Audi , VW Group’s crown jewel, is damaged by emissions scandal

Christiaan Hetzner is Automotive News Europe’s Germany correspondent.

Vorsprung durch Technik is beginning to gain an unenviable double meaning for Audi.

The German words, which mean gaining the edge through technology, have been widely used by Audi in its European marketing. In the U.S., Audi uses the slogan Truth in Engineering. Either way, Volkswagen Group’s premium brand’s choice of slogan leaves it vulnerable to criticism after it admitted that 2.1 million of its diesel cars have “defeat devices” to cheat U.S. tests for health-harming nitrogen oxide emissions.

The cheat allowed Audi to claim a competitive advantage by saying some of their TDI engines were clean when they in fact were not.

And unlike other VW subsidiaries Skoda or Seat where sustainability is not a core element of their identity, a German luxury brand like Audi needs to identify socially-accepted luxury in part through environmental credibility. The Audi e-tron Quattro concept for a battery powered crossover to fight the Tesla Model X was one of the biggest stars of this month’s Frankfurt auto show.

VW Group’s emissions rigging scandal may have a deeper impact on Audi in the U.S., a key market for the brand even though it is the fourth best-selling premium carmaker behind BMW, Mercedes-Benz and Lexus.

Audi’s profits are important to VW Group. The brand booked more than twice as much profit last year worldwide than the VW brand despite selling less than a third as many the cars.

So far at least Audi’s strategy to deal with the crisis seems out-of-touch, as if it simply wants to pretend the issue will go away by not talking about it. Characteristic for this approach perhaps is that Audi’s U.S. website doesn’t have one statement even acknowledging it, while the U.S. website of the VW brand (which had 5 million cars affected) has published eight different statements related to the scandal.

Officials at Audi’s headquarters in Inglolstadt, southern Germany, divert inquiries up north to VW Group’s HQ in Wolfsburg, claiming that the EA 189 diesel engine involved in the emissions rigging scandal was developed by VW in Wolfsburg unlike the larger V-6 or V-8 engines that are developed in-house in Inglolstadt. While true, and perhaps even sensible to coordinate crisis communication centrally, the logical inference is all communication for A1 and A3 models based off VW platforms should now be handled by VW. Additionally, Audi manufactured the EA 189 in its engine plant in Hungary.

Perhaps it’s time then for Audi CEO Rupert Stadler to take some drastic action to protect the brand from further reputational damage. This is now the second major crisis in the U.S. market following one three decades ago that nearly forced it to close shop there. Sales of Audis plunged starting in 1986 following a fabricated public scare about unintended acceleration in Audi 5000 models.

In the end the National Highway Transportation Safety Administration largely exonerated Audi, but the brand never fully recovered in the U.S. Risks of a fallout cannot be underestimated, especially since this time, a fraud was actually committed.

Audi is unique in that it is the only VW group car brand that is also publicly-traded company. It may have virtually no free float, but it still has a few remaining minority investors holding less than a half a percent of the stock who receive an annual payment in lieu of a dividend due to a cash pooling agreement with Wolfsburg.

Even if all the damages ensuing from recalls and compensation for lower resale values are kept off its own P&L by booking them at the parent company level, that may not solve the problem.

Since Volkswagen will take a 6.5 billion euro hit this year – possibly more – Audi shareholders will also be affected since their payment is linked to VW’s profits.

Is it conceivable then that Audi for reasons of fiduciary responsibility may have to sue its own parent for damages?

“It’s certainly possible, at least theoretically,” says Metzler Bank’s auto analyst Juergen Pieper. As bizarre as that sounds, that may be one way of shifting the blame to the less valuable asset – the VW brand – to protect the group’s crown jewel.

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