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BMW CEO Norbert Reithofer knows the future is about more than high-performance suburban status symbols
When former U.S. Secretary of State Madeleine Albright arrived for lunch with BMW Chief Executive Officer Norbert Reithofer in late 2008, she brought along an unexpected guest, Joschka Fischer, a one-time left-wing radical. In the early 1970s, Fischer was fired from GM's Opel unit for trying to organize a communist revolution among his fellow workers, and in 1973 he was photographed clubbing a police officer in a street protest. Later, disavowing violence, he entered mainstream politics, rising to prominence in the Green Party and serving as German foreign minister from 1998 to 2005.
Now he has a new job. After that lunch, Reithofer hired both Fischer and Albright to help BMW win support within the company and around the world for its Megacity Vehicle. Battery-powered, and built of carbon fiber and aluminum, it is meant to win BMW a place in the fastest-growing markets—sprawling urban megalopolises.
"The Megacity Vehicle is a must-have for BMW," says Reithofer at the company's landmarked headquarters in Munich. Reithofer, who has been at BMW for 23 years, is an unprepossessing man of 54, rarely seen in anything but a dark, three-button suit, with all three buttons fastened. He lives in the same modest Bavarian village where he was born. He owns a beagle. But with this new vehicle, Reithofer is attempting something radical, pushing BMW beyond its core strengths of speed and style, and toward solving different problems, like global warming, oil depletion, and the shift in growth from the West to the East. China is, in a sense, the ultimate destination, a land of exponentially growing megacities—and the pollution, traffic snarls, and huge spending power that come with them.
Reithofer's challenge is to secure a place for BMW in this new world without sacrificing its status as a rarefied drive for the open road. "We don't see threats; we see opportunities," says Adrian van Hooydonk, an 18-year BMW veteran whom Reithofer installed as design chief last year. "That's an indication of how this company thinks and the kind of energy that Dr. Reithofer brings to the company. 'It is what you make of it,' that's what he always says."
Inside BMW, the Megacity message didn't immediately resonate with all of BMW's horsepower-driven managers. Their resistance is understandable: BMW is doing quite well as is, building beautiful cars that go fast. In 2005, it bested archrival Daimler's (DAI) Mercedes-Benz in sales, and the company has come roaring out of the recession, expecting to sell 1.4 million vehicles this year, just off its 2007 peak, while raising margins to 6.6 percent. With both the trendy Mini badge and Rolls-Royce's silver lady under BMW control, the Bavarian manufacturer is on more solid footing than at any time in its 94-year history. Despite its success, however, BMW is still a much smaller company than its rivals. It lacks the giant bus and truck operations that allow Mercedes to amortize research costs. Volkswagen, with a stable of 10 brands including Bentley, Porsche, and the aggressive Audi nameplate, sells nearly five times as many cars as BMW and has vowed to topple it as the biggest premium automaker by 2015. "Because of its size, BMW can't allow itself any mistakes," says Stefan Bratzel, director of the Center of Automotive at the University of Applied Sciences in Bergisch-Gladbach, Germany, and a former manager at Daimler's Smart unit. "If the Megacity Vehicle doesn't work, BMW will have considerably less room to maneuver."
Reithofer grew up in Penzberg, a former coal-mining town about 50 kilometers (30 miles) south of Munich. Living a short distance from the house where he was born, he's stayed in the area to be close to family and the Alps, where he unwinds by skiing and mountain biking. After studying machine tools and operating science under Joachim Milberg, BMW's former CEO and current chairman, he joined BMW in 1987 as head of maintenance planning. Later he moved to South Africa as technical director of BMW's plant in Rosslyn. From 1997 to 2000 he managed BMW's factory in Spartanburg, S.C., where the company manufactures the X5 and X6 lines of sport-utility vehicles. He credits his stint in the U.S. with streamlining his management style.
