Ever wonder why so many automakers build fast, expensive cars?
Here’s a clue, starting with the latest news from Germany’s Audi brand.
Answering the prayers of a tiny band of well-heeled car nerds around the world, Volkswagen (NASDAQOTH:VLKAY)‘s Audi brand said that it will speed up future launches of its hyper-fast (and hyper-expensive) RS lineup of high-performance cars.
Audi sales chief Luca de Meo told reporters at the Shanghai Auto Show on Saturday that the move to bring future RS models to market sooner would help it boost profits.
That’s a big priority for Audi, as the already very profitable brand works to close a pricing gap between it and German rivals BMW and Mercedes-Benz.
But does it matter to the rest of us? Audi’s RS models can cost $100,000 or more, and they sell in tiny numbers. Who cares, beyond those few rich car nerds and a few German auto executives?
I bet General Motors Company (NYSE:GM) cares, for starters. Here’s why.
Fast cars have fat profit margins
Audi’s RS models don’t sell in big numbers. In the grand scheme of things, neither do their German counterparts, Mercedes’ AMG models and BMW’s somewhat more famous M line of vehicles.
But they’re important to the businesses in other ways. In fact, high-performance “halo” cars are so important to luxury brands that General Motors Company (NYSE:GM) pushed to get the second-generation of its hot Cadillac CTS-V sedan to market in late 2008 – when it was quickly spiraling down the drain toward bankruptcy.
Why did General Motors Company (NYSE:GM) do that at a moment when it was desperate to conserve cash? There are two big reasons. First, these cars are very profitable: The current Cadillac CTS sedan starts at about $39,000, and a nicely equipped one will run you about $50,000 or so – but the CTS-V can run well over $70,000. That difference is mostly profit.
The CTS and CTS-V are the same basic car, built on the same assembly line in Lansing, Mich. – but the bigger engine and other high-performance features in the V version command a substantial premium in the marketplace, much greater than General Motors Company (NYSE:GM)’s incremental cost to build it.
That’s even more true at Audi, where the RS versions of its sedans can sell for as much as three times the price of the base model.