BMW to be tested as premium sales slow

Cumbersome

Governments are tightening emission standards making it difficult to manufacture profitable big luxury car.

In 1987, a recent engineering graduate named Norbert Reithofer wrote a treatise that in retrospect reads like a manifesto for the German economy. The only way manufacturers in a high-cost country with few natural resources could survive, he argued, was by becoming the most flexible and efficient in the world.

Reithofer, now 56 and chief executive of the automaker BMW, has since put that principle to work with a vengeance, delivering consistent profit through two crises and becoming something of an icon of the revival of German industry.

Though continuing to build roughly 60 percent of its vehicles in high-cost Germany, BMW reported another rise in quarterly profits this month despite the worst downturn the European car industry has had in decades.

As the auto crisis shows signs of spreading to the premium market, though, Reithofer faces a test of his management skills that will have implications for the whole nation. Cars are Germany’s largest export product. But the losses that companies like Fiat, Ford and General Motors have been piling up in the region raise fundamental doubts about the future of automobile manufacturing in Western Europe.

Moreover, deep changes are under way that threaten to reshuffle the pecking order among carmakers, or even create openings for upstarts.

The price of fuel, already close to the equivalent of $8 a gallon for premium gasoline in Germany, is only likely to rise in coming decades, forcing automakers to think about other means of propulsion. Governments are tightening fuel economy and emissions standards to the point where it will be difficult to manufacture the big luxury cars that have the highest profit margins.

And young people are increasingly apathetic about cars, which must compete with mobile phones and video games for their attention and money. BMW’s third-quarter earnings, along with recent reports by rivals Mercedes-Benz and Audi, show that the high-end carmakers are beginning to feel the effects of the crisis. While BMW managed to eke out a sales increase in Europe during the third quarter, it reported marked declines in troubled countries like Spain, where BMW sales have fallen by half since 2007.

“The next two years will be a real challenge, there is no glossing that over,” Reithofer said during an interview at BMW’s headquarters in Munich, a high-rise building shaped like four cylinders that, from the upper stories, has a clear view of the Bavarian Alps.

The ebullient Reithofer, whose default facial expression is a self-assured smile, betrayed no hint of anxiety, though. Instead, he told a story about the three years, from 1997 to 2000, that he spent overseeing BMW’s factory in Spartanburg, S C.
Soon after arriving, Reithofer recalled, he presented managers there with a list of problems. They corrected him. “Norbert,” they said, according to Reithofer, “here in the United States we don’t have problems. We have challenges. And every challenge is an opportunity.”

That expression of American can-do spirit “left a deep, deep impression on me,” he said. An aide says that Reithofer tells this story at least once a week.
Thus, BMW is treating the crisis as an opportunity to expand its market share. The company is accelerating spending on research and development and sticking to the timetable for next year’s introduction of a battery-powered car with a lightweight carbon-fibre body. BMW is building a new factory in Brazil and expanding production of its Mini brand in Britain.

If the company begins to feel the effects of the economy’s slowdown, it has agreements with workers that will let it cut production quickly, as it did in 2008. Reithofer is also positioning the company for big shifts in the industry years from now. Chris Bangle, former chief of design at BMW and now head of his own design firm based in a small town in northern Italy, argues that the industry must worry about the decline in what he calls “its lifeblood – customers who grow up caring about cars.”

“Any look into the stats on issuance of drivers licenses and involvement in cars by the youth in USA, Japan, and Europe shows this,” Bangle said in an email.
Expectations for Reithofer are high because BMW is one of the few automakers to have made a profit ever year since the financial crisis began in 2008. Warned in late 2007 by a BMW dealer in the United States that the subprime crisis was beginning to hurt sales, Reithofer returned to Germany and persuaded the company’s board of management to cut production even though evidence of a downturn was only anecdotal.

Rainer Feurer, BMW’s head of strategy, said that the episode demonstrated that, while Reithofer preferred to take a methodical, analytical approach, “he is ready to make risky decisions.”

