Bayerische Motoren Werke AG is defying the odds in Russia.

Over 95% of new cars sold there have been models priced below $10,000, and global players like Fiat Auto SpA and General Motors Corp have hesitated to launch production in Russia, afraid they cannot turn out vehicles cheaply enough to lure customers. Yet the foreign marque assembled in the highest volume in Russia last year was BMW, though its cars are the most expensive models made in Eastern Europe, except the hand-made limousines from the factory named after Likhachov (OAMO Zavod imeni Likhachova or ZiL) in Moscow.

BMW may seem to build modest volumes (output hit 1,350 last year), but it hardly would join the pack of companies hoping to make over 100,000 cars a year in Russia anyway.

The German automaker has arranged a discreet venture in Kaliningrad, formerly named Konigsberg, birthplace of philosopher Immanuel Kant and historical capital of East Prussia. (The city now is capital of the Kaliningrad Region, a Russian enclave on the Baltic Sea.) BMW contracts out assembly of its vehicles to one of two plants there owned by ZAO Avtotor. (The other site produces models from Kia Motors Corp of Hyundai Motor Co Ltd.)

Wolfgang Schlimme, managing director of BMW Russland Trading OOO, discussed all aspects of the German manufacturer’s presence in Russia in an interview at his office in Moscow. He talked to Ryan James Tutak, associate editor of just-auto.com for Eastern Europe and former Soviet Union. An edited transcript of the conversation follows.

Wolfgang Schlimme, BMW managing director for Russia

just-auto.com:
How many BMWs were assembled in the last two years at Kaliningrad?

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Schlimme:
The first car rolled out August 1999, and production in the first year was 600. We celebrated the 1,000th vehicle in April 2000, and output last year totalled 1,350, a solid volume according to plans. Realistically, our target for 2001 is more than 2,000.

just-auto.com:
What models are made?

Schlimme:
Only the 5-series is produced regularly. We started with two variants that had been successful in Russia (the 523 and 528), and they were made through October 2000. In November 2000, assembly began of the new 525 and 530: these models were introduced to the market in January 2001 with different options packages… The 7-series has been built only on order – mainly the 728.

just-auto.com:
Do you still work with Land Rover?

Schlimme:
We recently transferred responsibility for Land Rover to the Moscow office of Ford Motor Co.

just-auto.com:
When the plant was launched, BMW officials said they would be unsatisfied with output under 3,000 a year. Are you happy with volumes for the first two years?

Schlimme:
The 3,000 included Land Rover. Volumes for the 5-series were in line with our targets.

just-auto.com:
What can you disclose about the plant?

Schlimme:
The floor space is roughly 20,000 square metres. We have about 300 workers, and two-to-five managers from Germany are always there to supervise production and quality.

Avtotor plant for BMW

just-auto.com:
What is the price gap between a 5-series from Germany and a 5-series from Russia?

Schlimme:
The 523 and 528 were roughly 20% cheaper from Russia than from Germany. The cost of models from Kaliningrad includes features that perfectly adapt the cars for Russia: an elevated ride with fitted springs and stabilisers, crank-case protection, enlarged windscreen-washer tanks, wider tyres, etc.

just-auto.com:
What percent of BMW cars sold in Russia come from the plant?

Schlimme:
Over 75%.

just-auto.com:
Do you build or sell other versions of the 5-series in Russia?

Schlimme:
We offer the 540, but it is not made in Kaliningrad because it is a low-volume high-end version. The plant would need different operations and tools. This is true for M5 too. In the past, our best-selling editions of the 5-series in Russia had six-cylinder engines.

just-auto.com:
What operations does the plant perform?

Schlimme:
The plant receives kits of semi-knocked-down (SKD) vehicles with all components needed for assembly, except a few items that are localised like starter batteries. The plant is not simply fitting tyres and wheels onto the cars. Each kit has roughly 2,000 parts to be pieced together.

just-auto.com:
Has BMW invested in the plant?

Schlimme:
BMW is investing in Russia in three areas: developing a dealer network; establishing a distribution centre for parts; and supporting the plant. But we have not put capital directly in the factory. The bulk of investment there is handled by our partner Avtotor.

just-auto.com:
How much has BMW invested in Russia?

Schlimme:
This is hard to answer because we continually invest, and we cannot separate our outlays for each of the three areas. Concurrently, we are improving our marketing and training. We are laying a solid foundation for the future.

just-auto.com:
What has BMW pledged to invest in Russia?

Schlimme:
Over DM100m in five years starting in 1999.

just-auto.com:
What are BMW’s long-term objectives for the plant?

