Back on Track

Addition by subtraction.

That's the formula BMW AG has used to fight its way back from a nearly disastrous brush with red ink in 1999. And, given its success, it wouldn't be surprising if DaimlerChrysler AG brass were to second-guess their strategy to stick with Chrysler in North America, rather than cut and run.

Only 24 months ago, things looked bleak for the Bavarian automaker. Saddled with heavy losses from its Rover Group operations and distracted by top rank squabbling over what to do about it, BMW erupted into a nasty bloodletting that saw Chief Executive Bernd Pischetsrieder and product development head Wolfgang Reitzle issued their walking papers.

A fire sale followed a year later as Rover car operations were peddled to investment firm Phoenix Consortium for a meager £10 ($15) and Land Rover signed over to Ford Motor Co. for $3 billion. The move made it clear BMW's controlling shareholders, the Quandt family, indeed were losing patience, and it spawned new rumors a buyer would be sought for BMW.

Since then, the maker of the “ultimate driving machine” has rediscovered the road back to its roots. Having abandoned Rover, and with it the distraction of designing, building and selling high-volume, low-margin cars, BMW now has its full attention back on what it does best — highly profitable, performance vehicles.

Chief stylist Chris Bangle puts it this way in a design dissertation penned for the Harvard Business Review: “We don't make ‘automobiles,’ which are utilitarian machines you use to get from point A to point B. We make ‘cars,’ moving works of art that express the driver's love of quality. This may sound like New Age hokum, but it is a powerful core belief at BMW.”

Hokum or just plain hocus-pocus, it appears to be working. BMW says turnover rose 2.8% to a record E35.4 billion ($33 billion) in 2000 despite the loss of Rover business, as revenues from BMW-brand vehicle sales jumped a whopping 20.5%.

And the new model game plan — which includes the upcoming Mini, a new entry BMW called the 1-series, and a Rolls-Royce to fill out the top end — holds far more promise than the one circa 1998, when BMW appeared tragically bent on becoming a full-line car producer.

“Volume as an end in itself is not the objective,” Chairman Joachim Milberg now says. “Rather, what we want is profitable growth, with ‘profitable’ coming first and ‘growth’ following second. What matters is strength, rather than sheer size.”

Burned by the Rover experience, Mr. Milberg has issued a clear edict, notes Helmut Panke, management board member in charge of finance. “Each of our products has to have the same profitability hurdle rate,” he says, from the least-expensive Mini to the top-of-the-line Rolls.

Even with those checks and balances, the 1-series project still represents a risk, as critics contend a lower-cost BMW could cheapen the brand. In fact, that was the thinking that initially led to the Rover acquisition — management felt it was safer to use a separate marque to attack the market's low end, leaving the BMW badge untarnished.

But Mr. Panke no longer sees any downside to lowering the price of entry for BMW customers.

“I honestly don't see the dangers,” he says, pointing out that size, comfort and performance levels will be greatly differentiated between the 1-series and more mature 3-series. “In our understanding, there is room in the market for a product that is positioned like this,” he says.

To meet Mr. Milberg's stiff profit targets, the rear-drive 1-series, due in 2004, will share key components with the 3-series. That likely includes powertrains, electronics, instrumentation, seats, axles and front end, executives say.

Low labor rates are not part of the formula for keeping 1-series costs down, however. The new model will be launched at BMW's Regensburg, Germany, plant. And although the need for more capacity means a new assembly plant will be built — eastern Germany and the Czech Republic are leading site candidates — that facility will produce the more tried and true 3-series at startup.

Manufacturing flexibility is a key part of BMW's cost-cutting strategy, however. The new plant's body shop and assembly tooling will be agile enough to do both the 1- and 3-series based cars, and the company is targeting 12-day order-to-delivery times across-the-board by 2004. More outsourcing is likely for the new model, as well. “We'll bring in more components,” says Norbert Reithofer, BMW board member in charge of production. “We can't make every screw.”

A step below the 1-series in size and price is the new Mini — which appears destined to be an out-of-the-box hit. The Mini, all that's left of BMW's ties to Rover, will bow this summer in Europe and Asia and will land in the U.S. in first quarter 2002.

Initial capacity is set for 100,000 units per year. But the Oxford, U.K., plant is positioned to expand to 200,000 cars annually, and BMW is hinting of future derivatives beyond the initial three models — the Mini One, Mini Cooper and performance-oriented Mini Cooper S.

