Case Study: Audi' Profile, History and Status Quo In 1910, the first Audi car was produced in Zwickau, Saxony. In 1932, Audi merged with three other Saxony car manufacturers (DKW, Horch and Wanderer) to form the Auto Union AG. The four rings in Audi's logo have their origin in this merger. The company produced cars under the four original brands but production under the Audi brand was stopped in 1940. After World War II, the former production sites of Auto Union were in the Soviet occupation zone and the company was expropriated. Creation of the Company in Ingolstadt In 1949, the former managers of Auto Union recreated the company in Ingolstadt in Bavaria in West Germany. Production began again with the four ring logo but under the brand DKW. In 1958/1959, Daimler-Benz acquired 100 per cent of Auto Union, which in 1965 was sold to the Volkswagen Group to which it still belongs today. In 1965, the company also switched from two-stroke engines to the modern four-stroke engines, a move that was accompanied by a brand change From 1965, the Audi brand was used again. Merger with NSU in Neckarsulm A further merger, in 1969, with car manufacturer NSU is also noteworthy, NSU was located in Neckarsulm, were the headquarters of the new company was located from 1969 until 1985 when it moved to Ingolstadt. The merger also brought the production site in Neckarsulm into the company. Two other acquisitions brought new brands to the company that are still used and very popular today. Since 1998, the Italian luxury sports car manufacturer Lamborghini belongs to Audi: in 2012, Audi acquired Ducati Motors, the Italian manufacturer of high-performance motorcycles. Surpassing Mercedes The Audi brand has developed very well since its rebirth in 1965. It slowly moved into the premium segment of the passenger car market, Le against its main competitors BMW and Mercedes. Sales grew steadily. In the last ten years, sales have more than doubled (see Figure 19.4). In 2011, Audi sur- passed Mercedes-Benz to become the No. 2 premium car manufacturer in the world. The strategic target for 2020 is to sell more than 2 million cars. Underperforming in the USA Audi's largest single market is China, where it achieves more than 30 per cent of its sales and where it is the leader ahead of BMW and Mercedes (see Figure 194). From the perspective of the current production strategy it is notable that the USA only makes up 10% of Audi's sales. In this market, And/ is much less successful than its main rivals BMW and Mercedes.Deliveries (Sales) of Audi - Development and Geographical Distribution Figure 19.4 Development of Delivered Cars Geographic Distribution 2013 (in thousands) (in thousanda) 157 145 253 Germanty 250 USA 150 TTO X70 328 Root of Europa 423 China 432 2003 2004 203 2026 2707 2003 2070 2050 2791 2012 7013 Source: Audi 2014a and several annual reports. Production of Audi Vehicles around the World Audi operates under the slogan "Vorsprung durch Technik", With a work- force of 73,000 people, Audi currently produces cars with the Audi brand in the two traditional German production sites in Ingolstadt and in Neckarsulm and in eight more countries in Europe (Hungary, Belgium, Spain, Russia, Slovakia) and Asia (China, India, Indonesia). Two further production countries are planned for the near future: Mexico, where production should start in 2016, and Brazil, where production will start in 2015 (see Figure 195). The different factories produce different car models or components and they serve different purposes which will be explained below. One challenge is to guarantee consistent quality. In light of this, Audi has the same motto for every factory: "one name, one standard, everywhere" 2014 marks the first year when Audi will produce more cars outside Germany than in its two factories in Germany.Production of Audi Vehicles around the World Audi operates under the slogan "Vorsprung durch Technik". With a work- force of 73,000 people, Audi currently produces cars with the Audi brand in the two traditional German production sites in Ingolstadt and in Neckarsulm and In eight more countries in Europe (Hungary, Belgium, Spain, Russia, Slovakia) and Asia (China, India, Indonesia). Two further production countries are planned for the near future: Mexico, where production should start in 2016, and Brazil, where production will start in 2015 (see Figure 19.5). The different factories produce different car models or components and they serve different purposes which will be explained below. One challenge is to guarantee consistent quality, In light of this, Audi has the same motto for every factory: "one name, one standard, everywhere". 