Automotive News - May 13, 2019 - 28

28 * MAY 13, 2019

Audi's rocky road

Audi's 9-year streak of year-over-year monthly U.S. gains ended last October. The
brand has posted losses in 6 of the last 7 months.
10%
5%
0%
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2018

2019

MAY JUNE JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR
Source: Automotive News Data Center

AUDI

Sudden switch

Dealer: I haven't had
a Q3 since December
continued from Page 3

downturn in the market since the start of
the year, the loss of the Q3, perhaps the onset of the Tesla Model 3. All those factors
may have contributed."
So what happened? From a sales standpoint, Audi's skid has almost everything to
do with the lack of its Q3 compact crossover. A redesigned Q3, which debuted last
year in Europe, won't reach the U.S. until
late summer at the earliest.
Why? Inventory. An Audi of America
spokesman confirmed that there had been
no Q3 production for the U.S. in more than
six months at the automaker's factory in
Martorell, Spain. And as of Wednesday,
May 8, only about a dozen new Q3s were
left for sale in the U.S.

'They're waiting'
Through the first four months of 2019, Audi dealers had sold just 415 Q3s in the U.S.,
down 94 percent from the 6,892 sold during
the same period a year earlier. To put it in
perspective: in April, Audi's U.S. dealers
sold just 17 Q3s compared with 30 R8 supercars. In 2016 and 2017, U.S. Q3 sales

"But there are people that want that particular vehicle, and if we can't satisfy them,
then they'll transition to something else."
But the Q3 is not Audi's only problem. The
brand is struggling to comply with Europe's
Worldwide Harmonized Light Vehicle Test
Procedure, which was implemented last year
and has led to tighter availability of A6 midsize sedans with the 2.0-liter turbocharged
inline-four engine. Q7 large crossovers with
the 2.0-liter turbocharged inline-four just began arriving in the U.S. in February, an Audi
of America spokesman said.
At the brand's annual press conference in
March in Germany, Audi CEO Bram Schot
blamed the brand's response to the new testing procedure for a 3.5 percent decline in
global deliveries in 2018 and said Audi would
take steps - including possibly limiting engine choices - to solve the problem.

topped 20,000 each year.
"When was the last time I had a new Q3 on
my lot? December," said Pat Primm, a partner
at Cascade Auto Group in suburban Cleveland, which owns Audi Cuyahoga Falls.
Primm said Q3 customers have been pretty
understanding, and Audi has begun some
programs to keep them loyal while they wait.
"For lease customers, we can extend their
lease out, up to six months. And Audi is giving us extra incentives to encourage customers who can't wait to choose something
else that we do have in our inventory."
Primm said potential customers call
weekly about Q3 availability. "The thing
about Audi clients, they're very forward
thinking. They usually want to wait for the
new car. So they're waiting," Primm said.

CANADA

U.S. stores' expenses
became a problem
continued from Page 3

"If we can't get a dealership into profitability
over the course of the next six to 12 months under our leadership, we think it would be better
served under different ownership," AutoCanada Executive Chairman Paul Antony told analysts on a conference call this month.
He declined to comment on how many stores
could be left in the U.S. But he said that some of
the dealerships could become profitable by
year's end, while others won't.

'Hands-on operator'
Leading the charge to turn around the
dealerships is Darvish, 55, former executive
vice president of DARCARS Automotive
Group in Bethesda, Md. Darvish was tapped
to replace former AutoNation Inc. COO Bill
Berman, who was named in August to lead
the former Grossinger dealerships. But Berman resigned just months into the job. AutoCanada didn't disclose exactly when Berman left and didn't respond to multiple requests for comment.
Darvish, most recently COO of Capital Automotive Real Estate Services in McLean, Va.,
was introduced as AutoCanada's president of
U.S. operations during the retailer's
fourth-quarter earnings call in March. Her
LinkedIn page says she took the job in February. Darvish also didn't respond to Automotive
News' phone calls and emails.
Antony, AutoCanada's executive chairman

Less than a day after disclosing April's
disappointing sales, Audi abruptly announced a change of leadership. The brand
said Del Rosso, 55, had left the company,
effective immediately, to be replaced on an
interim basis by COO Cian O'Brien.
In 2017, O'Brien had replaced Del Rosso
as Audi of America COO when Del Rosso
was named president of Bentley of America. In December, Del Rosso left Bentley to
head Audi of America.
Audi's announcement of Del Rosso's departure cited no reasons and provided no
details. But it did say that O'Brien would retain his COO role "while the company
works to identify Audi's next president."
In January at the National Automobile
Dealers Association Show in San Francisco,
Del Rosso told Automotive News that the
brand shouldered the blame for inventory
problems, such as those with the Q3.
"We haven't been a consistent partner,
from a supply-side point of view, and we've
missed not only market opportunity, but
customer opportunity," Del Rosso said at
the time. "My No. 1 priority is stabilizing the
supply chain so that [Audi dealers] can fulfill customer demand."
An Audi of America spokesman declined
to comment further on the departure. a

MAZDA

Architecture could signal
rear-wheel-drive direction

continued from Page 3

Skyactiv-X spark-controlled compression ignition
system. The other will be an inline six-cylinder diesel.
Also on tap is a new 48-volt mild-hybrid setup
and a plug-in hybrid.
All of the new powerplants will be deployed on a
new "large architecture" that will also accommodate a longitudinal drivetrain layout that works
with the company's all-wheel-drive system.
Under the plan, Mazda will introduce two product architectures, instead of relying on one for the
bulk of its sales.

