DIRE STRAITS

A plan to save Audi

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Dark skies above Audi. Picture source: Reuters

Once Volkswagen’s star performer, Audi has become one of Wolfsburg’s biggest problems. Revenues at the premium automaker dropped four percent in the first half of the year, and the diesel emissions scandal just keeps on growing, threatening to take down Audi’s senior leadership.

The money and legal problems are only part of the problem. Audi lags woefully behind the competition in developing electric cars and implementing a plan to go digital. It has just two all-electric models in the pipeline, both SUVs, compared to 10 at Daimler and six at BMW.

Embattled Audi CEO Rupert Stadler and his strategy chief Roland Villinger have a plan to dig Audi out of the ditch. They are going to roll out a massive cost-cutting program that aims to save the automaker €10 billion ($11.7 billion) through 2022, according to Handelsblatt sources at the company.

“Everything that the customer no longer demands or pays enough for will be canceled,” a source at Audi’s headquarters in Ingolstadt told Handelsblatt.

For Audi engineers, who are used to being lavished with funding, these changes will come as a major culture shock.

The idea is to plow those savings into five new all-electric vehicles, company sources said, in addition to the two electric SUVs that Audi already has in the works. Mr. Villinger recently presented the plan to 700 managers. Audi, for its part, declined Handelsblatt’s request for comment.

The money will come from ditching niche models, such as the Cabrio, and engines that sell poorly. Audi also plans to reduce costs by relying more on the production capacity of other VW subsidiaries as opposed to building or expanding its own plants. The automaker has already outsourced the production of the A1 compact car to its sister company Seat in Spain. In other words, Audi will not be building any more plants like the $1.3-billion facility that opened in Mexico last fall for the production of the Q5 SUV.

The plans do not stop there. Audi also wants to save money by pooling development costs across the VW group. The premium automaker will rely on the VW core brand to help develop an all-electric Q1 as well as another small city car and a vehicle in the A3 compact class. Audi is not even above working with its sibling rival Porsche, which will help develop electric versions of the A8 and the A9.

For Audi engineers, accustomed to lavish funding, these changes will come as a major culture shock. Peter Mertens, who played a key role in Volvo’s turnaround, has been brought in as Audi’s chief of development with a mission to enforce budget discipline. For example, the budget for revamping the Audi A6 will be slashed from €1 billion to between €500 and €600 million. Engineers working on the Q4 and Q6 SUVs will now have to make do with €280 million instead of €500 million.

Change is also afoot in China, Audi’s most important export market. Audi ended its joint venture with FAW, one of China’s biggest automakers, to work instead with VW’s partner in China, SAIC. The decision to switch partners cost Audi dearly. FAW dealerships revolted and boycotted the VW subsidiary, which led to a 20 percent drop in its sales. As a result, Audi lost its crown as the premium market leader in China to rival Mercedes.

But moving forward, Audi believes SAIC will provide greater and more efficient production capacity to meet the rapidly growing demand in China’s premium market, which is expected to skyrocket from 600,000 to 3 million vehicles over the next five years. The increase is equivalent to the number of premium vehicles sold in Germany every year.

“An examination of the decision structures will show that not just engineers, but also top managers set the course in the big questions regarding emissions cleaning.”

Klaus Schroth, Lawyer for Audi engineer Giovanni Pamio

The plan to save Audi may also be Chief Executive Rupert Stadler’s last chance to save his own hide. Mr. Stadler has been walking on thin ice with Audi’s supervisory board since illegal software to manipulate diesel emissions was found in several Audi vehicles. One former engineer, who was let go in the wake of the scandal, has alleged that Mr. Stadler knew for years about the so-called defeat devices.

Though his contract at Audi was renewed through 2022, Mr. Stadler’s contract as board member at parent company VW is the agreement that really matters. His contract with Wolfsburg expires in 2019 and many people at the company do not expect it to be renewed. Karl-Thomas Neumann, a former VW manager who recently stepped down as the head of Opel, has been floated as a possible replacement, particularly among supervisory board members who represent workers.

Audi plans to dismiss nearly half its executive board by September, including the heads of production, personnel, sales and finance. So far, Mr. Stadler has been spared, but it’s unclear how long he can last. Giovanni Pamio, a former Audi engineer accused of involvement in the diesel scam, is in custody in Germany and is cooperating with the authorities. He could implicate people higher up the chain of command.

“Our client is cooperative,” Klaus Schroth, his lawyer, told Handelsblatt. “An examination of the decision structures will show that not just engineers, but also top managers set the course in the big questions regarding emissions cleaning.”

 

Markus Fasse and Martin Murphy reported this story for Handelsblatt. Spencer Kimball adapted this story into English for Handelsblatt Global. To contact authors: murphy@handelsblatt.com, fasse@handelsblatt.com

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