German Car Zone

Our first encounter with Audi of America boss Johan de Nysschen couldn’t have been more uncomfortable. Here he was in 2004, fresh from Audi Japan and ready to begin his new post when I laid claim to a chair at de Nysschen’s table during an Audi-sanctioned dinner. Not more than a few minutes into the meal, the new V.P. asked those of us at the table what we as Americans thought of the Audi brand. A journalist to my left quickly piped in that Americans really knew very little of the brand other than the Unintended Acceleration debacle of ‘80s. Otherwise, the journalist concluded, he didn’t know anyone who actually owned an Audi. Welcome to America Mr. de Nysschen.

Johan de Nysschen, or “JDN” as he is referred to by his staff, took it in stride. Having begun his career in South Africa and just arrived from Japan, the executive wasn’t exactly intimate with a PR nightmare that happened long before just about everyone currently working in Auburn Hills had even applied for a job at Audi. Nevertheless, the executive kept his poise.

Turns out two of the four journalists there, including this author, owned Audis and also knew the claims had been shown to be tragic driver error by the three major car magazines at the time – no surprise… both car enthusiasts. Our table was perhaps somewhat characteristic of the market itself. Audi had less to prove to its enthusiastic owners, but faced some major work ahead on the improvement of brand image in the eye of the average consumer who is less aware of the marque and its products.

On the other hand, Audi was also just beginning an explosion of new products that continues today. Even better, JDN had doubled the Japanese business during his tenure, focusing on developing stand-alone dealerships and improving customer service by a significant margin. No surprise then that these have also been tenets in his reformulation of Audi of America.

The strategy seems to be paying off. Audi continues to climb into record territory and garner even more credibility amongst those also shopping its competition… all well and good though continued growth won’t come easy.

It seems everyone and their brother in the luxury car market is playing their A-game, while de Nysschen faces new challenges such as overseeing the complete relocation of the Audi of America offices from Michigan to Northern Virginia while learning to work with new Volkswagen Group of America boss Stephen Jacoby and new Audi AG board member in charge of the American business Peter Shwarzenbauer.

Several weeks ago, Mr. de Nysschen was kind enough to sit down and speak frankly on the state of the Audi brand, the move to Virginia, new models, motorsport and much, much more. A transcription of the conversation follows:

Fourtitude; It seems some the biggest move this year is your move to DC. The move begins in April?

Johan de Nysschen: Audi will move. We want to give ourselves a little bit more time. We have defined very clearly the core group that is moving with us. So we know which vacancies need to be filled and we really want to make sure that we select the best people and we have given ourselves more time for that transition because of that. We have the people who are not making the move on retainers with financial incentives to stay. It is possible that some of them will move on but there is a pretty handsome financial incentive to stay.



Fourtitude: Will it take until about August until the move is fully complete?

Johan de Nysschen: Yes, I think realistically you have a transition. The planning right now is exactly on track and it will probably take until August before everything is completely finished and all the vacancies are full.

Fourtitude: Does that create difficulties in trying to continue your operations?

Johan de Nysschen: Oh yes, of course. We have operational challenges. When we announced the move, we identified the people we wanted to make the move with us. Some of the people who were not invited obviously had to weigh up the financial incentive to stay versus finding an alternative job. Those who felt that the financial incentive was not very compelling made a switch. Some of them too, it stands to reason, have found alternative opportunities too. So, we have had some resignations and it creates a concentration of people who perform different functions at the same time.

We have had some operational challenges. We also have plans, not only to bring in people from the field to help support the headquarters functions, but even support teams coming from Ingolstadt on a temporary basis to help sustain the key functions.

Fourtitude: Is the new facility considerable larger?

Johan de Nysschen: No, in fact it is smaller. The company, the group is downsizing. In terms of available space for Audi, our space increases. We will be a little bit less jam packed than we are today.

Fourtitude: If I can back up a little bit. Audi completed a record sales year. I am sure there are probably some points where you are most proud and maybe some points where there are things you would still like to improve. Would you care to share any of these?