Reithofer said that one lesson he learned from the downturn in 2009 was that it paid to continue investing in future growth. Even as BMW cut production back then, it expanded its factory in South Carolina and added a second factory in China.

It paid off. The company continues to post phenomenal sales growth in China, including a 39 percent increase in the third quarter. The growth in American sales has been more modest, rising about 1 percent in the third quarter. During the current crisis, BMW is similarly increasing spending on research and development – by 15 percent this year, to about 3 billion euros ($3.8 billion) – as it pursues one of the most radical initiatives by a major carmaker anywhere.

Next year, BMW plans to introduce a battery-powered car with a body made primarily of carbon fibre and aluminum. Those materials are lighter than steel but much more costly to deploy in a mass-produced car.

The effort, known as the I Project, is especially risky given that sales of electric cars like the Nissan Leaf have been disappointing. But Reithofer said he saw the i3, a four-seat city car that will be built in Leipzig, Germany, as a way of preparing the company for long-term changes in the industry. BMW has not yet named a price for the four-seat i3, but analysts say it is likely to be close to $50,000.

That is about $20,000 more than the battery-powered Nissan Leaf, but BMW is betting that high-end buyers will be willing to pay more for the i3’s unique design and sporty performance.

He worries that carmakers could be blindsided by a technology shift, which has happened so often in the computer and software industries. “I have to get the message across to the organization: people, things are changing!” Reithofer said. Paul Nieuwenhuis, a director of the Centre for Automotive Industry Research at Cardiff University in Wales, said BMW was one of the few companies with enough extra cash to pursue an ambitious project.

“They are future-proofing the company,” Nieuwenhuis said. “The electric vehicles are not going to take off in one or two years. This is not how it works. But when they do take off, you’re in trouble if you’re not there.”

BMW may be able to take a more long-term view because it is essentially a family-owned company, somewhat immune from the demands of fund managers and bank analysts focused on short-term profit. About 47 percent of BMW shares are owned by the widow and children of Herbert W. Quandt, who acquired a majority in BMW in 1960 when it was close to bankruptcy, and oversaw its revival. Reithofer in many ways personifies the German ideal of a manager.

 He is an engineer in a country that reveres that profession. He grew up in a Bavarian village south of Munich where his father was a factory worker. Reithofer joined BMW in 1987 shortly after writing his thesis on manufacturing, part of his doctoral work at the Technical University of Munich.

He required only 13 years to rise to the executive board, which he joined in 2000 as head of production. He became chief executive in 2006.

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Ferdinand Dudenhoffer, a professor at the University of Duisburg-Essen in Germany and well-known industry analyst, describes Reithofer as “bodenstaendig” – down to earth.

When Reithofer spoke at a conference that Dudenhoffer organized, he arrived an hour early and without an entourage, which is not true of all German auto executives, Dudenhoffer said.

Improbably, BMW still builds cars at a complex adjacent to the company headquarters not far from downtown Munich. The neighborhood was rural when BMW first began producing motors at the site in 1922, but the city has long since engulfed it.

The proximity of the factory puts Reithofer almost next to the beating heart of the company. Just below the BMW executive offices is a building that houses a giant press, which rhythmically stamps out side panels and other pieces of 3 Series cars, the company’s best-selling model. Despite heavy soundproofing, the building emits a steady, bass throbbing sound. Reithofer is not far from his customers, either.

He can look down from the executive offices and see people taking delivery of new cars at BMW Welt – BMW World – the haute design structure where the company showcases all its auto brands, from Rolls-Royce to Husqvarna motorcycles. The company’s main development center is also nearby.

A bean counter would probably advise BMW to move the factory elsewhere and sell the real estate. But it is company doctrine that executives, designers and engineers should never be far from the factory floor. “If you can’t build in a place, then you can’t innovate there either,” Reithofer said.