Why Is Audi’s A3 Such a Hit With Millennials?

Why is Audi’s A3, a $30,000 luxury vehicle with average gas mileage, suddenly so popular among millennials?

Leo Sun
Leo Sun
Jul 5, 2014 at 6:30AM
The Business

Millennials are generally a fickle bunch when it comes to cars. The number of millennial buyers (ages 18 to 34) of new cars has fallen dramatically since 2007, according to AAA Foundation of Traffic Safety, mainly due to a lack of financial independence and a preference of gadgets over wheels.

That's why it's surprising that Volkswagen's (NASDAQOTH:VWAGY) Audi 2015 A3 sedan, which has been on the market for three months, has been so popular among this age group. In June, the A3 sold 2,452 units, accounting for nearly 15% of Audi's shipments and helping the luxury brand post a healthy 23% monthly gain in U.S. sales. Audi credits higher sales of the A3 to a surge in younger buyers.

The 2015 Audi A3. Source: Audi.

So why is Audi's A3, a vehicle that costs at least $30,000, such a hit with millennials? The reason is that the A3 taps into the millennial's obsession with smartphones by offering 4G LTE connectivity -- something that its closest competitor, BMW's 320i, fails to provide.

Audi's 4G smart car
With a 4G connection, the A3 offers a bevy of additional functions beyond dialing and answering the phone. The A3's infotainment system, which runs on top of BlackBerry's (NASDAQ: BBRY) QNX, can dictate Facebook and Twitter updates along with the latest news using text-to-speech technology. It can seamlessly stream over 7,000 Internet radio stations worldwide. 

Since 4G LTE is five to 10 times faster than 3G, videos can be streamed without hiccups, and Google services such as Maps and Search load much faster. The vehicle's 4G WiFi hotspot supports up to eight simultaneous connections, and its doors can even be unlocked through with a paired phone in case the keys are locked inside the car.

Moreover, the A3 will be compatible with Apple's (NASDAQ: AAPL) CarPlay and Google's Android Auto, which both mirror iPhones and Android devices onto the vehicle's dashboard by running on top of QNX. This means that for today's constantly connected millennial, the A3 is like a seamless extension of his or her smartphone -- simply hop into the driver's seat, and the phone merges with the vehicle.

Bells, whistles, and hidden costs
The A3's standard exterior includes a leather seat trim, a 12-way, power-adjustable driver's seat, a panoramic sunroof, dual-zone climate control, and a 10-speaker audio system. A leather seat trim is a luxury not always found in higher-end vehicles -- BMW's 320i, for example, lacks one yet costs nearly $3,000 more than the A3. For an extra $850, all models can be equipped with a 705-watt Bang & Olufsen sound system.

The A3 costs $29,900 to $41,350, depending on additional features and whether the vehicle is equipped with front-wheel or all-wheel drive.

The A3's interior. Source: Audi.

But the A3 comes with a big hidden cost -- data consumption. The Audi Connect services runs on AT&T (NYSE:T), which charges $100 total for 5GB of bandwidth spread over a six-month period (an average of 830MB per month), or $500 for 30GB over a 30-month period (an average of 1GB per month). Current Audis, which run on T-Mobile's network, get unlimited data for $30 per month.

AT&T's plan initially looks cheaper at $16.67 per month, but it will be tough to stay under that data cap. For example, a video on Netflix consumes 0.3GB per hour on the low setting, 0.7GB on medium, 1GB on high, and 2.8GB on the max 1080p setting. Therefore, it would only take 3 hours of streaming video on the lowest setting to top the 5GB plan's monthly average -- indicating that A3 owners can expect to pay a lot of excess data fees to AT&T.

A secondary hidden cost is the A3's fuel economy. The A3 only gets 27 miles per gallon, the same as a 2014 Mazda CX-5 SUV. With gas prices in the U.S. topping $3.70 per gallon due to geopolitical turmoil, millennials might be better off buying the hybrid Toyota Prius, which starts at $24,200 and gets over 50 miles per gallon.

But in the end, the Audi A3 sedan is a luxury vehicle, so secondary costs like data and gas could be secondary concerns for many affluent consumers.

The Foolish takeaway
In conclusion, the new A3 sedan is a glimpse of the future of fully connected smart cars. It also holds a lot of promise for Audi, which came in 10th and 12th place (the A4 and Q5) among the top-selling luxury vehicles in America in 2013. Audi also has a strong head start against GM, which is also gearing up to launch its first 4G LTE car, the 2015 Chevrolet Malibu.

Volkswagen's Audi still trails behind BMW, Daimler's (NASDAQOTH: DDAIF) Mercedes-Benz, and Toyota's (NYSE: TM) Lexus in the U.S., but it has overtaken General Motors' (NYSE: GM) Cadillac and Honda's (NYSE: HMC) Acura to claim fourth place in the high-end market. Prior to the launch of the A3, Audi claimed 9.7% of the high-end market. Its market share has since risen to 11.5%.

The A3's strong debut, combined with the fact that it has now passed Cadillac and Acura in terms of luxury market share, indicate that the top three luxury carmakers should keep a close eye on Audi's rising sales growth and the popularity of 4G LTE vehicles among younger drivers.