BMW is back in top gear. Global sales are up nine per cent – with market increases ranging from one per cent in Germany to 21 per cent in the US – and profits before tax are up five per cent year on year. The talk inside the company’s landmark Munich headquarters is of selling more than 900,000 BMWs this year, an all-time record. The Rover disaster, which claimed the careers of its two most senior executives, CEO Bernd Pischetsrieder and product development chief Wolfgang Reitzle, and set the industry buzzing with rumours of a takeover by Ford or GM, is but a distant pothole in the corporate rear view mirror.
With numbers like that Dr Helmut Panke, BMW’s board member responsible for finance, can afford to shrug off suggestions the company is a takeover target. “Of course there will always be speculation of a sale,” he smiles, “but this has been around since I joined the company almost 20 years ago.” He refutes the notion that BMW’s share price, which has bounced back from a nadir of 23.04 euros in late 1999 to just under 40 euros, is the result of speculators sniffing a deal: “I think the stock price now is reflecting satisfaction with BMW’s performance.”
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Rover was clearly a traumatic episode for a company that – uniquely in the car industry – had known nothing but profits and growth for almost 30 years. But Panke says BMW was not panicked into divesting itself of the loss-making operation.
“There was no single incident that made BMW’s senior management decide to divest,” he says. “At the point we decided to divest (which came in February last year after a third draft of the 2000 budget failed to show necessary improvements in Rover’s profitability) it was not a critical situation,” Panke insists. “We simply decided we did not want to get into that situation and risk the BMW brand.”
“Without Rover, BMW is radically rethinking its future“ |
Without Rover, BMW is radically rethinking its future, shrugging off the current industry mantra that bigger is better. While Ford’s Jacques Nasser has said carmakers will need to be building seven to 10 million units a year within 10 years just to remain competitive in terms of product development and manufacturing costs, and GM, Daimler Benz, VW and Renault have all gone chasing volume and synergies through mergers and acquisitions, BMW is betting it will not only stay in business, but remain ahead of the game, building about 1.5 million cars a year.
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By GlobalData“We have not altered the basic strategy,” says Panke of the company’s future post-Rover. “We will still do small cars. And we will still do SUVs. What has been altered is the question of whether a company can be in both the premium and the mass market. The BMW brand is clearly positioned in the premium market, whereas Rover – and we probably overestimated the strength of the Rover brand – is positioned in the mass market. This stretch between the two positions clearly didn’t work.”
Panke says BMW plans to grow by dramatically broaden its product offering. “Our marketing people think in terms of what could be called a chess board,” he says. “On one axis you have the hierarchy of size and the position in the market, and on the other you have the body styles. BMW has started applying this strategy looking at what kinds of segments we can access with our model families.”
The board has signed off plans to add a 6-series coupe and convertible – based on 5-series mechanicals – to the range, plus a new small SUV, the X3. A new 1-series range, rear wheel drive and within millimetres of the landmark BMW 2002 sedan of 1968 in terms of overall size, will be positioned under the 3-series. Controversially, the 3-series range, which still accounts for about 50 per cent of sales, will be split in two, with the coupes getting unique sheet metal and badged as 4-series models.
The BMW range will straddle a broad demographic that stretches from the new Mini to the new Rolls-Royce. Sources in Munich say work has already begun on a second generation new Mini, due in about six to seven years’ time. This model will be engineered from the outset to be built in different variants – such as a cabrio, wagon, and even a five door – and to accept BMW’s new generation Valvetronic four cylinder engines, which simply won’t fit under the bonnet of the current car without major reworking of the front floorpan and firewall.
“Size does matter to BMW, but not at any price“ |
Crucially, this Mini will also be significantly cheaper to build – analysts are sceptical the current model will make money and some BMW sources whisper the program will not break even until year six or seven of the program. “Any new brand takes an extra effort because of the up-front investment in R&D, tooling and marketing,” explains Panke. “We can accept that we are not hitting our normal targets with the first generation Mini. But we will not lose money on it.”
With its tiny volumes, Roll-Royce is probably a zero-sum game in terms of risk. But small cars, with their notoriously small margins, have a big potential downside for BMW. However Panke insists it’s a segment BMW cannot ignore: “If you want to address segments of the market you don’t currently have access to – say, for second or third family cars – then you have to position vehicles at a lower price point,” he says. “Besides, this is where the volume is going to be – not in the US, but in Europe and Asia, where the small car segment is going to grow at twice the rate of the medium and large car segments.”
Panke believes the key to BMW’s success in the small car segment is to maintain a premium price position. He points out that although the Mini is two feet shorter than a VW Golf, it costs about the same, and most buyers will be tempted by a bewildering array of options, all of which carry a healthy profit margin.
BMW’s margins – said to average seven per cent and second only to those of Porsche – are clearly the key to the company’s go-it-alone strategy, as they give it the cash flow to continue to invest in R&D and capital expansion. “We have completely financed those activities from cashflow for the past 20 years,” says Panke, ” and we will continue to do that.”
Simple mathematics – take the current growth rate of five or six per cent per annum, and add in 100,000 units per annum each for the new X3 and 1-series – suggest BMW will be looking at a total volume of at least 1.2 million units a year within five years. Significantly, that’s equal to the total number of BMW and Rover branded vehicles sold in 1998, the best year for the combined group.
Size does matter to BMW, but not at any price. “We want to grow profitably,” says Helmut Panke. “The focus is we look for the profits first, then decide which models are more important. But we don’t see a limitation in our growth or size at this point.”
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