“If one just thinks long-term of brand development for the Mini, one will have to go to other body concepts than just having the current (models),” Mr. Panke says. “And if you dream, then yes, you can start dreaming of new volumes there.”

At the other end of the spectrum is the new Rolls, which BMW will launch in 2003, when it takes possession of the brand from Volkswagen AG. Although there reportedly is some last-minute politicking to squeeze out the final drop of government incentives, BMW is expected to build a new 1,000-unit-per-year plant in Goodwood, U.K., near the one-time home of Rolls-Royce co-founder Sir Henry Royce, to handle assembly of the car. It is part of a £1 billion ($1.45 billion) investment BMW plans for the U.K. by 2002.

Like the Mini and 1-series, the new luxury sedan also represents as much a challenge as opportunity for BMW. For many owners, buying a Rolls-Royce is less about the car, itself, and more about the pampered buying process and the way the sedans are built — to individual specification by highly skilled craftsmen.

But here too, execs insist BMW is up to the task. The automaker acquired low-volume production experience with the 8-series, insiders point out, and many of those production processes — and the car's aluminum spaceframe underpinnings — will be adopted for the new Rolls.

As for selling $200,000-plus, chauffeur-oriented cars, executives say that too is a logical, evolutionary step for the automaker.

“If one analyzes the underlying demographic trend, people want to go beyond the Mercedes S-Class, BMW 7-series and Lexus LS430 level and have a high technology, high prestige product with high quality,” Mr. Panke says.

Having the Rolls brand to fill this niche will help BMWs remain true to their core values, he adds. “A lot of customers said they wanted more luxury out of a BMW car,” he says. “Instead of putting that into the 7-series and step by step moving it away from its role, we can answer those needs with Rolls (and) keep the BMW brand focused.”

As if the Mini, 1-series and new Rolls weren't enough, BMW also will offer a 6-series coupe and convertible “within the next few years.” A new M3 convertible will bow this spring and a completely reworked 7-series flagship will be unveiled at the Frankfurt Motor Show in September. Also on tap is a full-fledged crossover utility vehicle (CUV) assault. Spurred by the market performance of the X5, at least two more CUVs are planned, an X3 sized down a notch from the X5 and a bigger X7 model.

The product barrage is continuing to squeeze capacity. Last year, BMW produced a record 835,000 vehicles, with overall supply still lagging demand. To rectify that, the automaker is investing $300 million for a body shop expansion at its Spartanburg, SC, plant in order to boost capacity 25% to 100,000 units per year. It also has launched assembly of 10,000 3-series cars annually in Amata, Thailand, and reportedly is on the verge of adding 3-series assembly to its low-volume 5- and 7-series operation in Kaliningrad, Russia. And it has shored up engine capacity, with a new £400 million ($580 million), 400,000-unit 4-cyl. plant at Hams Hall, near Birmingham, U.K., and a 25% expansion of the Steyr diesel facility in Austria.

With the expansion at Spartanburg, the launch of the Mini and other bottleneck improvements, BMW production should surpass 900,000 vehicles this year. With the new plant on tap and rising Mini output, BMW capacity easily will top 1 million units by 2004.

Although the investment tells the story, executives remain cautious about publicly predicting how high is up for BMW.

“I think (we'll see) continuation of smooth (sales) growth — whether it is 6% or 8% is not important,” says Mr. Panke. “We see the market for the BMW product (growing). The acceptance for not just the cars but the sports activity vehicle gives us the message that we are on the right track.”

The rapid turnaround has paid off in spades for investors. In the past year, BMW shares rose to an all-time high of E41.77 ($37.50) in October before settling in at E34.90 ($31.33) at year's end — still a 15% gain on year-earlier levels that outperformed both the German DAX 30 and CDAX Automobile indices. Preferred stock jumped 43% during the year. And higher profits are promised for 2001.

All that apparently is making the Quandt family happy again. And for the time being at least, speculation that BMW may need a partner to survive has been laid to rest.

“There's no reason to think of a merger or sellout, because BMW, in particular now after the repositioning of our strategy, is one of the most marketable manufacturers in the world,” Mr. Panke says. “If you look at the margins, we are No.2 in the world per car in profits. So there's no real reason to sell.

“And in talking to the (Quandt) family members myself, they will not consider any upcoming proposal there.”