Join Date: Nov 2004
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BMW Puts a Premium on Independence
MUNICH — The quest for scale that now obsesses the global automobile industry does not impress executives at BMW.
Known for its iconic blue-and-white logo and an engineering emphasis on sports-car-like drivability, BMW, the German luxury automaker, is placing a premium on maintaining its independence during the most painful economic downturn in decades, even as companies like Fiat and Chrysler seek government help in pulling off large cross-border mergers.
While some analysts say they worry that BMW is at risk of losing ground to rival Audi, which is owned by Volkswagen, the largest European automaker, the company is banking on going its own way. Independent-minded people of means, it reasons, will pay good money for cars produced by an independent automaker.
“Do people want to differentiate themselves from each other?” Friedrich Eichiner, BMW’s chief financial officer, said during an interview here at the company’s headquarters. “I think so. That wish is there and it is enduring.”
But as the man who signs the checks at BMW’s towering headquarters here in Munich, Mr. Eichiner knows making money off that instinct depends on the customer’s willingness, and ability, to pay for the distinctive cars that have become its specialty. In an era of ongoing austerity and increased personal savings — especially in the United States — the BMW business proposition has turned complicated, to say the least.
On Wednesday, BMW reported a relatively modest loss for the first quarter, lower than analysts had expected, but it warned that its outlook for the rest of the year was highly unpredictable.
BMW said it had a loss of €152 million, or $202 million, in the January-March period compared with a net profit of €487 million a year earlier. Sales fell 13 percent to €11.5 billion from €13.3 billion.
The company’s shares rose 84 cents, or 3.1 percent, to close at €28.20 in Frankfurt on Wednesday.
For BMW and other premium automakers, “the times of growth are past,” said Helmut Becker, a former BMW chief economist and now a consultant based in Munich. The challenge ahead will be to “catch up with the levels achieved before.”
Indeed, with sales in the all-important U.S. market off sharply, executives speak openly about not getting back to pre-crisis sales levels until 2011 at the earliest.
BMW is seeking its salvation in a new definition of premium cars, one that would emphasize to affluent buyers in the United States and Europe that its models are not just fast driving machines but can be configured to do less damage to the environment than much of the competition.
Buyers of luxury cars may be less willing or able to pay for all the bells and whistles that have fattened BMW’s bottom line, executives say, but they may well continue to dig deep into their wallets if they think of their cars as doing their bit to limit climate change.
With its eye on that prize, BMW is rejecting pressure from financial markets to join the industry trend toward consolidation through a merger with an archrival, Daimler, the maker of Mercedes cars and trucks.
The auto industry’s man of the moment, Sergio Marchionne, the chief executive of Fiat, argues that the successful carmakers of the future will need sales of at least 5.5 million vehicles a year — far above the 1.4 million BMW sold last year.
Only companies with that kind of scale, Mr. Marchionne argues, will be able to bear the expense of developing new technologies, especially as governments demand higher fuel efficiency and lower emissions of the gases that contribute to global warming. Mr. Marchionne says he can achieve that goal by piecing together a partnership with now-bankrupt Chrysler, and, he hopes, the European operations of General Motors.
To many auto industry experts, it is time for the premium manufacturers to consider similar moves, combining high-margin cars with economies of scaleBut to Mr. Eichiner and his fellow executives, that approach would be a mistake, since it ignores precisely the problems the vex G.M. and several others in the industry — the enormous fixed costs of factories and labor that become a burden when they’re not producing.Size does not protect you from anything,” Mr. Eichiner said.Consolidation also stirs unwelcome memories at BMW, whose only logical partner would be Daimler.
In the late 1950s, as BMW was on the brink of bankruptcy, Daimler was poised to scoop up its Bavarian rival until the Quandt family stepped in with a cash injection that ultimately revitalized BMW. Since then, the family has been a controlling shareholder, an alluring position that, its members have quietly made clear, they have no intention of giving up.
“The Quandt family would rather have a big influence at BMW than minimal influence at a combined company,” said Jürgen Pieper, co-head of research at Bankhaus Metzler in Frankfurt.
BMW executives do not dispute that Daimler and BMW have something to offer each other, but they insist the two companies can get what they need through more targeted cooperation that dodges the pitfalls of a full merger.
The two companies are already developing hybrid engines together. They also plan to expand an embryonic program to buy certain components together, so as to squeeze better prices out of suppliers, Mr. Eichiner said.
Economies of scale, he pointed out, are tricky to exploit. BMW and Mercedes would only get greater volumes to the extent that their cars use the same components, and too much of that would make them too similar.
“You know who’d be happy if that happened?” Mr. Eichiner said. “Our competitors.”
The BMW business model until now has been to customize cars well beyond the standard in the industry, while still capturing enough economies of scale to keep its prices competitive with its rivals and within reach of those who aspire to buy a premium brand.
In the future, BMW hopes to “expand the brand” by appealing to the environmental instincts of the upper-middle-class customers who represent its core.
To counter the turn to smaller and more affordable fuel-efficient cars that is the goal of policy makers in both the United States and Europe, BMW is tweaking its offerings in the United States to place more emphasis on environmental friendliness. It plans, for example, to put a new four-cylinder engine in the 3 Series, its most popular model, replacing a six-cylinder engine in most vehicles but preserving the same performance.
Analysts give BMW credit for investing heavily — the company puts the number at €1.2 billion — to make its fleet significantly better than the fuel-efficient standard of premium cars.
“It cost us money, but I think it will pay off,” Mr. Eichiner said.
Official tests bear out BMW’s claim that it compares well on environmental standards with other luxury brands, including Japanese names like Lexus and Infiniti, that are part of larger companies. But so far, analysts said, BMW has not yet leveraged this advantage financially.
“I have a lot of sympathy for the idea that a car has good performance and is cleaner,” said Arndt Ellinghorst, head of automotive research at Credit Suisse. “But they have yet to price it so that the customers actually value it.