Johan de Nysschen: Yes, I would say to you that Audi is on a roll. But we are by no means where we want to be. This is also good. We’ve just set a new all-time sales record for new cars and all-time market share. We have an all-time record for our pre-owned business, all-time for our parts and accessories and all-time customer satisfaction. These are all major indicators from the operational business that things are really heading in the right direction.

We have retained a new high in terms of brand awareness, a new high in terms of the prestige connotation that people attach to the Audi brand. But there is still a significant gap in awareness between Audi and the top three luxury brands. That is the gap that we wish to close. We are accustomed to being amongst the best and that is part of our long-term strategic mission for the U.S. - to entrench the brand in the same top level as we enjoy in Europe.

Particularly for us, an area of improvement that we want to focus on is continuing to enhance the ownership experience. It is not only good enough to have a fantastic product. We also want people to have a great ownership experience in terms of the car and the augmented value that comes form the dealer organization, the service quality and the customer satisfaction area.

While we are at an all-time high for Audi, I will not be satisfied until we are number one. Until then you always have room to improve. You want to use the opportunity of the new product offensive to really leverage it to drive awareness. Our dealers always say to us, and our customers, ‘Audi is the best kept secret’. So, you have got to invest far more aggressively in market communication, above and below the line, in PR activities to help shape people's attitudes - not only awareness but also the attitude of the brand.

Fourtitude: I know you have the Super Bowl ad planned as well as some activities on the ground there. Is that one way that you go about doing that?

Johan de Nysschen: It is a good way to obviously raise awareness levels. There are 140 million people watching. We must recognize also that Audi is not a mass-market brand. We will never retain the same level of awareness among consumers as say Toyota, Chevy or whatever. But that is not our interest.

Even today, if we measure awareness across the spectrum of society, it is relatively low. But if we measure it only in the people whom we target then the gap between Audi and BMW actually is far, far closer. So I have approached marketing communication in a pragmatic way. We don’t have limitless reserves and resources and we have had to focus our marketing communication in specific markets and specific customer groups. It is less interesting for me if people are as familiar with an Audi A4 as they are with a Toyota Corolla. But, the people with the right addresses, I want them to know that Audi is an alternative luxury brand that they might consider. That will continue to be our focus.

Now the Super Bowl avenue clearly is little bit costly, for which is also true. But, all the people who we are targeting are also watching on that day. It gives an opportunity for us to make a bold statement. We are about making some bold statements.

Fourtitude: What are your activities on the ground at the Super Bowl? I understand that you are setting up an Audi forum there?

Johan de Nysschen: Yes that is right. We have actually acquired a very contemporary, modern luxury home that will be set up as the 'Home of Audi' and we will have a series of events and happenings there. It will also be the base for broadcasting on one of the lifestyle TV channels. Lifestyle is a very important part and we will also be programming events with other luxury brands. We will have joint events and parties and we think we will have the right people there. It should be very interesting.

Fourtitude: Speaking of other events. You mentioned the experience of owning an Audi. How is the Audi Driving Experience going? Is that starting to take effect that you can notice in either sales or awareness?

Johan de Nysschen: I think that it is too early to say that is impacting sales. What it is doing for people who go through the driving experience, they walk away as ambassadors for the brand because they are overwhelmed by the technical and dynamic ability of the cars. So we want to continue to make it a destination in itself.

There is a reason we chose that location, because it is a destination in and of itself and people could conceivably plan a vacation to the wine country, a beautiful part of California, and incorporate the Audi Driving Experience as part of their trip. In doing so, we aim at not only existing owners but people who want to get to know more about Audi, and what a better way to introduce people to the brand than to put them in a car and let them experience its full potential.

Fourtitude: If I may move along to diesel, obviously you are showing the 3.0 TDI here to day. How far out is that? When are you expecting that in this market?