Schlimme:
We have achieved one already: perfect quality. This began with the first vehicle that rolled out. Production remains a great success, and we have overcome prejudices against Russian manufacturing. Stereotypes about poor quality are a dead issue with the media and public. This is important for us to sell cars from the plant… Our next goal is to find new types of customers… Essential for all buyers is our assurance that our cars are 100% legal in customs-clearance and 100% trustworthy in value… Most of our competitors vary prices for the same models across Russia. We are different. BMWs in Novosibirsk cost the same as BMWs in Moscow… BMW feels obligated to guarantee to customers here that every sale is clean, clear and reliable. As a result, we are among the first brands in Russia to create an active market for used vehicles. If you buy a car first registered in 1997, the model still has value, but the value here depends on the integrity and transparency of its customs clearance. Our approach, including a consistent price policy, enables consumers to retain reasonable residual values for cars after two or three years, when they want to buy replacements.

[Editor’s Note: According to a story on 24 December 2000 in the car magazine Avto-Revue of Moscow, the production quality system is the same at the Kaliningrad plant and BMW factories in Germany, and the results are better in Russia… On a visit to the automaker’s headquarters, Russian auditors found mistakes in production that German auditors missed, the article said… An official at Lada-maker AO AvtoVAZ told Avto-Revue that no car could pass inspection at his plant, under the auditing regime at Kaliningrad… BMW declined to comment on the report, except to confirm it applies the same quality system at its factories worldwide.]

Avtotor plant for BMW

just-auto.com:
Are your sales to the Russian government important?

Schlimme:
Very important. A premium and prestigious brand must establish a strong presence with the state’s power structures. BMW’s popularity in Russia is based on its image.

just-auto.com:
What percent of your sales are to the government?

Schlimme:
I cannot tell you exactly, but we have a strong position because we produce locally, and we definitely have a high acceptance among government organisations. It is a reciprocal relationship: BMW invests in Russia, and the country supports its industry.

[Editor’s Note: According to the daily newspaper Kommersant of Moscow on 16 January 2001, the plant recently built over 10 cars (including the 523 and 735) ordered by the high command of Russia’s army. BMW would not confirm the report.]

just-auto.com:
How many dealers do you have?

Schlimme:
20. This year, we plan to add five or six.

just-auto.com:
What percent of your sales are in Moscow?

Schlimme:
We differ from competitors. In 1999, we started with a focus on Moscow and St Petersburg, major centres that allow carmakers to achieve easy sales volumes with a little marketing. But an emphasis on two cities is no way to build a national dealer network. The percent of our sales not in Moscow and St Petersburg was nearly 15% in 1999 and nearly 30% in 2000. We expect it to be 35% in 2001. In sales outside the country’s power centres, our partners are outpacing our competitors.

just-auto.com:
What did you sell the past two years?

The BMW 5 series sedan

Schlimme:
711 in 1999 and 1,301 in 2000.

just-auto.com:
What is your plan for 2001?

Schlimme:
2000 was the best-ever year for BMW in Russia, an increase of 83% on 1999. The previous record was sales of 1,087 in 1997, before the country’s economic crisis in August 1998. In Russia and elsewhere in Eastern Europe, BMW enjoys some of its best growth rates in sales, and we expect this tendency to continue in 2001.

just-auto.com:
Any of your dealers still sell Land Rover?

BMW 530

Schlimme:
A few.

just-auto.com:
Would this be allowed later?

Schlimme:
That is under negotiations.

just-auto.com:
Would you oppose it?

Schlimme:
Land Rover offers interesting possibilities for some dealers. But BMW’s new sport-activity vehicle X5 is a great success, and we are sure this model can replace a lot of Land Rover volume in those outlets. X5 is only the start of the X model range, so I am confident dealers will not miss Land Rover in future.

just-auto.com:
Could BMW sell its future small car, the 2-series, in Russia?

Schlimme:
Russia is a market for us to focus on the 5-series, 7-series and X-models. I do not see big volumes for the 2-series here.

BMW 320

just-auto.com:
According to Russian media, the plant will start assembling the 3-series this year, specifically the 318 and 320. The models reportedly would cost $4,000-$5,000 below import versions.

Schlimme:
I cannot comment, but we plan to announce news about the factory on February 7.

just-auto.com:
Do you sell motorcycles in Russia?

