Bavaria's next top model
With its new GT, BMW hopes to expand the definition of luxury touring car. But down the road it faces a greater challenge: figuring out what consumers will want in a premium green automobile.
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| Young fans admire a car at BMW Welt, an exhibition center built as part of a $630 million expansion of the company's Munich headquarters. |
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| BMW is hoping that the 5 Series Gran Turismo will be the first of a full lineup of GT cars. |
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| CEO Reithofer would like to build a whole line around the new GT, which is a bit like a station wagon in a bespoke suit. |
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(Fortune Magazine) -- For a luxury-car maker like BMW, the unveiling of a new model at the Geneva auto show is as important as a New York opening for a Hollywood movie. The Geneva show is considered the premier showcase for upscale automobiles, and a positive reception there can create invaluable buzz.
BMW executives approached this year's event, held in early March, with more than the usual trepidation, and it wasn't only because of the economic gloom. They were launching not just a new car but what they hoped would be the start of a whole new segment.
Like every other luxury manufacturer, BMW is continually faced with the dilemma of how to extend its brand without diluting it. So it came up with the 5 Series Gran Turismo, which combines the formality of a four-door sedan, the carrying capacity of a station wagon, and the high seating position and convenient hatchback of a crossover SUV.
All that may add up to a relatively minor bump in the automotive landscape, but for BMW it represents a tectonic shift from its core four-door-sedan lineup. In BMW-speak, the GT is a "progressive activity vehicle," meaning it can be adapted to uses ranging from an Orange County shopping trip to a weekend run up the Pacific Coast Highway. BMW envisions a full lineup of GT cars in small, medium, and large sizes that it can sell alongside its coupes, sedans, roadsters, and sports-activity vehicles.
Reaction to the GT ahead of the show was mixed. A BMW aficionado blogged that it "could easily turn out to be the best performer" of any crossover vehicle. But Peter DeLorenzo, an influential analyst, compared it to a 1980 Chevy Citation, concluding, "BMW has now officially jumped the shark ... and bent its famed blue-and-white propeller." Said a BMW spokesperson: "We know there is a perception that a BMW always should be a classic performance sedan."
The GT is only the most visible of the changes at BMW - changes that could reshape the company over the next decade. New social attitudes, customer preferences, and government regulations are forcing the company to rethink its high-performance image. Says one BMW watcher: "The focus on sheer driving pleasure will not work anymore. You have to be sociably acceptable as well. That will take a complete redefinition of the brand." Or the addition of a new brand. BMW is thinking about developing a line of smaller, more fuel-efficient cars for city driving and marketing them under a new name. Whether it will do so is the subject of intense speculation in the auto industry; a decision is expected in 2010.
Despite the worsening economy and difficult questions about the future, a hearty Bavarian bonhomie prevails at BMW's headquarters complex in Munich. As a premium brand, BMW has fared better than most volume manufacturers during the recession, but it has felt pain. Sales of BMW cars in the U.S., the company's largest market, fell 15.2% in 2008, and so far in 2009 they are down 28.5%. The BMW brand performed better worldwide, with sales slipping just 5.8% in 2008, but the company is bracing for a falloff in the total car market of 10% to 20% in 2009. Last year BMW reduced its workforce by 7%, to just over 100,000, through buyouts and attrition, and it anticipates losing another 1,000 workers this year. Despite a rocky fourth quarter, analysts expect BMW to report that it remained profitable in 2008. Some predict that BMW will lose money in 2009. "We will have a very tough year in 2009," says CEO Norbert Reithofer. "We will have no growth before 2010."
An aggressive leasing program to boost sales in the U.S. left BMW more exposed to the downturn than it would like. BMW encouraged leasing, especially in its high-end models, because lessees return to the dealer when their contracts are up. But it also meant that BMW had to cope with excess production from three years earlier when the leases were arranged and, in effect, had to sell the cars twice - once at the start of the lease and then again when the lease was up.
Last year BMW got caught with a huge fleet of off-lease cars whose value had cratered, and it was forced to take a $1 billion write-down for the first nine months of 2008. Now it plans to stiffen its lease terms and reduce the percentage of lease customers from 60% to between 45% and 50%.