Johan de Nysschen: We actually still have to make a decision. We could introduce it in the fourth quarter of this year. However we really need to match the cadence of our new product launches. The A4 is going to hit this market in October. We also have the Q5 and there is just a limit to how much we can all pile into the same period. Ideally, you want to stretch the time in which you have news. If you concentrate it into one period, it is not so smart, apart from the fact that it creates an enormous demand on our people. One option we are looking at with the Q7 is to delay the introduction to early next year, which would allow us to launch it as a model year 2010 and that has some benefits, for example, in terms of residual value development. So that is an option that we are exploring, but we have not made a final decision yet.

Fourtitude: I have heard that thought on residuals before. Is that so you don’t have a few late in a particular model year? Does that hurt residuals?

Johan de Nysschen: Over 50% of our vehicles are leased. The automotive lease guide people really set the basis for what the finance companies will accept as the lease residual. The deeper into the model year that you launch a car, the lower your kickoff point is. It usually drops from the launch right through the change in the model year and then comes up again. It is actually financially advantageous to launch the new model year as early as you can, that would be the reason why we would be considering a launch in early 2010 rather than in the middle of the model year cycle.

Fourtitude: Do you have to launch it after the first of the year?

Johan de Nysschen: Yes. The cars actually have to be built after the first of the year.

Fourtitude: Further on TDI, does a production version of the R8 V12 TDI make sense for the American market?

Johan de Nysschen: You know, firstly I should say what our motivation is with this car. We obviously are preparing customers for recognizing Audi as a force and the leader in diesel technology, but we also have to break the preconceived ideas that people have about diesel - being slow, noisy, smelly, and all that stuff.

That is also the inspiration of our racing program. If there is anything that is going to break the mold around what diesel represents,it is winning races in a diesel car. We are, after all.

The R8 V12 TDI is also a performance car. What a better way to capture attention for diesel than to showcase it with such a design, using that to really communicate diesel technology. You have tremendous performance with good fuel consumption that is very compelling, plus low emissions.

The R8 is hot. People are interested in it. They are interested in reading about it and that is the reason why we created this concept. Leading on from that, is this the kind of car that we want to commercialize? We haven’t made a final decision. What I will tell you is that such a car would be very much in keeping with Audi’s spirit of doing the unexpected. A thousand Newton-meters of torque is fantastic and, put into a package of something like this, that would be really unique.

On the other hand, we also have to be a little pragmatic. The R8 is a low volume car. It is hand-built. The production capacity is finite. We have already committed to an additional engine derivative, an additional body derivative and the question that really needs to be answered is, for such a low volume car do you really need three different engines? Two different transmissions for each car?

Fourtitude: Is that perhaps then something that you cycle through?

Johan de Nysschen: Well, you could look at the life cycle of the car. It might be something that you do towards the end of a life cycle. Still, the production complexity and the development cost of what is really a unique application given the available volume might not feasible.

Fourtitude: What is the install rate of R-Tronic install rate is on the R8?

Johan de Nysschen: The installation rate is probably around 80%.

Fourtitude: Is it really? Eight-zero?

Johan de Nysschen: Yes.

Fourtitude: You mentioned racing earlier. Has anything been finalized for the American Le Mans Series this year?

Johan de Nysschen: We are in discussion with IMSA people about regulations. The ACO, which is the international governing body for endurance racing, has defined the rules for the forthcoming season and as far as the separation LMP2 prototypes versus LPM1, particularly diesel powered cars, they have promulgated additional weight for the LMP2s and reduction in fuel capacity. It was felt that last year the rules had gone a little too extreme in holding back the diesels. So that is why they kind of had a compromise of the rules that applied in '06 versus '07. For these reasons, IMSA have chosen their own version, and they have not gone as far as the ACO in defining what the gap will come to. We are not satisfied that the playing field is entirely level and so for that reason we have not committed to race.