2014 marks the first year when Audi will produce more cars outside Germany than in its two factories in Germany. Figure 19.5 |Audi Production Sites around the World Brusoda Neckarpunt Kaluga Ruma Bruis mo, Bluvalia Marwirel Spain bad Doshan San Jovi Chia CHINS Mexico [rom 2015) Cerbreak Dragl(Los 2015) Source: Adapted from Audi 2014b, p. 145. Production Sites in Germany as the Traditional Core of the Production NetworkHome Country as Largest Production Country Ingolstadt is Audi's most important locadon. It is where the company was founded in 1949, it is the location of the headquarters and it is also Audi's biggest manufacturing site. More than one third of all Audi cars are produced in Ingolstadt (577,000 cars in 2013). It has all the major parts of the car manufacturing production process: a body shop, a paint shop, an assembly line and even a press shop. The factory builds some of the company's most important car models (A3, A4, A5 and Q5). For many of the models, Ingolstadt serves almost as a world market factory, supplying most countries with their respective models, and having a high level of value added for these models. The Ingolstadt factory even has an in-house tool making department which develops and builds meta-forming tools and assembly-line systems for the factory but also for other factories in the Audi and the Volkswagen Group. Audi's second German location Is in Neckarsulm, about 250 km away from Ingolstadt. It is another major production site with a production of about 275,000 cars. It is characterised by a broad product diversity, building the Audi Ad sedan, Audi A5/S5 cabriolet, Audi A6 (sedan, Avant, S6, allroad Quattro, hybrid), Audi A7/57, Audi A8 and Audi A8, and Audi R8 models (in its different versions) as well as the high end models for different Audi ranges (RS)- Production in other European Countries Engine Production in Hungary Audi had established its first foreign production site in 1993 in Gyor, Hungary. Its main task is to be the global production centre for engines, with an output of almost 2 million engines per year (compared to 1.6 million Audis sold last year), supplying the other Audi factories and some other customers. The site has also been responsible for the assembly of various models of Audi TT since 1998, with the body being built and painted in Ingolstadt. The factories in Ingolstadt and Gyor are linked by rail to transport the components between them. In an extension of the factory, Audi Hungary has recently taken up series production of the Audi A3 (sedan and cabriolet). These two models are the first to be built entirely in Gyor. In 2013, about 10,000 cars were produced in Gyor- Assembling the Audi Q7 in Slovakia In 2005, Andi started to assemble its SUV Q7 in Bratislava, the capital of Slovakia. From there, the Q7 is exported globally (there are two more assembly sites for the Q7, Russia and India, but these merely assemble, have low value- added and serve only their local markets). It is the final stage in a cross-border production process in which many body components are produced in Ingolstadt and Neckarsulm and the engines are produced in Hungary before being assembled in Bratislava. Gyor and Bratislava are only 80 km apart. The factory produced 63,500 07s in 2013.Producing the Audi A1 in Belgium Since 2007, Audi also has a factory In Brussels, Belgium. It took over this factory from Volkswagen. Audi Brussels focuses on the production of the Al series (A1, sportback, S1, S1 sportback) and it is the only Audi site to produce these models. Its output in 2013 was 121,000 cars, An "Automotive Park" helps to link the Audi factory to its suppliers. The logistics and supply centre is adjacent to the Audi plant and has a direct link to the production site via a bridge. Producing the Audi A3 in Spain In Spain, Audi recently started to use a production site owned by SEAT (an- other division of the Volkswagen Group). SEAT and Audi Invested a combined 330 million EUR in the now joint production site, helping both divisions to achieve larger economies of scale in their production and creating synergies within the Volkswagen Group. Since 2011, the SUV Audi Q3 has been produced in a factory in Martorell, with an output of 107,000 cars in 2013. Martorell is the world market factory for the Q3, from which it is exported globally. One exception is the Chinese market, where the Q3 is locally produced. SKD Assembly in Russia in the Automotive Cluster Kaluga Audi has experienced strong growth rates in Russia over recent years, with sales of 36,000 cars in 2013. Even though the economy is currently weak, Russia is considered one of the strategic growth markets for Audi in Europe. To begin production in the country, Audi established a production site in Kaluga in 2013. This is an SKD production site for the Audi AG, A7 and ABL sedans and the Q5 and 07 SUVs. Audi has not reported their planned pro- duction figures for the Kaluga plant. Kaluga has developed into an automotive cluster within Russia (see Chapter 8). The Volksungen Group has been in the city since 2007, with full production processes for Volkswagen and Skoda. Other companies have also come to the city; PSA Peugeot Citroen for passenger vehicles and Volvo and Renault for trucks. Further, automotive suppliers such as Magna International, Continental, Benteler, Severstal-Gonbarri have followed their customers and built plants in the region (Russian-German Chamber of Commerce 2014). Production in China, Audi's Most Important MarketProduction in China, Audi's Most Important Market China is Audi's most important market, with sales of 492,000 vehicles in 2013. This is way ahead of BMW and more than twice as many cars as Mercedes sold in this country. Audi's