Weak Dollar Could Drive Audi to Set Up U.S. Plant

The growing chasm between the euro and dollar that is making it tougher for European auto makers to earn money in the U.S. ultimately could provide the push Audi AG needs to shift some production to North America, a high-ranking executive says.

Audi, which had been exploring U.S. assembly capacity for more than a year, put any thoughts of building a new plant on hold in mid-2009 as the overall light-vehicle market collapsed and the steady climb in the brand’s sales volume abruptly came to an end.

The German auto maker has said it ultimately would need a U.S. plant to reach its annual sales goal of 200,000 units by 2018. But Audi of America Inc. head Johan de Nysschen says volume growth isn’t the only thing that could trigger a decision on local capacity.

“We set up our business model in a way that we could tolerate being an importer until the point the dollar hits €1:$1.80,” he tells Ward’s in an interview. “At $1.80, we would certainly have to look at a very high degree of local content and local manufacturing.”

Currently the exchange rate is at €1:$1.40, and barring some catastrophic event, it is unlikely to reach $1.80 any time soon. But the trend is headed in that general direction, according to some forecasts. Texas-based Financial Forecast Center LLC projects a widening in the exchange rate to E1:$1.48 by August.

De Nysschen doesn’t say whether Audi eked out a profit in the U.S. in 2009, as was expected earlier last year.

Absent a bigger dollar-euro gap, volume probably would need to reach 150,000 units to prompt new North American capacity.

Audi expects to sell 4,000 A8s in U.S. this year.

Audi sold 82,716 vehicles in the U.S. last year, and de Nysschen says he would be happy if the brand delivers more than 90,000 units in 2010.

“Even at 100,000 cars across our full model line, there is no vehicle that has the critical mass that would enable you to take the step of local production,” he says. “So our approach is to continue to grow the business in a way that incremental volume brings incremental financial contribution – until we are approaching the volume trigger point where local production makes sense.”

Most models, from the A4 to the Q5 and on up to the new A8, are or will be based on the auto maker’s Modular Longitudinal Build architecture, so it would be possible for Audi to build several models at a single plant to achieve volumes necessary to justify investment.

Despite the overall drop in sales last year, Audi of America outperformed the market overall and gained 0.1 points in light-vehicle share, and de Nysschen says he expects the momentum to continue.

“I’m much more optimistic now than a year ago,” he says, forecasting the total LV market at 11.5 million units, with the luxury sector rising 10% to 1.1 million.

A short supply entering 2010 may delay any gains for Audi until the year’s second half, de Nysschen says. Typically, the brand targets a 60-day supply of vehicles on dealer lots, but it ended the year with a 38-day inventory of cars and just 14 days’ supply of trucks, according to Ward’s data.

“Our fourth-quarter performance was way better than what had been forecast,” he says. “So we thought we would end the year with a certain amount of inventory on the ground, and it’s gone.”

Audi didn’t cut production much in 2009, despite the global market slump, de Nysschen says, so increasing output will take time as both the auto maker and its suppliers scramble to ramp up volumes.

“That’s why we can only get more production in the second half (of 2010),” he says.

Audi should get some sales help this year from the heavily re-engineered A8, a model de Nysschen says will spearhead the next phase in Audi’s U.S. strategy, which is to add more prestige to the brand.

“We see that being an important building block to move the center of gravity for the brand further up market,” he says, forecasting sales at 4,000-plus units this year.

A bolder, more provocative marketing approach and steady stream of new products has helped to raise Audi’s profile in the U.S. Showroom traffic increased 25% last year, vehicle residuals have risen two points and the return on sales for exclusive Audi dealers is running at 2.4%, a figure de Nysschen says is among the best in the industry.

In addition, Audi picked up 1.2 points of luxury-vehicle market share while taking incentive spending down 4% to $3,500 per unit, he says, citing independent data that puts Audi’s outlays at about $1,500 per car less than competitors BMW and Mercedes-Benz.

“We want to be really disciplined on our incentive spend,” de Nysschen says. “It’s been a key factor in helping us get our residuals back, and I wouldn’t want to undermine that for the sake of selling more cars.

“We’ve been down that road before. We will not do it again.”

[email protected]