Schlimme:
Motorcycles are a beautiful success story here. Our sales in Russia started 8 April 2000, exactly one year after we signed contracts with local partners. In nine months last year, we sold close to 100, a nice figure. An attractive market is emerging, and we are following our strategy for selling cars, by developing motorcycle-competence centres nation-wide. We use the same regional warehouse for car components to provide replacement parts and riding gear for motorcycles… We have two dealers in Moscow, a dealer in St Petersburg and two regional sales points… I am a motorbike fanatic. Motorcycles are central to BMW’s core values and history. I cannot imagine BMW prospering in a market without a successful motorcycle business. Remarkably in Russia, we see strong demand for bigger and more prestigious models. Among the best-selling bikes are K1200LT and R1150GS. Cruiser is popular too… We have enjoyed an enthusiastic start with motorcycles. Some importers of other marques in Russia sell fewer cars than we sell motorcycles.

just-auto.com:
Does BMW sponsor motorcycle events in Russia?

Schlimme:
We had important launches in Moscow and St Petersburg with huge crowds – over 1,000 visitors at each. In the bike world, it is not important who you are. You are a biker. Motorcycling is classless… We support motorcycling exhibitions and sporting events… Many people ask: Can you ride a bike in Russia? Is it dangerous? Is road traffic a problem? But dangers are not worse here than in New York or Paris or any big city. I see no reason not to enjoy riding in Russia. Of course, the biking season is not all year round: it runs only April to September.

just-auto.com:
Is your office responsible for all of the ex-USSR?

Schlimme:
No. Only Russia.

just-auto.com:
Foreign manufacturers have a reputation for neglecting customers in Russia, once the cars are sold. Service often is seen to be poor. Do you have problems here?

Schlimme:
On the contrary. Since 1996, we have maintained a training centre in Russia with support from BMW headquarters, including external trainers and regular technology updates. We continually train our sales staff, and we maintain regular contact groups for customers… Our spare-parts system operates 24 hours a day, 365 days a year. We deliver 95% of orders within one day. We can serve places far from Moscow, like Novosibirsk, within two days. Our logistics are really efficient… In 1999, BMW held an internal competition for service staff worldwide – the team in Russia participated for the first time, and they won first prize. You can see the high level of education and qualifications of people here.

just-auto.com:
Besides the Moscow motor show, where else have you exhibited cars in Russia?

Schlimme:
At shows with dealers in Ekaterinburg, Nizhny Novgorod and St Petersburg.

just-auto.com:
How will demand for foreign cars evolve in Russia?

Schlimme:
In 2000, BMW surpassed its sales levels before the crisis in 1998. Over the next two years, the luxury segment will remain small, but I see steady growth because business is recovering significantly. Signs are all over. It is harder to reserve flights to Moscow or hotel rooms in Moscow – because more people are coming. It is much harder to book advertising space in media. Consultants and law firms are busy again. So not only our business is growing: the business of our customers is growing. Plus a lot of Russian companies are emerging from the crisis stronger than they entered it; they are potential customers for us… We see optimism everywhere. In our business, dealers and importers are upbeat – and more motivated. The mood is good, and that is important.

just-auto.com:
Any prospects to buy parts from Russia for car assembly here and elsewhere?

Schlimme:
BMW is in discussion with potential suppliers for Kaliningrad and other plants.

just-auto.com:
How is your business for armoured cars?

Schlimme:
Demand is growing. Our armoured car, based on the 750 with long wheelbase, is a strong product. It enjoys a unique market position, but I prefer not to discuss sales.

The BMW 7 series sedan

just-auto.com:
Where does Russia rank globally among BMW’s markets for armoured cars?

Schlimme:
Not in the top 10. A lot of people exaggerate elements of crime and danger here.

just-auto.com:
What happens when you find customers seeking service for stolen cars?

Schlimme:
We cooperate with authorities in Germany and Russia… But dealers and service technicians are on the spot, they check the cars, and they must think for themselves, so the first decision must come from the person who discovers a car is stolen. If a mechanic sees a long-time customer with a new vehicle that appears suspicious, it can be easy to alert the individual to potential problems. If an unknown customer comes, and the vehicle-identification number looks altered, the dealer must be careful in reacting. But anytime we learn something from dealers, we investigate immediately.

just-auto.com:
Why did BMW decide to assemble cars here?

Schlimme:
It is not simply to gain a break on customs duties. We see opportunity to grow with the market as a serious carmaker and serious investor in Russia.

just-auto.com:
But BMW could make cars in other markets with bigger immediate returns.

Schlimme:
If you want to prosper in a market with huge potential like Russia, you must build a presence early – to be ready when demand grows. If you wait until the market matures and your competitors are established, you are too late. You must be part of the development to be part of the success.

just-auto.com:
The plant in Russia will serve only Russia?

Schlimme:
Absolutely.

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