The advent of the new year is often seen as a time to reflect on the happenings of the prior year, but also a time to take stock of where one is at and where they are going. With the worldwide financial forecasts all over the map, and uncertainty the norm, sailing a car company over the year’s horizon will be a challenge.
The automotive industry doesn’t have the best margins to begin with, missteps in the market (or precipitous contractions in sales) can send a manufacturer into an unrecoverable tailspin. Just ask GM. Having your financial fortunes tied to a car company is not for the faint of heart.
But if you are financially tied to a car company, you could do a lot worse than being tied to BMW. So, this small article will present one man’s opinion of why that is and in the process raise what is positive and what is worrisome.
The Industry Since 2008
The nadir of recent worldwide automobile production came in 2009, but started its decline coincident with the global financial crisis in 2008. Where production had topped 73 million units in 2007, it had fallen to only 62 million units in 2009. That drop hastened the collapse of General Motors and Chrysler. They were tough times for all manufacturers and, depending on the financial obligations to current and past employees and excess capacity, deadly. Jobs banks, health care benefits, and improperly managed expansion in prior years brought on crisis to the Big Three in the US.
BMW faired better. The product line and customer base were better insulated from the crisis. BMW had taken pains to manage capacity and their employee base. BMW (and other German manufacturers) did not appear to have the same structural issues that the US Big Three did.
2010 saw a worldwide production of 77 million units and when the final count is totalled for 2011, it will be better. But the future forecast is still cloudy to opaque. There are financial forecasts that say 2012 will see a follow on global recession, the other shoe dropping as lack of consumer demand catches up to Chinese production and the Euro faces further stresses. We’ll have to wait and see, but again, in the thin margin realm of the auto industry, it leads to sleepless nights.
What Are BMW’s Strengths
BMW has the ability to profitably produce small batches of vehicles. BMW builds approximately 1.5 million cars a year currently. Toyota produces approximately that many Corollas in a year. That BMW is considered a premium brand is vital in the quest for profitability.
BMW has a three legged stool of design, engineering, and production processes that enable it to produce the varied set of vehicles seen streaming out of their plants. These three things allow them to maximize the differentiation of models while minimizing the differences in structural components needed to produce them. Flexibility of architecture and production processes has proven to be strengths of the brand.
In addition, it appears that all oars are rowing in unison, from upper management through the plant floor. BMW has been executing its Strategy One vision since 2007 and it extended the contract of Norbert Reithofer through 2016. Herr Dr-Ing Reithofer will guide the company through the introduction of several new, and unorthodox (to BMW enthusiasts), models including the new ‘i’ sub-brand and upcoming A and B class front wheel drive cars.
What are BMW’s Weaknesses
BMW is known in the US as the, ‘Ultimate Driving Machine’, and that image is toned down just slightly with the ‘Joy of Driving’ tagline in the rest of the world. But that appeal to the enthusiast driver is also one of the brands weaknesses. BMW does not have the volume of production to sell cars outside of the premium market. It has to be perceived as a premium brand to survive. But its enthusiast cachet also limits the potential luxury/premium buyer pool. Most customers don’t care as much about the driving dynamics as they do the brand image and the amenities.
Quite frankly Lexus and Mercedes Benz appeal to a larger segment of the luxury buyer pool than BMW can. And there is some perception that BMW is softening its models to attract that buyer. While features such as run flat tires and electric power steering are for efficiency, the Dynamic Damper Control and Integral Active Steering are examples of catering to a more luxury oriented clientele.
Another potential dilution is if EfficientDynamics becomes more about efficiency and less about dynamics. Yes, the legislation is demanding increasing reductions in fuel consumption, but at what cost to driving pleasure? And can someone tell me what the difference between ECO PRO and ‘limp home’ mode is?
Car companies go sideways when they ignore customers, just ask GM and Chrysler. BMW has a great customer base that is incredibly enthusiastic about the brand – the worldwide BMW car clubs are the envy of many manufacturers. But navigating a brand with difficult customer expectations through the changes necessary to grow market share will be difficult.
What Keeps BMW Up At Night
Two million is the number. Two million is the goal. Two million vehicle sales in a year is what BMW believes will keep the company independent. Yes, the Quandt family owns the controlling interest in BMW (at approximately 46%). But the Quandt family has numerous other holdings and in a pinch, given a financial crisis, the BMW shares can be used to stop the bleeding in another area. BMW is a stand-alone jewel that other, volume manufacturers, covet.
If you look at the top tier (the top ten) automotive manufacturers, there are only a couple that would be seriously interested in picking up BMW. GM is too busy rebuilding itself (and dealing with its own European problems with Opel) to be a factor. VW does not need BMW, Audi and Porsche cover the same segments. Toyota isn’t a fit and the Lexus and BMW brands would be redundant.
In my mind that leaves Ford and one other to watch. But Ford is coming off the sales of its European holdings and hopes to revive the Lincoln nameplate in the premium segment. But there isn’t a lot of product overlap between Ford and BMW, so its a better fit than most.
However, the potential shark in the water to me is Hyundai. Adding the 1.5 million units of BMW to the Hyundai volume puts the combined companies right at VW volumes. And there is virtually no product overlap at all (once the Genesis and Equus sedans are factored out).
All of that is, of course, mere speculation. As far as I know, there have been no strong rumors or rumblings. Coming off a worldwide
production downturn, and an uncertain future, is not the time that car companies get absorbed by their larger siblings. It’s when those companies are flush with cash during boom times that those transactions occur, and often to the detriment of all involved. Just ask BMW how the Rover deal went.