Fourtitude: I know in the end of last season Corvette found themselves in a similar situation as you all, not from a rules standpoint but simply being the only real factory team in their given class. I caught a quote by one of their team leaders saying that they are going to continue again this year. The main reason was not winning against anybody because there is no one to compete against, but more so simply the amount of enthusiasm from Corvette owners for the racing team. Is that a factor at all when you consider the ALMS?

Johan de Nysschen: Yes, we consider that. I will tell you that it would be a shame if one considers how long Audi has been the backbone of the ALMS Series and the extent to which we have supported it through thick and thin, that the environment in which we have to race becomes so unfriendly as to make it impossible for us to do so. We obviously would like to continue this form of racing. It is an important part of market communication. It serves as a platform for us to launch our diesel communication strategy.

But also you have to understand that there is very little benefit to be gained from investing the millions of dollars that it takes for this kind of racing if, for example, the difference in fuel capacity between LMP2 cars and LMP1 diesels are such a nature that a diesel has to have more frequent pit stops. That completely negates one of the advantages of diesel that we are trying to communicate - lower fuel consumption. We do have lower fuel consumption but the average observer just sees the Audis in the pits all the time. Therefore, in his mind it uses more fuel. So it actually begins to work against us and that is why. We are not just trying to be obstructionists; it is an important market consideration. We are not in this business to be philanthropists. We want to also have competitive and close racing. We actually welcome it.

The LMP2 class was conceived for private teams. The LMP1 class was conceived for manufacturers. If you are going to have top class manufacturers engaging themselves in the LMP2 class, then you need to make sure that the rules are set up in such a way to clearly differentiate the classes. LMP1 is the premiere class; it should win.

Fourtitude: Is it encouraging at all seeing Peugeot coming over here to race a bit?

Johan de Nysschen: We want the ALMS form of racing to be stirring and successful. We have invested in it. Competition is what makes it interesting. The year before last at the awards banquet for the series, I laid out the challenge personally to the other manufacturers, "Come on. LMP1 is the premiere class. There are a lot of powerful companies here that are competing in lesser classes. Take us on in the top class". That is the way that it should be. I repeat that invitation.

Fourtitude: Do you think that any of the current players in the ALMS will take you up on that?

Johan de Nysschen: It would seem sad if Peugeot, who doesn't even market in this country, would be the sole brand to take it up. I guess you should ask that question to my counterparts.

Fourtitude: Fair enough. With the exception of the pit stop situation, does ALMS, or rather the R10 program, become more important as the 3.0 TDI nears market?



Johan de Nysschen: Yes it is important. I want to reiterate. We are not even asking the ALMS people to fully accept, this year, the ACO rules. We are willing to compromise on the weight and the fuel capacity. But we want to compromise at 50%, not at 75%.

At the moment, what is separating us and the ALMS people from agreement is five liters of fuel capacity for those Porsches. You might say that five liters doesn’t seem like a lot, but when you are going into the last three laps of a race and Audi has to pit for fuel and Porsche doesn’t, it is the difference between winning and losing. It is an important issue for us. For next year, things have indicated that they will fully endorse the ACO regulations so it is not a question. For us, given that we may only launch the 3.0 liter TDI next year, it might well be then that we take a hiatus this year, not compete and come back when there is a more even playing field.

Fourtitude: If I may ask you a little about new models… you were alluding to the Q5. What is the plan for this year as far as new models?

Johan de Nysschen: Our big news this year is of course the new A4. We will be introducing the new A4s, I think customer deliveries start around October 2008. The current car continues, which by the way we have configured in a way that is very attractive. The S-line package is more of the standard now - really nice content in the cars. We think they really offer a compelling value.

Other news will be the expansion of the TTS. We will have the addition of the A3 2.0 liter quattro. The TT will also be available with quattro and a four cylinder engine. So for both A3 and TT, we have the addition of quattro with a combination of a four cylinder.

Fourtitude: Either of those have manual transmissions?

Johan de Nysschen: The S tronic transmission will be standard in both cars.

We also have the product refreshing of the A6, which is really just a model year change. But, we are going to reconfigure the range somewhat to reduce complexity and that will keep us busy for this year.