Rear wheel
The introduction of the large architecture signals a
possible interest in rear-wheel drive. Mazda sells only
one vehicle with a rear-wheel layout, the MX-5 Miata.
The other platform will underpin smaller vehicles. It
will accommodate the four-cylinder Skyactiv-X engine
as well as upgrades of the existing Skyactiv-G gasoline
and Skyactiv-D diesel powerplants.
Mazda will also use it as a base for mild hybrid vehicles as well as battery-electric and other electrified offerings.
But Mazda's challenge will be finding the funds to
invest in all this development.

Slumping profit
A small carmaker among its global competitors,
Mazda saw operating profit slump 43 percent in the
latest fiscal year, with results broadsided by falling
global sales, increased marketing expenses, foreign
exchange losses and spiraling costs for increased
investment in its U.S. retail network.
Global retail sales declined 4 percent to 1.56 million units, and operating profit margin deteriorated
to 2.3 percent from 4.2 percent the year before.
Marumoto outlined a new midterm business strategy that targets lifting operating profit margin to a sustainable 5 percent by the fiscal year ending March 31,
2025. But the company also downgraded its longterm sales goal in line with tougher realities.
Mazda now targets global sales of 1.8 million vehicles in the fiscal year ending March 31, 2025. That
is lower than the 2.0 million sales target it earlier
pinned to the fiscal year ending March 31, 2024. m

since August, said in the March call that Ber- "that's become the issue."
Grossinger Auto ranked No. 95 on Automoman was hired to assess and "structure" the
U.S. business. But with the unit's expenses tive News' 2016 list of the top 150 dealership
higher than industry norms, Antony said, it be- groups based in the U.S. - its last year on the
came "clear that the U.S. business could not list - based on 10,733 new-vehicle retail sales
in 2015.
support Bill."
AutoCanada's U.S. management changes are
"Bill's expertise is more aligned with building
a platform," Antony said in March. "And at this only part of the executive shuffle.
Shortly after the Grossinger deal was antime, the more immediate need is to build a
sustainable foundation with the U.S. assets we nounced, AutoCanada CEO Steven Landry
currently own that can withstand the economic stepped down into an advisory role, COO Mark
Warsaba resigned, and AutoCanada overclimate over the next few years."
Darvish was hired to be a "hands-on opera- hauled its board following a strategic review
initiated at the urging of an activist intor," Antony told analysts. He said she
vestor. AutoCanada also named a
moved to Chicago and would be in
new president in June and has gone
the stores daily until they were profitthrough two CFOs; a search continable. He praised her experience at
ues for a new finance chief.
DARCARS and her ability to maxiLast year, U.S. operating expenses
mize store operations.
exceeded gross profit, for a U.S. operDarvish, in that March call, told anating loss of $7.7 million. That includalysts she was focused on renegotiated $1.5 million in management traning contracts with vendors and partsition costs.
ners, including floorplan lenders and Berman: Unions
First-quarter results weren't better,
finance and insurance companies.
were a challenge.
as the U.S. unit posted an operating
AutoCanada, which operates 66
franchises, in March 2018 said it would spend loss of $5.4 million. The struggles in the U.S.
$86 million to buy the Grossinger stores. But in were a drag on the company, which posted a
its first-quarter 2018 earnings released in May, net loss in the three-month period.
Antony, in the first-quarter earnings call this
the company disclosed the purchase price was
higher, at $105.6 million. The deal included month, said Darvish had completed an evaluaabout $7.8 million in land and buildings and tion of the U.S. dealerships and put together a
gave the company its first Toyota, Honda, Lin- plan centered on cutting expenses and growing revenue.
coln and Volvo stores.
Former AutoCanada CFO Raj Juneja in the
March 2019 call told analysts that the Grossing- 'Highly abnormal'
er dealership group was profitable on a whole
Antony told analysts that costs for normal
before AutoCanada bought it, though some operations were "highly abnormal." He said
stores weren't. He said that after the purchase, pay plans are being altered and employee salathe stores' "expense structure changed," and ries are moving to performance-based vs.

guaranteed. The dealerships were overpaying
vendors by an "astronomical fashion," and advertising budgets were "out of line," as were
leads from lead management systems, Antony
said.
"Every day we come in, there's new invoices
for new things that we didn't think is possible
to have anymore," he said this month. "I would
say we're to the bottom of it now."
In AutoCanada's third-quarter earnings call
in November, Berman said half of the stores
were unionized, which made things a little
more challenging. The dealership group lacked
standardized systems and processes, Berman
said then, and there was "just lack of good
business acumen across the board."
Berman, who in 2017 abruptly resigned from
AutoNation after 20 years, did not return a call
or emails for comment.
Chris Murray, an analyst with AltaCorp Capital Inc., told Automotive News he was surprised
by the Grossinger purchase.
"There just seems to be a number of really
major issues with that dealership group they
purchased," Murray said.
Indeed, AutoCanada blamed the first of the
two U.S. unit write-downs on a lower and longer profitability timeline for the U.S. "primarily
because store quality was lower than expected
and will require more time to realize needed
improvements," Antony said in an August
earnings call.
That write-down was for $33.3 million, announced in the company's second-quarter
2018 earnings report.
Said Murray: "It was a case of insufficient due
diligence on the transaction, of not fully understanding the financial performance of the
dealerships prior to their acquisition." a

Automotive News - May 13, 2019

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