With laser-like focus on its brand and its values, BMW behaves more like a maker of apparel or jewelry than of automobiles. That makes sense, because BMW is the hummingbird of auto companies. By objective standards, it is too small, too exclusive, and too Eurocentric to succeed. All its major competitors - Mercedes-Benz, Audi, and Lexus - are part of much larger industrial groups. Despite having a big factory complex in South Carolina, BMW is rooted to the Continent, and with group sales of just 1.4 million vehicles last year, it is tiny.
As a small company that has to live by its wits, BMW would be expected to be run by marketers, or at least sales and promotion experts. In fact, four of the last five BMW CEOs have been manufacturing specialists. Since taking over in 2006, Reithofer, 52, has been realigning the company along several tracks. The first is an effort to boost returns so that BMW can invest in new technologies while remaining independent. Reithofer has the company hunting for efficiencies. BMW's two smallest cars, the 1 Series and 3 Series, share 60% of their parts, and the upcoming 5 Series and 6 Series will be built on the architecture of the new 7 Series. The efforts are paying off. After bottoming out at 21.1% in 2006, return on capital employed - a key financial measure - turned up to 22.8% in 2007 and is targeted to reach 26% by 2012.
Another part of Reithofer's mission is trickier: figuring out what transportation will suit an increasingly urban, environmentally aware customer. Today BMW can charge more than many competitors because its cars are zippier. The company will find it harder to charge a premium just because its cars are greener. Reithofer has formed a skunkworks team dubbed Project i. Staffed by a cross-functional organization that numbers from 80 to 150 people depending on the task, Project i is studying all aspects of the business. Other companies have foundered with similar projects: GM is winding down its Saturn experiment after two decades with billions of dollars of losses, while Mercedes' Smart city car has burned through piles of cash.
Overseeing Project i is veteran BMW engineer Ulrich Kranz, who previously worked on the Z3 sports car and X5 sports activity vehicle. Kranz says he's looking at everything, including vehicles that run on two or three wheels, but his first Project i car is more conventional: a battery-powered Mini Cooper. Developed in a mere eight months, the Mini E boasts a range of nearly 150 miles and can be recharged in 2½ hours on a 240-volt circuit.
BMW has begun leasing 500 electric Minis to residents of California and New York for $850 a month. Powered by 572 pounds of lithium ion batteries that replace its back seat, the Mini E felt nimble and quick during a brief test drive through the streets of Munich. Its 204-horsepower electric motor zips the car to 60 miles per hour in under nine seconds - the same acceleration as a conventional Mini Cooper - and top speed is said to be 95 miles an hour.
Reithofer has taken a personal interest in Project i. As he puts it, "In the future we will not sell cylinders, we will sell modern technology. "He says the decision on what to call new cars coming out of Project i - BMWs, Minis, or a new brand - will be put off until a vehicle is developed for the retail market. "First we need the car, then we decide on the brand," says Reithofer.
A couple of missteps have marred Reithofer's tenure to date. BMW showed a stunningly beautiful coupe-style sedan known as Concept CS at the Shanghai motor show in 2007 and announced that the car would go into production, likely to emerge as a top-of-the-line 8 Series. Then, a year later, it announced that the car couldn't meet the internal profit target, and the program was canceled. Traditionalists complained that the old BMW would have gone ahead with the project, regardless of profitability, but Reithofer stuck with the decision.
Reithofer also spent months early in his tenure as CEO studying whether BMW should enmesh itself in the turnaround of another automaker by buying the Volvo car division from Ford (F, Fortune 500). Given BMW's sorry history of trying to resuscitate England's Rover Group, which it sold in 2000 after six years of ownership and losses of several billion dollars, it is surprising that he even contemplated such a deal. "It should have been dismissed immediately," says the company observer. Reithofer won't discuss the deal now, but acquisitions are off the table. The unofficial byword around Munich is "The Eagle flies alone."
For the future, BMW must create a car that is economical, environmental, and clever. There is an early example of such a vehicle on display in the BMW museum: a bug-shaped two-seater with a single refrigerator-like door that opens from the front, called an Isetta. BMW made more than 160,000 Isettas starting in 1955. For many buyers in postwar Germany, they represented a transition from motorcycle to car, the first vehicle that protected them from the weather. What a luxury! 
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