Audi, VW Must Share U.S. Factory

Audi (NSUG) plans to sell 200,000 cars and sport-utility vehicles a year in the U.S., and is getting more serious about manufacturing vehicles there. But to do so, it and parent company Volkswagen (VOWG) must work together.

Audi Chief Executive Officer Rupert Stadler said at Audi's annual meeting on May 7 that the company would benefit "tremendously" from a U.S. production plant. In an interview with BusinessWeek [BusinessWeek.com, 1/16/08] last January, Stadler said, "It's getting harder to see a way for us to reach our goals in the U.S. without our own facility, but it is a difficult problem to solve."

As it has been minor player in the North American auto market for as much as a decade, Audi's desire for U.S. manufacturing is understandable. VW and Audi profits are being hammered by a weakening U.S. dollar. Both divisions of VW are intent on increasing their business in the U.S. VW has an audacious goal of selling 800,000 vehicles in North America by 2018. Audi sold 93,506 vehicles last year. Its problem is that even if it built all of its vehicles in the U.S. [which is not feasible] it does not have enough sales volume to justify a plant of its own.

Very Little Platform-Sharing
Volkswagen's other luxury marques include Bentley, Bugatti, and Lamborghini. And Audi has made some curious product decisions in recent years that will make it difficult for it to share much production with VW, which has already decided to build a U.S. factory and is near a decision on a building site. Audi used to build the Audi TT and A4 on the same vehicle platform as the VW Jetta, Golf -- sold as the Rabbit in the U.S. -- and shared a platform with the New Beetle.

But the two companies have developed their own unique engineering platforms in recent years and plan to continue that trend. In the coming years, the only Audi vehicle known to be sharing a platform with VW is the forthcoming Q5 SUV.

The clearest road to VW and Audi building vehicles together in a single plant would be if the VW plant were building VW Passats and Passat-based vehicles, since the Q5 is to be built on the same platform, and a second Audi derivative could be developed to fill out the capacity of a new plant.

Pitfalls of U.S. Production
As much as the German automaker needs U.S. production and U.S.-sourced parts to hold prices and costs down, that road is not without pitfalls. VW stumbled badly when it manufactured in the U.S. in the late 1970s and 80s. It shuttered a plant in Pennsylvania where it built VW Rabbits and pickup trucks, and sold a second plant it planned to open to Chrysler. Toyota (TM) and Nissan (NSANY) have excess U.S. production that the companies are having trouble selling. And Hyundai has stumbled with its new plant in Alabama because it planned the wrong vehicle configurations for the factory and has been stuck with excess inventories of unsold cars.

Volkswagen started out considering Michigan, Tennessee, and Alabama for its new factory. Michigan has been eliminated. A decision is expected by June.

Audi's Stadler says he has been looking into cooperation with parent Volkswagen to build vehicles in the U.S. "There are no signs right now of this situation letting up," Stadler said, referring to the sharp rise in the euro against the dollar which makes Audi cars more expensive. But VW has been going through great upheaval in the last two years as it has turned over management, with many big decisions now being influenced by Porsche Chairman Wendelin Wiedeking and .

Profits Have to Come First
A longer shot for Audi would be building vehicles in joint venture with Porsche (PSHG), VW's biggest shareholder. At the annual meeting, two Porsche executives were named to Audi's supervisory board, which is separate from VW's supervisory board.

Audi is at a huge cost disadvantage to rivals BMW (BMWG) and Mercedes-Benz (DAI) as those automakers manufacture vehicles in South Carolina and Alabama respectively. Lexus, Acura, and Infiniti also manufacture in North America.

The need for a U.S. plant for VW and Audi is dictated as much by sales goals as it is by profit. VW has been losing an average of a $1 billion a year in the U.S. the last few years. As important as the sales targets are, though, profits are the priority. As Stadler said, "Our sales ambitions are real, but profits have to come first."