"In the U.S., I learned to take quick decisions and not hold long speeches," he says. "When I got back to Munich, it struck me right away how long it took to make decisions, but we've changed that now."
Part of his plan for the Megacity project has been to leave some of the long speeches to Albright and Fischer. The two spoke separately to auditoriums filled with hundreds of BMW executives and engineers, discussing trends like urbanization and global warming that threaten to make BMW's athletic sedans obsolete. The result has been a groundswell of enthusiasm for the electric-car program, which came out of Project i, BMW's internal think tank for the future of transport.
Ulrich Kranz, a former Mini developer, runs Project i, and says more people want to work for the unit than he can hire. Project i has grown from a handful of diverse experts in late 2007 to a team of more than 250 people, as BMW readies for the launch of the Megacity Vehicle in 2013. "Reithofer has provided more than 100 percent support," says Kranz. "He is an absolutely enthusiastic motivator."
He's also a listener, and that helped BMW navigate the financial crisis without slipping into the red. In late August 2007, on a routine swing through the U.S., Reithofer met for a light lunch with a half dozen of BMW's top American dealers. The meeting at the carmaker's customer center near its factory in Spartanburg was upbeat; sales were heading for a record that year. When conversation turned to prospects for 2008, however, the salesmen voiced concern about credit markets and warned that problems in the subprime market could spill over and hurt demand.
Reithofer could have been forgiven for ignoring the warning. It was after all more than a year before Lehman Brothers' failure set off the financial crisis. Instead, when he returned to Munich, he started putting crisis plans in place. The early warning helped BMW scale back production quickly, which prevented a glut of unwanted cars eating up cash and depressing prices. The company trimmed 11,000 workers from its payrolls through attrition and buyouts, and reduced hours for another 25,000, but was able to get through the crisis without layoffs.
Reithofer also used the crisis to reduce purchasing expenses and lower development costs, hoping to move profit margins to at least 8 percent by 2012. "The crisis accelerated the process," says Reithofer, who personally test drives competitors' vehicles and visits dealers anonymously to get an unfiltered view of his company. "We're farther along than we otherwise would have been," he says. That progress is reflected in the company's stock performance. The shares have risen 50 percent this year, outperforming Daimler's 20 percent advance and Volkswagen's 40 percent gain.
"Reithofer was very underrated when he came in, but he's since become one of the most respected CEOs in the industry," says Philippe Houchois, an analyst with UBS (USB) in London. "He's not flashy but rather an inside guy who gets the work done."
Reithofer's strategy is based on maintaining BMW's independence, keeping in mind the rescue funded by Herbert Quandt, who had inherited a stake in BMW from his father. In 1959, BMW was losing money and needed cash to develop a mid-market car. Mercedes' parent, then called Daimler-Benz, made an offer for BMW, which was rejected by Quandt because of opposition by the workforce and small shareholders. Quandt scraped enough money together to provide BMW a life line, and today his descendants still own nearly 47 percent of the carmaker. Says Reithofer, "The advantage of our major shareholder is—among other things—that they give us the stability to think long-term."
The long view has pushed BMW to build electric vehicles and the smaller cars that will be needed in the new urban world. BMW staff traveled to Tokyo, Mexico City, and Los Angeles, among others, to talk to mayors, city planners, and even regular folks, whom they followed on their commutes and into their homes to see how they lived and traveled. They determined that a car still had a place in crowded cities as a symbol of individuality and refuge from the bustle, but it had to be sustainable.
Tom Mouloghney, a new kind of a car nut, exemplifies the new BMW culture. Though he has a Porsche Boxster in his garage and a DeLorean in his past, he has gone electric and isn't going back.
"It's my intention to have at least one electric vehicle from now on; I hope the options are available," says Moloughney, who pays $600 a month in the second year of a lease of one of BMW's electric-powered Mini E test vehicles. "I don't see any way around us having to reduce our dependence on oil."
