Magazine

BMW: Speeding into a Tight Turn


At Bayerische Motoren Werke's Dingolfing factory just outside Munich, the stately new 7 Series sedans are rolling off the line, in time for a November debut. A remake of its predecessor, the new model features a powerful eight-cylinder engine, an all-aluminum chassis for a smoother ride, and air-cooled seats. Then there are the fun touches, such as a key that when inserted into a slot automatically adjusts the driver's seat to the preferred position and tunes the radio to a favorite station.

It's a tough time to be launching a car with a starting price of $57,600. But that's BMW's specialty: making Ultimate Driving Machines. Sure they're expensive--but they're expensive cars that people love to drive. And pushing a mix of luxury and high performance has delivered profits for the company every year for the past 40, save one. The question is, can the small Bavarian carmaker ride out this recession, which looks especially nasty and is weakening all of its main markets? It's up to BMW's quiet CEO, Joachim Milberg, a former engineering professor, to make sure it can.

WHAT DOWNTURN? So far, BMW is on track. In September, when most auto makers suffered a big drop in U.S. sales, BMW's U.S. sales actually rose 4%, bolstered by demand for the X5, a smooth-handling $45,000 sport-utility vehicle that BMW's plant in Spartanburg, South Carolina, can't churn out fast enough. That compares with a 16% sales plunge for Porsche, a 12% drop for Toyota's Lexus, and a 9% drop for Mercedes-Benz. Even in the Northeast, where auto dealerships were deserted after the September 11 attacks, BMW reported few order cancellations.

An impressive performance. But is BMW big enough to go the distance? In today's global auto industry, most CEOs subscribe to the view that bigger is better. "History shows that small players fall by the wayside," says Garel Rhys, professor of motor industry economics at Cardiff University in Wales. Heeding conventional wisdom, BMW tried--and failed--to grow through acquisitions. It admitted defeat when it unloaded Rover Group in 2000, just six years after buying the British carmaker. Family-controlled BMW could one day become a takeover target, since its output is only half the 2 million vehicle-a-year threshold considered a prerequisite for long-term survival, according to Rhys.

The 58-year-old Milberg, an executive who sometimes seems more comfortable with robots on the shop floor than with people, knows all the arguments and has considered all the odds. He's still wagering that BMW will make it on its own. "There's no reason for BMW to merge with anyone," Milberg says. "Our strategy is to grow from our own strength." He's not going to try the mass-market route. His predecessor, the brainy Bernd Pischetsrieder, tried that by buying Rover, a troubled British maker of dumpy middle-of-the-road sedans (the classy Land Rover off-track vehicles were just a small part of sales). The strategy seemed to make sense--until Rover's accumulated losses ended up costing BMW $3.6 billion. And Pischetsrieder? Under intense pressure, he quit.

So Milberg has taken BMW back to its roots. No more midpriced cars for the masses. Not that BMW won't expand its lineup. Milberg is dedicated to one of the most aggressive product rollouts in BMW's history. But every model will compete on quality, engine power, and ride--none on price. In fact, every model will be positioned at the top of the price range for each category.

Thus, in addition to its traditional three-model lineup--the wedge-shaped $20,000-plus 3 Series, the sleek 5 Series, which goes for $29,000 and up, and the luxurious, top-of-the-line 7 Series--BMW plans to introduce 20 new models. It will develop a 1 Series compact with rear-wheel drive, which is a rarity in small cars, to ensure the same precise handling that characterizes its larger cars. It will also roll out upscale 6 Series coupes and convertibles, and the X3, a small variant of the popular X5, an SUV that handles like a sports sedan. Rounding out the portfolio are two legendary British marques: the cult Mini brand, a holdover from Rover, and Rolls-Royce, acquired in 1998.

BMW is counting on the product offensive to boost annual sales by more than a third, past $45 billion, in the next six years. While overall margins at DaimlerChrysler have just about vanished, BMW's have inched up to 9%, more than double the industry average. A slew of other auto makers issued profit warnings after the September 11 attacks. Yet analysts are forecasting that profits at BMW will jump as much as 50% this year over last year's $940 million, a figure which included losses at Rover. BMW had sales of $31 billion last year.

Milberg seems an unlikely choice to steer BMW through this makeover. Born during World War II in a small Westphalian town, he got his start as an apprentice machine fitter. After nine years at Gildemeister, a manufacturer of industrial machinery, he accepted a teaching post at prestigious Munich Technical University in 1981. Then BMW recruited him in 1993 to serve as a board member in charge of production.

SUDDENLY CEO. Milberg appeared just as stunned as everyone else when he was named CEO during a tense board meeting on Feb. 5, 1999. BMW's owners, the ultrarich and secretive Quandt clan, had run out of patience with management's inability to generate a profit at Rover after five years. And industry predators Ford Motor Co. and Volkswagen were circling. The writing was on the wall for Pischetsrieder, who resigned. Then his talented No. 2, Wolfgang Reitzle, walked out after being passed over for the top job. The Quandts handed Milberg the big prize, who before accepting made sure to confer with his wife by phone.

