(FORTUNE Magazine) – While the Big Three automakers continue to fight devastating price wars and Mercedes struggles with nagging quality problems, BMW has stepped up its assault on the U.S. market. For the first time, last year the company sold more cars in America than in Germany (10,770 more, if you're counting). That's a source of deep satisfaction to Helmut Panke, 57, BMW's Americanized chairman, who attended Phillips Exeter Academy in New Hampshire, spent four years working for McKinsey, and ran BMW's North American operation in the mid-1990s. Alex Taylor III met with Panke in Detroit recently to talk about unpopular designs, the BMW that sells for $250,000 in China, and joining Microsoft's board.

How did the U.S. become BMW's largest market?

The population of the U.S. is three times as big as the population of Germany, and the U.S. market for cars and light trucks is more than four times as big. It was only a question of time.

You've managed to boost U.S. sales while spending less than $1,000 per vehicle in incentives. How?

There is a significant difference between the "mass market" and the premium segment. In the mass market customers are looking for a good deal. In the premium segment they are searching for a vehicle that fulfills their expectations and their emotions.

BMW has taken a lot of heat for its new styling. Have you decided to fire your chief designer?

Chris Bangle has been--and is--the head of BMW Group design. I admit that the intensity of the public debate over our new design did surprise me. But that proves we have a special emotional bond with our customers. We know our responsibilities. Let's talk facts: The current 7 Series is the bestselling 7 Series ever. So if we take this as the final word from the customers, we won. [But] there are still too many articles focusing on "I wish this car looked different because the performance is great, blah blah blah." The 7 Series was a combination of completely new technology with new design direction. The key point is that we should never make big steps in strategic directions without preparing the customers.

In China the 7 Series is a big hit. How did you manage that?

We all tend to see China as a market of enormous numbers of poor, underpaid workers, but there is a big middle class. China is the biggest single market for the 12-cylinder 7 Series. It is basically twice the price [$250,000] of what you pay in the U.S. We always say the Japanese are the ones who look for brands, for prestige. In China it is the same.

What should we expect to see from BMW in 2004?

We'll continue our product initiative and not settle for a quiet period. Remember: In 2004 we are introducing the X3 [sports activity vehicle], 6 Series coupe and convertible, and the MINI convertible.

You've heard the old joke that if cars ran Windows software, drivers would be pulling over to the side of the road to reboot, yet you've joined the Microsoft board. How did that happen?

Bill Gates visited BMW in Germany several years ago when I was the head of corporate planning and information technology. At the beginning of last year I had a longer one-on-one discussion with Gates about whether Microsoft software would work in the car industry. At some point later, I was meeting with [CEO] Steve Ballmer when he was traveling in Europe, and afterward he indicated they would be interested in seeing me join the board. The fact that I was asked to join reflects the technological reputation BMW has. Of course, it could help that I have lived over here, and we can talk about the movies and what's going on in the U.S.