Fourtitude: Will Q5 or anything with your hybrid drivetrain hit this year? I understand that the hybrid was specifically developed for America?

Johan de Nysschen: Hybrid is the most likely to be first applied in the Q7, Since multiple concepts were shown in Frankfurt 2005 with the V8 4.2 FSI gasoline engine, and then most recently with the 3.6 FSI V6 engine.

Fourtitude: Potentially more?

Johan de Nysschen: Potentially.

Fourtitude: Is the TTS DSG only or will that have a manual?

Johan de Nysschen: We have not finally decided that. We have to look at product complexity. If you have multiple transmissions available, it kind of means that the right car isn’t at the dealer. So we still have to fine tune. My personal rule, even though I am a fan of manual transmissions myself, DSG is actually such a compelling offer that presents more than the best of both worlds in terms of rational thinking.

Fourtitude: I personally like DSG. I think it is great and rationally understand it. But my car has a manual transmission. I know our readers aren’t exactly… they tend to be more on the enthusiast side naturally.

Johan de Nysschen: The last time I mentioned only DSG, I got so much hate mail that I was in fear of my life.

Fourtitude: Hopefully it wasn’t from our readers. Somebody else's maybe.

(Laughs)

The only reason I ask is because, when we ran the TTS news of DSG only, it seemed to be split amongst people who wanted the manual transmission and people who were fine with the DSG, that would take manual if they could but it’s not a deal-breaker.

Johan de Nysschen: The fact remains, if they were to do a back-to-back acceleration, DSG will win every time. If you are a performance enthusiast; people pay thousands of dollars for micro-improvements to the performance of their cars.

Fourtitude: It is funny. I see your point, and at the same time I see cars that came out this year like the GT-R and the Evo that push it. DSG is technically superior, but many people still prefer the manual. I don’t know if it is a factor of people who grew up with it and it’s a generational thing… and maybe eventually people won't care so much, but for now there are definitely those who want it… at least in performance cars.

Johan de Nysschen: Yes you are right, but we have to bear in mind the total market. If there is more market available. If we can choose any one transmission, choose the one that offers the most volume.


On the Q5…

Johan de Nysschen: The Q5 will be uniquely positioned to capitalize on that market wave. Q5 will become our second volume car. We will then have three high volume cars in our line-up with A4, Q7, and Q5.

Fourtitude: Where are Q7 sales now?

Johan de Nysschen: We were about 20,000 units last year.

Fourtitude: Is that about 20% of sales?

Johan de Nysschen: It is a bit higher than that. It is about 25%.

Fourtitude: Next year… 100,000 plus?

Johan de Nysschen: You know, we have to bear in mind the adverse economic conditions we are going to face. It is no good chasing volume when you have to pull in so many incentives on the car. We want organic growth. We want to maintain a very narrow path between profitability and volume. Our dealers need volume growth because we are asking them to invest and we want to expand our customer base, but not at any price. I expect that we will set another record, but 100,000 is not necessarily the number. It is going to e tough. We have A4 to run out the rest of the year. Next year will be a great year. We will have the combination of new A4, Q5 and diesel. This year is kind of maintaining our position and making sure we do not lose ground.

Fourtitude: You mentioned that you attack markets, market by market. Of course Miami and LA have worked well. What are the next frontiers? I would assume DC is a focal point?

Johan de Nysschen: DC is obviously going to become more interesting for us given that is where our home is. We certainly will be putting some emphasis on developing the DC market. It isn’t anywhere near its potential and, if you look at the share we have there, it is lower than the average that we have in most other important cities. So we will be working very closely with our dealers to enhance the quality of our representation there.

Fourtitude: Any other markets?

Johan de Nysschen: We are going to continue our focus with the kind of growth from the Northeast, the LA area, California, and Miami. Chicago is also important. It is an important epicenter for the Midwest and a lot of opinions are spread across the country from there, so that will also be an area that will fall into out planning.

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