as it refines,
upgrades, and improves on the original 5000 series.‖ With a better-built car and longer servicing warranties, Audi
hopes its faithful clientele—as well as its own management—will encounter fewer complications and amend their
relationship. To entice previous 5000 owners to accept their new offer, Audi provided a resale guarantee, limited to
the first through fourth years of ownership, that would pay the customer the entire difference in retail trade-in values
between the Audi 5000 and the comparable 260 E Mercedes-Benz, Volvo 740, and BMW 525.


Case Closed
A March 1989 National Highway Traffic Safety Administration study concluded that sudden acceleration may occur
on a number of automobiles for a variety of reasons: ―close lateral pedal placements, similarity of pedal force
displacement, pedal travel and vertical offset, and vehicle acceleration capability that allows an error to occur before
a driver has time to take corrective action.‖ The study also explicitly stated that changes to the pedal design and
placement in future models would only reduce the number of occurrences and not eliminate them altogether.
     In the following years, Audi continued to conduct major promotional campaigns. Even though major emphasis
rested on the technology advantages of Audi, rebates still played a major role. In addition, a new three-year, no-
worry policy was offered to Audi buyers: The purchase price included all scheduled maintenance down to the
windshield wipers. Maintaining an Audi therefore only costs you the oil and gas needed to drive. Table 3 shows how
sales developed over these years.
     In spite of the major drop in sales, used car prices showed a gradual strengthening for the Audi. Table 4 shows
these prices in comparison to similar models of BMW and Volvo.




    Table 3
    Audi sales in the United States, 1989–1992
    Year                      Number of Sales             Percentage of Imports          Loss in Sales since 1998
    1989                         21,283                           .77                             7.2%
    1990                         21,106                           .86                             8.0%
    1991                         12,283                           .58                            46.5%
    1992                         14,756                           .74                            35.7%
    Source: ―1993 Market Databook,‖ Automotive News, May 26, 1993, 28.




    Table 4
    Used car prices in 1993 (average trade-in, U.S. $)
                                  1989                1990                1991              1992            1993
    Audi 100                      7,125              10,225              13,200            17,900          20,700
    BMW 325i                     10,475              13,225              16,550            20,775          24,050
    Volvo 740 GLE                10,350              12,425              15,925            17,950         18,500**
    Source: Official Used Car Guide (McLean, VA: National Auto Dealers Association, 1994).
    *940 model




                                                           4

								
To top