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Q&A: Audi America CEO Johan de Nysschen

Moving into the top tier?

by on Aug.31, 2009

TK

I think that when you are in the luxury market, you need more than just product.

Johan de Nysschen has always wanted a career in the auto industry, but it wasn’t easy, not when growing up during the final days of the old apartheid regime, in South Africa, when most of the world’s automakers were convinced to grudgingly abandon the market.  Eventually, however, de Nysschen found a way into the business, and has since served a variety of global assignments for Audi of America, including a stint in Japan and, now, a position as the CEO of the Volkswagen luxury division’s U.S. subsidiary.

While Audi of America wins numerous kudos from the media – and loyal owners – it has struggled to gain ground against better-known competitors Mercedes-Benz, BMW and Lexus, a point of frustration considering Audi’s huge growth abroad, global sales topping the million mark for the first time in 2008.  But there are positive signs in the U.S., as well, where Audi’s market share has surged during the economic downturn.  TheDetroitBureau’s Paul A. Eisenstein spoke with de Nysschen about the challenges of moving into the top tier of luxury brands – and how he can exploit the weaknesses of its competition.

TDB: While the Cash-for-Clunkers program didn’t do much, directly, for luxury brands, it certainly did have an impact on the overall car market.  Can you talk about what you’re seeing happen?

De Nysschen: We had expected the total vehicle market to come in (for 2009) at 9.5 million, which made us one of the more conservative manufacturers.  Cash-for-Clunkers injected some life into the market and overcame some of the inertia, so we’ve raised our outlook to 10 to 10.5 million.  As for Audi, we sold about 600 cars through Clunkers, which, does nothing to materially change our business.

TDB: Maybe not, but you’ve done surprisingly well, despite the overall decline in the U.S. market.

Luxury Coverage!

Luxury Coverage!

De Nysschen: Audi has been a little more fortunate than most and kept much of its momentum.  We’ve had the benefit of a new product line-up, so our incentive spending hasn’t been almost completely flat compared to last year.  Our model mix has trended upwards, so our revenues are flat compared to last year.  Last year, we did 86,000 cars, so we expect to end this year around 75,000 or 76,000 (but) we’ve had a significant increase in market share – to 8.1% of what we define as the luxury group, from 6.2% last year.  Volumes are down just over 14%, but the sector has declined over 30.  We hope to extend the momentum when the market comes back.

TDB: What about overseas?  Audi continues to do even better abroad.

De Nysschen: Last year was an all-time record, breaking through the million mark, globally, for the first time, and profitability was a record, as well.  It marked our 13th record year in a row.  In an environment like this, however, there’s no way we can repeat that again this year.

TDB: It’s often said that car buyers will focus on just their top 3 favorite products.  And according to one of your staff, that means you often fall off the shopping list when luxury buyers look at Mercedes, BMW and Lexus.  How big a problem is that for you?

De Nysschen: That’s not a problem for us in Europe, but here we’re often lumped into the Tier II of luxury brands, which is something we’re not satisfied with.  If you look at the brand metrics, brand consideration, prestige, they’re all at record levels.  Audi is raising itself from the Infinitis, Cadillacs and Lincolns, but we’re still in a sort of no-man’s land.  We think we’ll continue to build that.  But it’s not something that will happen overnight.  It may take another decade before we’re established in the top tier of luxury manufacturers.

TDB: At that point, do you see Audi sales matching the 200,000 or even 300,000 volumes of some of your competitors?

De Nysschen: I have to say, quite candidly, that the numbers we’re seeing from the market leaders are nonsense numbers.  We have seen a fixation of volume at the detriment of retaining the quality of the business. You have to keep buying up market share with ever-increasing incentives and you can’t sustain that. And if you look at the financial performance of the European makers, you’ll see the impact of this.  I think they’ll have to settle at a volume level that is sustainable.  That is our strategy.  We will not sell a car unless it is profitable.  And 250,000 is not part of our volume plan.

TDB: So, what is your target?

De Nysschen: At the moment, given our cost structure, that would be between 110,000 to 130,000.  That is the sweet spot for us and would be a very comfortable level of business.

TDB: Who, among the leaders is most vulnerable for you to target?

De Nysschen: I wouldn’t use the word, “vulnerable.”  All brands have strengths and weaknesses.  We will seek to leverage our strengths and exploit their weaknesses?

TDB: Care to explain?

De Nysschen: Lexus, for example, has an issue with the brand being seen as conservative and stodgy and that is an opportunity.  Look at their best-seller, the RX (crossover), which totally dominates its market segment.  No car can sustain a 70% segment share.  It is seen as very much a woman’s car, and that creates an opportunity for us.  BMW has been chasing volume very hard for very long.  I think there’s got to be a time when the CEO notices that his junior typist is driving the same car and becomes uncomfortable with it.

TDB: Hyundai won North American Car of the Year honors, this last January, with its Genesis sedan, and now wants to target top-line products, like the Mercedes S-Class and your own A8, with its premium luxury Equus model.  Does that worry you?

De Nysschen: I think that when you are in the luxury market, you need more than just product.  You need heritage, and brand character.  I am not dismissing them.  It is just a reality that it is impossible to stretch a brand from entry level all the way to executive level and make it work at all those levels.  And to create a separate luxury brand is quite expensive and profound.

TDB: Hyundai is looking at ways to pull this off, perhaps even by handling Equus sales at a potential customer’s home or office.  Is that a viable strategy – and one a maker like Audi might adopt, as well?

De Nysschen: You can’t remove the dealer from the equation.  People want to see, feel and touch the cars at the dealer, even if they know more about the car than the sales person when they walk into the showroom.  So the traditional role of the dealer will never be completely eliminated.  But demands on personal time is being stretched thin as the pace of our society accelerates.  So the most successful marketers will be those who are best able to allow consumers to manage their time by reaching out to them.  That may mean a hybrid distribution model that blends traditional methods, the Internet and, as in Japan, where they bring the car to the customer.  Of course, these all add cost.  They cannot be done for free.

TDB: We have seen an explosion in segmentation, in recent years.  But are we reaching the limits of potential new offerings?

De Nysschen: Customers are demanding more product categories.  We are looking at the market eight years down the road to (stay) ahead of the curve.  Companies that don’t take risks may never make a mistake, but they will never be a leader.  As we’ve seen platform strategies evolve, it’s become possible to differentiate products at a relatively low cost.  But you can overdo it.  You have to ask yourself what is the core essence of the brand.  And you can’t chase niches that stray from that essence.

TDB: Where are often-discussed plans for a U.S. assembly plant?

De Nysschen: No plans now.  We have had a very comprehensive analysis which we presented to our board.  But the collapse of the market hasn’t helped and it has been decided to defer a decision until market normality returns.

TDB: Mercedes just cut the price of the E-Class by $5,000.  That has to be a challenge.

De Nysschen: You asked, earlier, about brand weaknesses and I didn’t discuss Mercedes.  That price cut says people no longer see the intangible value in the brand.  They are not valuing it as much as they used to.

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