Audi's market leadership and financial performance in China

Audi China

Audi and Operations in China

Company Overview

Audi has a long and rich heritage as being a manufacture of luxury automobiles. The business has been in existence for more than a century when August Horch invented his first car in 1901 with the help of his workers (Audi Quattro, N.d.). Horch was later forced out of his own company in 1909 due to trademark infringements, 8 years after the company's first car completed finished production in the plant in Zwickau, Germany. Sometime later four companies merged to form a new company referred to Audi and used four interlocking rings as a company logo that is still being used today. Audi's current vision for the company is (Audi, 2015):

Vision: "Audi -- the premium brand"

"The Audi brand has focused on the challenges of the future in adopting its Strategy 2020. The strategy took on firmer contours during 2011 as the full potential of the mission "We delight customers worldwide" was explored in greater depth. It now gives more weight to new issues that have emerged as a result of heightened environmental awareness, growing uncertainty about the future availability of fossil fuels and increasing urbanization."

Audi today is owned by the Volkswagen Group which overall sells nearly three million cars a year in China. Under the Volkswagen umbrella, the company manufactures entire automobiles in China, sells and services them, and has some factories that produce parts and components. The Volkswagen group is the largest international company operating in the Chinese market largely because it was one of the first multinational companies (MNC) to enter the market in 1978 and was also the first international brand to establish manufacturing capabilities in the country. The company now has sixteen subsidiaries in China with its headquarters in Shanghai. This analysis will look at Audi's current financial position related to its Chinese operations as well as a discussion of its future opportunities.

Figure 1 - Audi's Worldwide Production Totals (Audi, 2015)

Chinese Business Environment

China is the fastest growing market in the world for many luxury goods and services. However, this market demands that luxury products be customized to fit the Chinese local preferences. For example, a sixty-three percent majority of international companies operating in China acknowledged that they needed to alter their product and marketing messages specifically for the Chinese market; however, in most cases, the alteration does not require a completely new product or service, but making small adjustments to existing products so that they better suit Chinese culture and preferences (Forbes, 2011).

The Chinese middle class is growing faster than in any other place on the globe. There is a high level of inequality in China and the middle class earns significantly more than other demographic segments in China as well as different from other middle class populations in developed countries. Some of the characteristics of this market segment have been identified as being (Hong, L., 2014):

China's middle class has a strong preference for novelty, which leads them to constantly seek out the newest products available.

They are early adapters of new technology and have embraced social and digital media.

Although they enjoy the status conferred by luxury brands, they generally lack the emotional ties that would lead to brand loyalty in other nations

Since the late 1970s China's GDP growth rates have averaged roughly nine percent and as a result China has become one of the largest economies in the world. China has also surpassed the U.S. In terms of GDP based on purchasing power parity (PPP), becoming the largest in the world by this measure, International Monetary Fund estimates show (Guan, 2014). However, due to its large population of over 1.3 billion, the GDP per capita is still relatively low compared to OECD countries. Yet with continued development the total GDP and per capita GDP will both continue to rise indefinitely.

McKinsey estimates that Chinese consumers will account for 20% of luxury purchases worldwide by 2015 and an estimated 45% of Chinese luxury consumers are age 35 or younger, while the average Chinese millionaire is 37, compared with 57 in the United States (Hong, L., 2014). The young middle class also offers strategic benefits. If a young member of the middle class develops a taste for a luxury brand and offers their loyalty then they will purchase the brand for a lifetime and can increase sustainable revenue streams. Therefore, if Audi can reach the young Chinese middle class with their luxury automobiles, then Audi can also form a longer lasting relationship with these consumers than it can in other parts of the world.

The Chinese government is communist and retains a significant amount of control over several aspects of the society. One initiative that the Chinese government has recently launched has targeted the perceptions of the growing inequalities that are present in the country. Chinese leaders fear that the large income inequality that is perceived to be potentially affecting the countries level of social stability and they have put many restrictions on the advertising of luxury goods. The government is now forcing companies to remove words such as "luxury," "royal" and "high-class" from all outdoor ads and banning any luxury ads from official television and radio stations (Hong, L., 2014). This could create an obstacle for Audi in this market in the near future.

Conclusion

Audi is the best-selling luxury brand in the automotive industry in China. The Volkswagen group owns Audi and is the largest international company operating in the Chinese market largely because it was one of the first multinational companies (MNC) to enter the market in 1978. Audi has been well received by the Chinese middle class who has unique demographic features that middle classes in other regions of the world. Audi currently has strong profitability indicators as a result of their success in China which has also worked to offset some of their sales losses in the EU. Furthermore, since the middle class is relatively young in China, the relationships the company forms today could led to sustainable revenue generation for the consumer's lifespan.