BMW's unassuming CEO certainly attracts less media attention in Germany than his counterparts, Volkswagen's imperious Ferdinand Pi?ch and DaimlerChrysler's commanding J?rgen E. Schrempp. "He doesn't fit the cliche you expect from a business leader," says a senior BMW executive. Yet Milberg displayed a steely determination in opting to pull the plug on Rover on Mar. 16, 2000. His decision sparked an outcry in Britain, where thousands of jobs were at stake. Milberg has no regrets, though. "We did everything we could to turn Rover around, and it didn't work," he says. If the British felt betrayed, the Bavarians heaved a sigh of relief. "The feeling within the organization was, now we can get moving again," says Chief Financial Officer Helmut Panke.

The question dogging Milberg now is whether he has scored his gains by doing only the simple stuff. After all, cutting Rover loose, though hard to do, instantly unleashed the moneymaking power inherent in the parent. But other problems lurk. BMW suffered a huge loss of managerial talent in the final throes of the Rover saga. Says one former exec: "Pischetsrieder and Reitzle were the heart of the brand."

CRITICAL EYES. It takes years to develop a new car, so it's too early to assess the impact of these defections. Yet concerns over the depth of BMW's bench have already surfaced. Take BMW's 7 series sedan, which hits showrooms in a few weeks. While critics rave about the engineering, they complain that designer Chris Bangle's quest to give the sedan greater presence resulted in a ponderous car with a bulky rear. That's nothing compared with what some critics and rivals said about the X Coupe concept car BMW unveiled earlier this year in Detroit. A car enthusiast wrote to influential Auto Motor und Sport magazine that the pudgy coupe looked like the offspring of a one-night stand between Ford and Fiat. Ouch!

Though both projects were far along when Milberg took over, the worry is that the former professor lacks the brand savvy needed to preserve the right BMW look. BMW officials are keenly aware they risk ruffling customers by straying outside the boundaries of its conservative styling. "We're going to be making a lot more products for a lot more segments. We have to expand the range of designs, and sometimes that hurts a bit," says Burkhard G?schel, director of research and development. But design blunders can be especially dangerous for a small manufacturer. Warns Rhys: "If BMW ever made an error with its 3 Series, it would be mortally wounded."

Another issue is how BMW will fare if the U.S. economy tanks. In the recession of 1991, BMW sales fell 16%, vs. 11% for the overall U.S. car market, partly because that was the year Toyota Motor Corp.'s Lexus luxury line made its debut. One wild card today is leasing, which accounts for one-third of the vehicles BMW sells every year in the U.S. Recession-ravaged drivers could return those cars when the leases expire, instead of signing up for new Bimmers.

Yet Tom Purves, chairman and CEO of BMW in the U.S., remains upbeat. He figures the expanded product range should help, as will a $350 million overhaul of U.S. dealerships. Purves believes that luxury car owners are loathe to part with their vehicles, even in hard times, so he doesn't expect a flood of returns after leases expire. Many homeowners have taken advantage of lower interest rates to refinance their mortgages and free up extra cash to justify those car payments. Purves also says BMW ownership has spread across all segments of affluent America. "With the trouble on Wall Street, we'd certainly have a reduction in sales, but its percentage isn't so great as to make a big blip," he says.

Doubts about recession and the model lineup have produced a divergence in investor opinion over BMW. In the minority are stock-pickers such as analyst J?rgen Pieper at Metzler Bank, who feels that BMW's profits won't grow enough to justify its price-to-earnings ratio, one of the highest in the sector. "In the short term, I see no reason to buy the stock," he says. Pieper also points out that in Germany BMW is facing a stream of new products from archrival Mercedes.

So far, most investors have been willing to back Milberg's wager. BMW's shares are down 5% since September 11, while the European car sector as a whole is off 12%. "It's the stock we prefer--even more so now that we're going into a big slowdown," says Guillaume Rambourg, a fund manager at Gartmore Investment Management in London, which owns 1% of BMW.

What comforts Rambourg is loyalty among BMW owners. More than two-thirds are repeat buyers. That kind of reputation allows the company to price its cars 10% to 30% higher than comparable models, says Karl-Heinz Kalbfell, BMW's brand-management director. According to Merrill Lynch & Co. (MER), BMW's incentives in the U.S. have been 35% lower so far this year than the industry average. The company's factories can swiftly shift production from one model to another, boosting output of a hot-selling car and cutting back on less popular models as needed. Those are powerful advantages, considering how savagely mass-market carmakers are discounting. BMW will need every one of its strengths to ride out this recession in comfort. By Christine Tierney in Munich, with Joann Muller in Detroit, Katharine A. Schmidt in Stuttgart, and Heidi Dawley in London


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus