Unpicking Audi’s quarta horribilis

Audi’s cash machine malfunctions on limited V6, V8 production and other issues

One stat leapt out from the Audi Group’s financial results from the first quarter of 2024: Lamborghini made more money than Audi. Bentley came close, too.

That’s overall operating profit, not just profit per car. We all know how good margins can be on selling luxury motors, but Lamborghini delivered just 2630 cars in the quarter, compared with Audi's 397,000.

From those deliveries, Lamborghini booked profits of €187 million (£161m), compared with €135m for Audi. Bentley made €120m from 2506 cars sold.

Audi margins stood at just 1.1%, compared with 27% for Lamborghini and 17% for Bentley. That dragged the overall Audi Group margin down to 3.4% – worse even than the Dieselgate fine year of 2016 and Covid-battered 2020.

The first three months were tough for all three German premium brands, as profits plunged from the highs of a year ago on returning supply and higher interest rates. However, BMW still managed an 8.8% margin on profits of €2.71 billion for its automotive division and Mercedes-Benz achieved 8.6% from €2.46bn profit. JLR meanwhile tore past Audi with profits of £661m in the same three months for a 9.2% margin on sales a quarter of Audi’s.

So what happened at Audi?

Audi has been subject to intense scrutiny in recent months within the Volkswagen Group. Group CEO Oliver Blume complained last June that the brand was “lagging the competition”, soon after which Audi CEO Markus Duesmann was replaced with Gernot Döllner, a former Porsche executive. More recently, head of design Marc Lichte was replaced with former JLR design director Massimo Frascella.

But Audi margins had mostly held up until this quarter. Audi’s Brand Group Progressive was the weak link in the Volkswagen Group’s first-quarter result as the Core brand group (Volkswagen, Skoda, Seat and Cupra) actually lifted profits from the same period the year before.

The Audi Group’s revenue was “significantly below last year's level”, Volkswagen Group chief financial officer Arno Antlitz said on the firm's earnings call, while Audi spoke of “extraordinary challenges” in the first three months on its own earnings call.

Chief among those, according to Antlitz, was constrained supply of V6 and V8 engines, which prevented Audi from building enough of its most profitable models.

Audi didn’t elaborate on the problem, but German publication Manager Magazin has reported that it was the Vitesco-supplied 48V starter-generator at fault. Fitted to both diesel and petrol versions of models such as the Q7 and Q8, the mild-hybrid system has been a weak link in terms of reliability and is presumably being overhauled, hence the production pause.

Antlitz said the Volkswagen Group was in the process of adding a second supplier and that production was due to return in the second quarter. The bottleneck hit volumes but “but much more importantly margins, specifically at the eight-cylinder model,” Antlitz said.

The problem illustrates just how much of Audi’s financial performance is concentrated around a few high-end models. In the quarter, 40% of Audi’s entire production was for 'A0/A' models, including the A1 and A3, while those categorised as 'D/E' (the largest) accounted for just 2%.

It also shows that supply constraints only boost profits when your competitors are similarly constrained (for example during the chip crisis). If your preferred Q7 is delayed but a similarly specced BMW X5 isn’t, you swap pretty quickly.

Lower sales of high-margin cars wasn’t Audi’s only difficulty in the quarter. A January strike at its Mexico plant, where it builds the Q5 SUV, also cut production, while lower residual values also dragged on profits. 

Production of Audi EVs also plummeted during the quarter, down 20% to 38,216. Interestingly, Audi in its investor slide deck attributed the lower demand to “to intensified competition” rather than overall demand reduction, suggesting that the fast rate of EV launches from BMW and Mercedes is hurting its own sales.

Until the recent launch of the delayed Q6 E-tron (a sister car to the Porsche Macan Electric), Audi offered just three EVs. 

In contrast, Audi PHEV production jumped 73% in the quarter to 28,063, perhaps to counter slower EV sales. In the first four months of this year, the petrol-electric A3 was the UK’s best-selling PHEV by far.

Audi is confident its terrible start to 2024 is a blip. The brand is guiding margins of between 8-10% for the full year as production of its cash-generating V6s and V8s return to normal.

Audi is also in the midst of implementing its cost-cutting initiative Performance Program 14 (14 standing for its longer-term margin goal). It has released few details about this except to say it  will “strengthen product line organisation, optimise the global production network and increase flexibility in production", all this “without sacrificing quality or customer-related attributes”.

Audi currently sells a staggering 18 models, excluding variants such as Avant estates or long-wheelbase versions, built in 18 plants globally. That’s excluding the Bentley, Lamborghini and Ducati operations. 

Some of those plants are run by the wider Volkswagen Group or Chinese joint-venture partners, but it does illustrate the huge complexity of Audi’s operation. More so because Audi doesn’t have the capability to build EVs alongside ICE models – something BMW has exploited to good effect through a more conservative approach to initial EV development.

Some Audi models have already ceased production, including the R8 and TT sports cars, but more are being added, including the forthcoming A6 E-tron and A6 E-tron Avant.

Others are being overhauled, including later this year the A5 and Q5, which use a new ICE platform that Audi calls Premium Platform Combustion (PPC). Further ahead is a new small EV that will sit below the Q4 E-tron.

In fact, Audi is planning to introduce 20 new models in the next two years. “We’re currently managing the biggest model initiative in Audi’s history,” Döllner told Autocar earlier this year.

Döllner has promised to refocus Audi on its long-running catchphrase Vorsprung durch Technik ('progress through technology'). “This is still the core of the brand. We have to find a new interpretation, but what remains is bringing technology that helps people,” he said.

Rivals have grabbed the initiative here in recent years. The stand-out example is BMW and Mercedes both offering level-three (hands off, eyes off) autonomous driving capability in their flagship saloons after Audi ceded them the win after first announcing then abandoning the technology for its A8 of 2018.

Audi also needs to boost its American operations. While Audi tracks BMW and Mercedes pretty closely in Europe and in China, it lags in the US. It sold just 44,000 cars there in the first quarter of 2024, down 16%, compared with 66,600 for Mercedes and 91,292 for BMW.

Audi’s quarter would have been so much worse without Lamborghini and Bentley, illustrating the useful safety of having deeply integrated, high-margin luxury brands in your stable.

But the deep impact of losing production of your biggest combustion engines illustrates the risks to Audi in coming years as CO2 emissions limits tighten in Europe. The V6 and V8 models will likely be the last to die, given their profitability, but Audi needs to demonstrate electric vorsprung if it’s to head off competition from rivals, new and familiar, in the EV space and continue its profitable run.