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BMW: Crashing The Compact Market


Can a compact car be endowed with the allure of a sporty luxury sedan? That's the wager Germany's BMW is making as it prepares to launch its 1 Series model across Europe. Eager to spur growth, BMW is betting that a smaller car with the high-performance handling and safety features of its exclusive sedans will win over fans of the Audi 3 and top-of-the-line Volkswagen Golf. It's even hoping to lure buyers upmarket from such mass market producers as Ford and Opel. "The 1 Series is a major milestone in the BMW Group's expansion into new market segments," says Burkhard G?schel, BMW board member in charge of design and engineering.

Since BMW sold its stake in Britain's MG Rover Group in 2000 and gave up the notion of acquiring a mass-market brand, the $50 billion auto maker has carefully added one hit model after another, from premium SUVs to sleek coupes and zippy roadsters. Each addition stoked growth, with revenues up 11% since 2000 and profits up 61%. But entering the compact market, Europe's largest and most fiercely competitive, may prove the toughest challenge of all. "It's difficult to save on costs, go downmarket, and still have a premium car," says Albrecht Denninghoff, senior automotive analyst at Bayerische Hypo-und Vereinsbank in Munich.

Another danger is tarnishing the brand with a model that disappoints. That's what happened when the compact hatchback Mercedes A-Class was launched in 1998. But the 1 Series, which starts at $23,800, doesn't stint on premium features. BMW incorporated styling, drive dynamics, and safety innovations from its pricey sedans into the new compact. For example, a high-performance, rear-wheel drive architecture will give the 1 Series a sporty, stick-to-the-road feel even when taking tight bends at high speeds. It also boasts the best aerodynamics in its class. "For good handling, the 1 Series will beat the competition hands down," says Philipp Rosengarten, senior market researcher at Global Insight in Frankfurt, who forecasts sales will hit a healthy 148,000 in 2005 and rise to 195,000 in 2006.

The 1 Series' avant-garde design should turn a few heads too. It has BMW chief designer Chris Bangle's hallmark muscular shoulder line and flame surface styling. The more powerful engine for the 120d hatchback tops out at 220 kph. Standard equipment inside includes a Bluetooth mobile phone interface, push-button starter, memory functions for climate control, seats, and mirrors, plus four-way lumbar support.

PARTS SHARING

The 1 Series launch is expected to push sales of BMW-brand cars over the 1 million threshold in 2004. But with all those premium features, will the 1 Series make money? The Mercedes A-Class, which starts at $31,000, is still losing an estimated $130 million a year after six years. Analysts say sales of the first-generation 1 Series are unlikely to recoup the $850 million to $1 billion development costs. But the move will ultimately pay off, analysts say, since BMW designed the car to share some 30% of its components with the slightly larger BMW 3 Series sedan and made sure it could be built on the same production line as the 3 Series.

Parts sharing and production flexibility will help generate savings. While margins may be lower in the compact segment, the extension of the brand downstream is designed in part to lure new and younger buyers who will eventually trade up. "The cash cows are the 7 Series and the 5 Series," says Thomas Sedran, partner at Roland Berger Strategy Consultants in Munich.

A youth-oriented campaign for the 1 Series is in full swing on the Internet, luring surfers with contests for hot concert tickets and sports events, as well as a test drive. But will Europe's twentysomethings appreciate the car's racy handling and technical innovations, such as tire-defect monitors? If 1 Series sales surge, BMW will have turned the economics of the car market's biggest sector on its head.

By Gail Edmondson in Munich


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