long relationship with the market and local production spanning more than two decades have certainly played a role in this success. Production in a Joint Venture Audi produces in a production site in Changchun, a complete production facility owned by FAW-Volkswagen Automotive Company. This joint venture was created between First Automotive Works (FAW), a state-owned Chinese company and one of China's largest automotive companies, and Volkswagen in 1991. In 1995, Audi became the third joint venture partner, with an equity holding of 10%. At that time, it was not possible for a foreign company to wholly own a production plant In China, Currently, the plant in Changchun produces the Audi A4L and Audi AGL, in particular the long-wheelbase versions, which are very popular in the Chinese market. In fact, the Audi AGL is Audi's bestselling car in China; the Audi A4L is the second highest selling model. The Audi Q3 and Audi Q5 SUVs are produced mainly for the local market for a total output of 420,000 cars in 2013. Establishment of a Second Production Site Given that the compact market in China Is fast-growing, it is also Important to produce cars in this segment in the country. In 2013, the FAW-Volkswagen- Audi joint venture established a second production plant, also a complete production faility, in Foshan in Southern China. The Audi A3 sedan and the A3 sportback are produced at this site, and production in the first year is expected to reach 150,000-200,000 cars. Local production in China has a number of advantages. Among other things, It helps Audi to avoid the 25% import tax in China (Team 2014). Production in India and Indonesia In India, Audi has had a small-scale production in a contract manufacturing agreement with Skoda, another Volkswagen division, since 2007. Skoda Auto India Private Lid. assembles about 9,000 Audis for the Indian market, of different models (A4 sedan, A6 sedan, Q3, Q5, and Q7).Assembling in India In fact, the value-added in India is very low; the cars are assembled from parts produced in Europe. For example, the Audi A6 is assembled from ca. 2,500 parts that are shipped in containers from Hamburg and Bremerhaven in Germany. Car bodies are already painted, the engines completed and many components (like the front seats) are preassembled. From these parts and components, the workers in India assemble the final cars. Indonesia has a very strong growth rate, and with 240 million inhabitants and a growing middle class it is likely to soon become the largest car market of South-East Asia. However, import tariffs are very high, at 40% for vehicles. This makes local production or at least assembly favourable. The tariff duties in Indonesia for CKD kits (completely- knocked-down kits of cars that are then assembled) are substantially lower, approx. 10% (DB Research 2011, p. 9), SKD Assembly in Indonesia Audi has some of its models for the Indonesian market assembled in the country. In 2011, it began a cooperation with PT National Assembler, a local vehicle assembly company (and a subsidiary of Indomobil), which also assembled some Volkswagen models. This partner assembles the A4 and A6 models for the Indonesian market in an SKD (semi-knocked- down) process. In this process, the cars are first completely produced and assembled at other Audi plants (mainly in Germany). They are then disassembled again and packaged as assembly kits which are shipped to Indonesia. PT National Assembler completes the car and employees specially trained by Audi carry out the final quality inspection. The capacity and long-term plan is for sever al thousand cars per year (the original target was set at 2,700 cars by 2015) but the current development is very weak. In 2013, only 186 Audis were produced in Indonesia, following a weak demand due to devaluation of the local currency. Establishing a New Major Factory in Mexico Audi is strong in Asia but it is weaker than its rivals in the US. BMW and Mercedes have both established production plants in the USA which gives them advantages in the country. In January 2012, Audi stated that strong growth in the USA would be crucial for the company's strategy and that an Audi production plant in the region would be important to achieve this objective (Handelsblatt 2012). In a series of press releases, Audi revealed more details about this plan. Location Choice for North America In mid-2012, the company announced that its North American plant would be located in Mexico. The location close to the US market, competitive cost structures, good infrastructure and the over 10 existing free trade agreements between Mexico and other countries (including integration in the NAFTA) wer cited as reasons (see the case study in Chapter 7). Later, it was announced that a detailed location evaluation process, with more than a dozen locations analyzed, had chosen San Jose Chiapa, State of Puebla (less than 100 kan from an existing Volkstoagen plant in Puebla City) and Audi would invest about 900 million EUR in this production site. A number of criteria were mentioned for this location choice - site conditions, logistics link, infrastructure, well-qualified employees and quality of life, Highly reputable universities