Moloughney installed solar panels on the roof to generate electricity for his daily 60-mile commute between his Italian restaurant in the New Jersey suburbs of New York and his home in rural Chester. Explaining the extent of his commitment, he cites energy independence, cost savings, and environmental concerns.
"What people like about this car is that it has no oil, so it's not hurting the economy, it's not hurting the environment, and it's not supporting countries that are not friendly to the U.S.," says Moloughney, who has a bumper sticker that says "Starve a terrorist! Drive Electric!" on his Mini. His license plate reads EF-OPEC.
There are many contestants, of course, in the race to build an electric car. Later this year, Nissan Motor will introduce the battery-powered Leaf, and General Motors will launch the electric Chevrolet Volt, which extends its range with a gas generator. More of a threat to BMW is Daimler, which has a broader development pipeline. A battery-powered A-Class compact will debut at the Paris Motor Show later this month, adding to fuel-cell buses on the streets of Hamburg, electric-powered Vito vans in Stuttgart, and a test fleet of 1,500 battery-powered Smarts in places such as Berlin, Paris, Rome, and London. The view from Munich is that the rivals are pedestrian.
"Since we're BMW, we don't want to create just any old electric car," says design chief van Hooydonk. "We want to deliver what people so far think is impossible: the combination of joy and zero emissions."
Though the Mini is popular and seems to carry some component of joy, the electric version of the car is nothing special technically. The rushed project pushed out in 2008 is a simple conversion, which placed more than 5,000 laptop batteries where the back seat is supposed to be.
BMW also has a checkered past with alternative fuels. The company spent years developing hydrogen-combustion technology, using hard-to-handle liquid hydrogen, which needs to be cooled to minus 253 degrees Celsius, just 20 degrees above absolute zero, to become a fluid. BMW showcased the technology in 2007 by outfitting 100 of its 7-Series sedans with bulky hydrogen tanks; the fuel, however, boiled away despite insulation equivalent to 17 meters (55 feet) of Styrofoam.
Perhaps the most daring part of Reithofer's plan for the Megacity is that he expects to make money with the car, despite the use of costly materials like lightweight aluminum and carbon fiber. The company has set up a $100 million factory near Seattle, together with partner SGL Group, to make the carbon fiber for the car's passenger safety cell. The use of carbon fiber is key to BMW's strategy for the Megacity, which will be big enough for four people and be marketed under a new BMW subbrand. Because the material is 50 percent lighter than steel, the carbon fiber will reduce the size and cost of the battery needed to move the car. Until now the automotive use of carbon fiber has been limited to Formula 1 race cars and other high-performance autos, where price isn't an issue. But BMW insists it can mass-market carbon fiber components, which will be glued together to form the safety cell. In addition, BMW is preparing a new test vehicle—the ActiveE, a converted 1 Series coupe—which will have lithium-ion battery packs developed by BMW and its partners Samsung SDI and Robert Bosch, as well as new electric motors.
BMW is also planning to expand its conventional business, adding more small cars to its namesake brand and expanding the Mini line with at least a roadster and coupe. It is, too, considering a new factory to support demand in Russia, India, and other emerging economies. All told, the company is looking to sell more than 2 million cars annually by 2020, an increase of 55 percent over 2009.
"I would have decided to produce the Megacity Vehicle even if, contrary to our expectations, it doesn't make money in the first generation," says Reithofer, who hasn't been afraid to break with traditions such as adding front-wheel drive models to the BMW brand, exiting Formula 1 auto racing, and linking with rival Mercedes to save purchasing costs. "As a leader, you can either be an entrepreneur or an administrator. I see myself as an entrepreneur."
When Reithofer shuttles between Penzberg and Munich, he surges down the A95, a speed-limit-free stretch of highway that begs for a car like his 12-cylinder 7-Series. But his view these days looks past the surrounding Bavarian countryside and toward the crowded avenues of Shanghai and Mumbai. Those streets demand a different type of car.