After 25 years of trying, Audi finally matches its peers such as BMW, and Mercedes-Benz on product, sales and a report from investment banker Goldman Sachs shows that profits may even beat BMW. Neil Winton reports.
Some purists persist in saying that Audi is not really a proper luxury brand. Audi is really a thinly disguised mass-market Volkswagen, they say; it doesn’t have rear wheel drive; it doesn’t have the “Wow”! factor that sets apart dream machines like BMWs and Mercedes.
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According to investment banker Goldman Sachs, those days have gone.
“Audi is now a fully fledged member of the premium segment, and the most profitable too,” said Goldman Sachs in a report.
“Audi is taking share from BMW and Mercedes in sedans (saloons). When it launches its first SUV products (Q7 due 2006, Q5 due 2007), it should be able to grow further. Recent financial results suggest that, excluding hedging, it already has the highest premium brand margin. Audi is a rare success story for the beleaguered VW Group and is now a genuine competitor for BMW and Mercedes,” Goldman Sachs said.
In 2004, Audi increased its earnings before tax by 3.7 per cent to 1.49 billion euros. Sales rose 1.2 per cent to 779,441 cars. Audi CEO Martin Winterkorn has said 1 million sales should be reached by 2008.
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By GlobalDataHigher earnings in 2005
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The Audi allroad quattro concept |
“I could imagine that earnings could be a bit higher in 2005,” Audi chief financial officer Rupert Stadler said, after 2004’s results were announced in February.
Audi increased its operating margin to 5 per cent last year from 4.5 per cent the previous year. Stadler said his goal was to raise this to 8 per cent, BMW territory, before the end of the decade.
Last year, BMW’s pre-tax profit margin was 7.4 per cent.
Troubled Mercedes has seen a stunning deterioration in its profitability, mainly thanks to problems with dodgy electronics on its E class saloon. Profit margins fell from the normal 5.5 to 6 per cent in the first half of 2004 to 2.5 per cent in the 3rd quarter and 0.2 per cent in the 4th quarter. Some analysts expect that the three-pointed star will have sunk into the red in the first quarter, with losses running as high as $500 million.
Finally, after 25 years
Audi has spent around 25 years trying to force its way into the premium segment. According to Goldman Sachs, recent sales figures provide strong support for its claim to a fully fledged member of the group.
BMW’s recent sales flatter to deceive, Goldman Sachs said.
“BMW showed the greatest overall volume increase (19%) among premium brands (in January-February 2005), but its growth comes entirely from new segments 1-Series and X3. Audi appears the success story, growing organically with the A3, A4, and A6 and gaining share despite lacking an SUV. Mercedes looks to be facing real difficulties, particularly in conventional sedans like the E-class,” Goldman Sachs said.
In the first quarter of 2005, Audi sales rose 7.4 per cent in Europe, while its parent VW’s brand sales slipped 6.2 per cent.
Saloon sales under pressure
Goldman Sachs said BMW’s sales were very impressive, but calculated that over 100 per cent of the growth was generated by new vehicles in segments where BMW has not previously been present, and where profits are lower than BMW norms. It conceded that this would change when the new 3-Series comes on stream in the current quarter, but worried that all its saloon sales were under pressure.
“BMW is losing volume in its core sedan franchise. This is partly due to the 3-Series changeover, but may reflect changing consumer tastes – thankfully X3 and X5 are taking up the slack.”
“There is a risk that BMW’s slow sedan sales might be partly secular, as consumers move away from sedans and Audi’s refreshed A4 finds greater success with remaining buyers,” it said.
Massive recall didn’t help
Mercedes is in trouble, and sales declined almost 10 per cent in the first two months of 2005, with the E class down 42.5 per cent and the C class off 21.1 per cent. A massive recall of 1.3 million vehicles later in the first quarter didn’t help sentiment, neither did shortages of diesel injector parts.
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The new Audi A4 |
“Mercedes has serious problems in C and E class, it seems to be the big loser as Audi gains strength. If we strip out SUVs and the A class, Mercedes has serious volume problems in Europe,” Goldman Sachs said.
Goldman Sachs said Audi’s strength has come despite its failure to anticipate the popularity of SUVs or minivans.
Wait till it gets SUVs
“One of the laggards in anticipating this development has been Audi – which has no SUV or minivan product. Yet despite this, Audi is growing sales in Europe. This is an impressive trend given the secular headwinds.”
Audi is taking share from BMW and Mercedes and gaining critical acclaim in magazines like Auto Motor und Sport.
“We would expect Audi sales to accelerate once it has a new SUV on sale. The Q7, built on the VW Touareg platform, is due in 2006, with much of the (possibly unnecessary) off-road capability stripped out. We think this is likely to be a financial success as off-road capability is probably irrelevant for the vast majority of consumers. A Golf/A3 based SUV called Q5 is due in 2007. Such vehicles look well positioned to drive Audi’s volumes and share higher.”
Most profitable German?
All this success forces Goldman Sachs to ask the question “Is Audi Germany’s highest margin premium brand?”
“We calculate that Audi alone has operating margins of over 5 per cent, adjusted for stated hedging profits. If we reverse out hedging profits at BMW, about 1.5 billion euros in 2004 in our estimation or half of profits, Audi margins are higher than those of its German peers. Not only is Audi delivering the best organic growth of the three, it also appears to have the highest margins.”
If VW shareholders are starting to hyperventilate with excitement, Goldman Sachs brings them down to earth with a thump.
“Unfortunately, Audi’s success is more than offset by the VW brand’s problems in Europe, the U.S. and China,” Goldman concludes.