and colleges of advanced technology as well as inter, nationally recognised schools help in find qualingd employees but are also important to Audi for international assignments. As Elk director I sis explained - When deciding on a new site, it is important that we can find well qualified employee then Internationally recognized schools for the children of employees sent on assignment to Mexico are also crucial" (Volkswagen AG 2012).World Market Factory for Q5 Production in Mexico is planned to start in 2016; Audi will produce its SUV Q5 in the plant and supply the world market for this model from Mexico. The expected volume is about 150,000 cars per year. Some additional features are noteworthy in the case of Audi in Mexico (Stadler 2013): Very Strong Local Sourcing Audi declared that it intends to have a local content of 65% in the medium term; thus, 65% of all sourced parts for the Q5 will come from North America, increasing to 90% in the long-term. Thus, global suppliers are encouraged to relocate their production for the Q5 to Mexico as well. The Volkswagen Group will build a just-in-sequence suppliers' park halfway between San Jose Chiapa and Puebla City, from where suppliers will be able to quickly supply both the Volkswagen plant and the Audi plant. The plant brings enormous benefits for the local economy. Audi expects that for each job at Audi, another five jobs will be created in the vicinity, at suppliers and in the rest of the economy. In total, they expect up to 20,000 new jobs to be created as a result of the new production site. Made by Audi in Mexico The new plant in Mexico also illustrates the standardisation of production at Audi. As the Chairman of the Andi board pointed out in a speech when laying the foundation stone to the factory: "The 3D animation of the factory's layout shows: Each machine here will have the same position as all over the world, thanks to our modular production toolbox. Our Audi Production System ensures that our customers all over the world can rely on the seal of quality 'made by Audi" (Stadler 2013).Establishing Production in Brazil As a further step to increase its international production foulprint, Audi also announced that it would begin production in Brazil from 2015. The Audi A3 sedan and the Audi Q3 will be produced in Curitiba in Southern Brazil. The car market in Brazil is booming and the premium segment is growing particularly strongly. With production in Brazil, Audi wants to have a basis for further growth in the region. Starting in 2014, Audi's competitor BMW is produces in its own plant in Brazil. These moves are certainly to circumvent the high tariffs on imported cars and take advantage of the tax incentives given by Brazil for such investments. Production Together with Volkswagen Production will take place in a Volkswagen brand production plant but Audi will invest in a specific production line for its models. Audi also intends to buy locally. Up to 35%% of the sourced parts for the A3 should come from Brazil. To achieve this objective, Audi has started to build up relationships with Brazilian suppliers. Production of other Brands of the Audi Group Centralised Production for Lamborghini The production configuration of the Audi Group's two other brands is rather simple. Lamborghini manufactures its sports cars at its headquarters in Sant' Agata Bolognese in Italy. Some Foreign Assembly for Ducati Ducati has until recently only manufactured its products in its site in Bologna in Italy. But in 2011 Ducati opened an assembly factory in Thailand in order to better penetrate emerging countries. It has shifted the final assembly of some models for Southeast Asian markets to this plant in order to avoid the extremely high import tariffs on foreign-made motorcycles. Furthermore, Ducati now lets a contract manufacturer (DAFRA) assemble its motorcycles in a CKD process in Manaus in Brazil from parts produced in the Italian factory. This is to improve its position in the emerging markets of South America and particularly Brazil, which is the third biggest motorcycle market in the world for medium- to high-capacity bikes.Summary and Outlook Audi uses a sophisticated production strategy in which different configuration strategies are used for different models and components. The increasing shift of market growth away from Western Europe to Asia and the Americas requires a shift in production locations. The new production locations do not replace the existing ones but complement them in meeting the new demand in other parts of the world. Similarly, Audi does not apply the same operation mode in every production country. In some cases, Audi establishes wholly-owned subsidiaries; in others, it partners with other divisions of the Volkswagen Group; and in other countries, alliances with local companies, on different levels and with different strategic relevance, are considered the optimal choice. With different partners and different production countries, it is a challenge to guarantee a uniformly high quality. Audi follows a standard production system everywhere, which is intended to ensure that "made by Audi" entails the same quality no matter where the product comes from