Audi: "S" is for sex, speed, and sales

October 10, 2012: 7:45 AM ET

The company's new S line of high-end vehicles is a step forward for Audi's bid to become the world's top luxury car brand.

By Doron Levin, contributor

FORTUNE -- The U.S. arrival of Audi's new S6, S7 and S8 high-performance sedans is one more step in the automotive brand's bid for recognition as No. 1 in the luxury category, an ambition that would have seemed a stretch a few years ago in light of competition from BMW, Mercedes and Lexus.

Thing is, no one is scoffing anymore. Audi is advancing its case with the introduction of technologically sophisticated alternatives to its German competitors and to premium models developed by Japanese makers Toyota (TM) and Nissan (NSANY). In fast-growing global markets like China Audi's A4 already is an entry-level luxury car of choice for consumers who wish to differentiate from those who once routinely bought BMW 3 Series or Mercedes C-Class vehicles. (For even more, check out our slideshow of 7 totally outrageous sports cars.)

And as the number of all luxury cars on the road increase, all franchises are creating performance variants -- special versions with outsized engines and other over-the-top flair -- to generate enthusiasm, if not boost sales. Mercedes has an AMG designation, BMW developed M versions of its cars and Cadillac's high-end V series fills the same niche.

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It's taken Audi a long time to regain "the legitimacy it lost" starting in the 1980s with an unintended acceleration uproar affecting its cars that proved largely unfounded, says Aaron Bragman, an analyst for IHS etc. "Audi has a lot of momentum internationally and might already be the top luxury brand today in China," he adds.

The heart of Audi's latest initiative in creating "S" models is a new 4.0-liter, twin-turbocharged V8, which replaces the former top-of-the-line naturally aspirated 5.2-liter V10. Though smaller in terms of total displacement, the new engine is more powerful.

In the S6, a souped-up version of the A6 sedan, Audi's new engine puts out 420 horsepower, enabling the car to reach 60 mph from a dead stop in 4.8 seconds. The S7 offers similar performance and a hatch rather than a trunk. Audi's S8 is powered with what appears to be the same 4.0-liter engine but is modified to generate 520 horsepower, accelerating the big sedan from 0 to 60 in under four seconds -- supercar territory.

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The 2013 A6 currently starts at $42,200, the S6 at $71,900. Likewise the A7 starts at $60,100, the S7 at $78,800. The A8 starts at $72,200, the S8 at $110,000. Company executives say that S versions of their compact, medium and large sedans might amount to 15% of the total units sold.

Filip Brabec, Audi's director of product management in the U.S., said that the average transaction price for vehicles has risen by about $5,000 a unit over the last few years, partly on the strength of selling more cars with premium features. But making the Audi brand stronger by virtue of creating versions to excite enthusiasts has provided the collateral benefit of stronger pricing for all models in the line.

Through the first nine months of 2012, Audi sold 100,694 vehicles in the U.S., up 18.5% from a year ago. BMW sold 186,397, up 4.9%; Mercedes-Benz sold 207,048, up 13.4% and Lexus sold 170,990, up 26%.

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"Number one doesn't necessarily mean selling more vehicles than anyone else," argues Brabec. "We could discount more aggressively, but we're not going to do that because it cheapens the brand." Instead, Audi carefully monitors such metrics as residual value, the proportion of the car's retail price retained after three years of use.

According to ALG, formerly known as Automotive Lease Guide, three-year-old Audi vehicles sold or turned in from lease last month kept 55% of their value. BMW and Mercedes each held 51% of their value, while Lexus vehicles held 56% of their value.

As Volkswagen AG's luxury subsidiary, Audi plays a role in the German automaker's goal of becoming No. 1 in terms of sales by 2018. Jeff Schuster, senior vice president of LMC Forecasting, said "Audi's target and goals are very aggressive, but similar to those of the Volkswagen brand.

"Given the competitive pressure in the premium segments," Schuster said, "It will be a very challenging environment to achieve parity with the other brands in terms of share, but they have results to date and show the will, so don't count them out."

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