Racing to stay ahead: BMW is investing heavily to survive as an independent automaker. Will it work? - Global - Company Profile

Chief Executive, The, Nov, 2003 by Igor Reichlin

A BMW promotional movie spot: In a vast hotel room, brilliant with kitsch and klieg lights, a BMW driver looks on, stunned, as his passenger, the singer James Brown, haggles with the Devil. Trying to recast a deal on his soul, Brown challenges the Prince of Darkness to a car race at dawn. "I like a wager," says the Devil, shaking his bejeweled finger. "But I like the concept of winner takes all!"

Sounds a lot like Helmut Panke's own set of challenges. Locked in a real-life contest against formidable adversaries, Panke's Munich-based BMW Group is racing into the market, determined to get ahead of the curve. And while his CEO soul isn't in danger, the stakes are just as high for the $45 billion company he's been heading for the past 18 months. Panke and his board know that this time around they have to get everything right. Experiments at BMW are over. "We don't want to waste money on trying things," says Chief Financial Officer Stefan Krause.

After a brush with disaster four years ago when BMW had to invest $5.3 billion in a failed bid to modernize Rover, the company has come back with a vengeance--bragging a boosted product range and firing off a salvo of new models. But the comeback has exacted a hefty price in terms of investment and has had to be engineered amidst a major economic downturn, with key markets sputtering, car sales slumping, profits thinning and auto shares taking a beating.

Carmakers the world over have been shifting down, laying off workers and closing plants. But BMW--backed by the Quandt family, which owns 47 percent of the company's stock--has bankrolled a multibillion dollar investment drive, hired almost 10,000 people and launched the construction of factories in Shenyang, China, and Leipzig, Germany.

But its room for maneuver--and for error--is razor thin. Can "The Ultimate Driving Machine" win the race? "I think they can," says Christopher Wills, automotive analyst at Lehman Brothers in London. "So far, they've stolen the march on the competition with their new models."

At the recent Frankfurt Car Show, the BMW lineup was, in fact, looking fresher than most of its competition. And it was a stark contrast with what the company had on offer when it was shedding Rover models four years ago. A one-brand, five-model carmaker then has by now has morphed into a three-brand, 10-model powerhouse. And there's more coming. "This isn't a one-off effort," claims Panke.

On top of their mainstay 3- and revamped 5-series cars, an executive 7-series limousine, an enormously popular, upgraded X5 SUV and the Z4 roadster, the Bavarians ate adding a baby X3 Sports Activity Vehicle (SAV), a 6-series coupe and a compact 1-series. Plus, of course, several new permutations of their saucy Mini Coopers and, finally, the Rolls-Royce Phantom cruiser.

This has effectively expanded BMW's car product range downward with Minis and 1-series models and also built it upward with Rolls-Royce, while filling the gaps in between with X3 and 6-series. The company has thus boosted its appeal to the wannabe-rich, the rich and the super-rich, all without departing from the pure premium purview.

Figuring out how to perform this balancing act is perhaps the key lesson BMW has learned from its excursion into the Rover world of mass-produced cars, an experiment that almost cost the carmaker its independence. "In hindsight," says Panke, "we shouldn't have even started with Rover. But what we learned was that mass and premium don't mix." He pauses and adds, "What I learned personally is that you have to do what you do best, and if you move up, you have to do it step by step."

The CEO and his team ate attempting to do that by pushing the premium envelope. The way they read the market, premium products stand for sustained added value in rational and emotional terms and for sustain able promise of unique performance. "Our market research shows the premium market has a higher growth potential than the mass market," says CFO Krause. "Are there enough wealthy people in the future who are willing to pay a premium? Economists will tell you that for the type of growth we want--remember, we don't want to be selling 20 million cars--there's enough growth for US."

Panke says the company has the numbers to back it up. "Our plans are based on economic forecasts and an analysis of the competitive situation,"' he says. "The mass market segment will grow 25 percent by 2015, the luxury market by 50 percent."

Moreover, he sees the market for premium SUVs--BMW X5 and X3--growing 100 percent by 2015. And the market for luxury two-seaters, such as the Z4, which has grown by more than 50 percent over the past 10 years, is likely to expand even more, especially in the United States. The U.S. is the No. 1 target for BMW: It overtook Germany as the company's biggest market in the first half of this year.

To expand its grip on the luxury market, BMW is proceeding in an unorthodox way--by questioning stereotypes. Traditionally, when car companies visualize a luxury car buyer, they see a middle-aged person, usually male, looking for ah executive or representative vehicle, preferably a larger car.