BMW Targets Growth Through Increased Sales/Efficiency; May Add Another Brand

Profitability Takes Priority over Volume Growth

BMW Group Chairman Norbert Reithofer yesterday unveiled the company’s long-term strategy, including ambitious profit margin targets and a goal of doubling unit sales by 2020. “We will consistently align the BMW Group to achieve profitability and increase value over the long term”, said Reithofer at a press conference in Munich. "We will focus the entire organisation on the return on capital", Reithofer added.

The strategy focuses on ensuring the company's long-term success and safeguarding its independence, targeting a return on sales of between 8% and 10% by 2012 in its key automobile segment. The company is targeting 6 billion euro (US$8.5 billion) of efficiency gains and unit volume growth up to 1.8 million vehicles in order to achieve these targets, leading to a 26% return on capital by the same year.

Reithofer added that the group's longer-term strategic targets "are equally ambitious" as the company intends to increase retail sales by its automobile business to "clearly more" than 2 million vehicles by 2020.

BMW said it has adopted a range of measures that will help achieve "significant progress in terms of cost". Besides putting all cost structures to the test, the company will continue to standardise its processes. Further targets include reductions in cost, capital expenditure, and capital employed per vehicle in development, production, sales and administration.

Other specific areas mentioned include increased co-operation agreements, similar to the current joint venture (JV) with PSA that produces Mini engines, intended to lead to economies of scale for components, modules, and drive systems, and the group aims for a productivity increase of at least 5% a year. The targeted productivity increase means that BMW expects to be able to achieve the growth planned for the period until 2012 with roughly the same number of workers as today.

EfficientDynamics

BMW will also establish a new programme based on its existing principle of EfficientDynamics, with fuel-saving technologies now being rolled out across the BMW vehicle line as well. BMW summarises it thus: "More output for less input".

The group also intimated that it intends to tap into additional earnings potential by starting new business activities, among other things. In addition to the expected new products and markets, the group said that it had "identified potential along the vehicle life cycle and the automotive industry's value chain".

Natural Hedging, U.S. Dollar Purchases

BMW also said that it will step up natural hedging as well as purchasing, primarily in U.S. dollars, to strengthen independence from currency fluctuations. Furthermore, capacity at its U.S. plant in Spartanburg, South Carolina will be increased from 140,000 to 240,000 units per annum (upa) by 2012, with the addition of X6 production.

Capacity will also be expanded at the U.K. Mini plant in Cowley, Oxford to 260,000 upa, without additional investment. In addition, the group also plans to "take the first step" towards increasing capacity at its JV with Brilliance in China, from 30,000 to 44,000 upa.

Higher 2007 Dividend

BMW will also "substantially" increase the dividend payout ratio, as a first step in proposing a "significantly higher" dividend for the 2007 financial year at the annual general meeting. It will also keep the option of conducting a share buyback. However, in the next 12 months, the company will concentrate on increasing the dividend payout ratio so that shareholders benefit from the company's success to a greater extent

Four New Vehicles by 2012

The group will also continue to expand into new segments across its brands, and specifically said that these will make use of modular systems for all new models in order to increase "synergy effects". The new additions include the expected new X1 small sports-utility vehicle (SUV) model, and a Mini ”sports-activity vehicle”, although the latter is expected to be produced in relatively small numbers at MagnaSteyr's Graz plant in Austria, and will not contribute directly to Cowley's output. BMW will also build a four-dour Gran Turismo based on the CS concept study shown in Shanghai (China), but will not, however, build a "space-functional" concept. The R-Class multi-purpose vehicle (MPV) crossover seen in spy shots, called ”progressive activity sedan” (PAS) by BMW, has been given the green light though, competing against the disappointing Mercedes R-Class. Rolls-Royce will also get the fixed-head coupé version of the 101EX concept and an additional model, a sedan expected to share the new 7-Series platform, positioned below the Phantom in terms of both price and size, likely called the Wraith.

Acquisitions Have to be ”Perfect Fit”

Reithofer said that the group has explored all options for future growth during its strategic review, including potential acquisitions or the creation of a fourth brand, but this would require the new brand to be a perfect fit for the company and its strengths. "Moreover, rising unit figures would have to result in a decline in unit costs and thus lead to economies of scale. The new brand would have to at least make the same positive contribution to earnings as the existing automobile business. However, an in-depth analysis found that none of the evaluated automotive brands currently meets these requirements", the company said, effectively ruling out any further pursuit of Volvo, or an acquisition of Ford's other premium brands, Jaguar and Land Rover. However, Reithofer did add: "In principle, we will keep acquisitions on our agenda. We defined clear criteria for potential acquisitions within the scope of our strategic review. This will allow us to act swiftly whenever necessary."

Outlook and Implications

BMW's near-term growth plans are ambitious but nevertheless achievable, given that the group has few weaknesses in its product line-up across all of its brands. The addition of the X1 was expected; although the 1-Series has not been an unqualified success, it is slowly building momentum, and the coupé and SUV versions are less aesthetically challenging than the five- and three-door versions. The X6 will be produced in Spartanburg in the United States, joining the X5 model already produced there, as the U.S. market is expected to be its biggest outlet. The increase in U.S. production, driven by increased sales of these two models in the country, will also help relieve some of the currency pressures on the balance sheet. BMW has indicated that it will also bolster its hedging efforts, which have been inadequate in the last year given the unprecedented rise of the euro against the dollar.

Rolls-Royce will get the fixed-head coupé version of the convertible, based on the 101EX concept and a smaller, all-new sedan, below the current Phantom and based on the new 7-Series platform. Rolls-Royce is looking to compete with former stable-mate Bentley, whose success with the GT and Flying Spur has been an inspiration, although the decision to share a platform will no doubt meet with criticism from the purists.

BMW's most difficult conundrum in the long term still appears to be Mini. With the addition of the Clubman ”wagon“ version (although the model barely fills the role that the standard hatchback should), and a mini-SUV-style ”sports-activity vehicle”, Mini will have a three-model strategy, but this still looks too limited, and there is the very real threat that the brand could lose focus and wane in popularity as better-packaged rivals enter the fray, such as the Fiat 500 and Audi A1. However, BMW hinted that it is investigating a low-consumption model, possibly sub-Mini, to put it in a position to exploit the small, low-emission trend.

BMW's growth ambitions rely on some basic trends remaining in the marketplace, but appear based on sound reasoning. The strategy of expanding into new segments and capturing the premium element of that given segment has thus far proved highly successful for BMW. Furthermore, despite the increasing competition, BMW has executed this plan better than most and has retained its touch for introducing well-executed designs. BMW expects the market for premium vehicles and services to continue to grow much faster than the mass market, anticipating the premium segment to rise by about 40% between 2005 and 2019, compared to an increase of just under 20% for the mass-market segment.

The returns BMW is aiming for would put it up with the industry leaders, but the target will not necessarily come easily and is likely to result in a further squeeze on suppliers and more demands from workers in Germany, and the growth must not be at the cost of quality. Mercedes demonstrated graphically the potential cost to a brand’s image of such a strategy when it tumbled down the quality rankings in the late 1990s, and the cache of its brand has yet to recover despite its renewed emphasis on quality.