BMW’s King of Profits

BMW is booming at a time when the car industry is struggling. Group chairman, Dr. Helmut Panke, tells David Robinson it's all about careful planning.

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By  David Robinson Published  May 15, 2005

BMW’s King of Profits|~|BMW 200.jpg|~||~|AT A TIME when many automotive manufacturers have skidded into difficulty, BMW has gone from strength to strength. And the towering presence of its chairman Dr. Helmut Panke, looms over much of its recent success. The Munich-based car giant, run by the 58-year-old doctor of physics, reported an 11% rise in profits last year to reach a record US$4.56 billion. Its stellar performance meant that for the first time in a decade, BMW wrested pole position in the global luxury car market from its Stuttgart-based archrival Mercedes-Benz. This year, the group's star has continued to rise; the BMW brand’s first-quarter sales rose 7.8%, to 239,387 vehicles, beating the 226,400 units sold by Mercedes. “It feels good psychologically for everybody within the organisation to beat the perennial rival,” Panke admits with smug satisfaction. “They are the biggest rivals in every market in the world.” Overall, BMW’s global sales — which include the Mini and Rolls Royce brands — rose 8.2% as the world’s largest luxury carmaker posted first quarter profits of US$668 million. That momentum looks set to continue this year with the BMW 3-series, in addition to the face-lifted 7-series — which Panke promoted during a whistle-stop tour of the Middle East last week — expected to ratchet up volumes. Such is BMW’s confidence in the future that it is planning to buy back and cancel up to 10% of its shares. Since he was appointed to the top job in 2002, Panke, armed with his doctorate in physics from the University of Munich, has proved a dab hand at handling the dynamics of the global car market. At the rate it is going, BMW looks set to overshoot the forecasts it gave for growth a couple of years ago. Then it said it would sell 1.4 million cars in 2008 — now 1.5 million looks equally likely. That’s more than double the 700,000 cars it sold in 2001. The latest figures represent a stunning turnaround from six years ago, when BMW suffered from an identity crisis brought on by the purchase of MG Rover. Panke admits the current resurgence can be dated to a decision to ditch Rover and focus clearly on what the group’s three brands fundamentally represent. “We stick to activities where we think we have strengths,” says Panke, a German national known for demanding as high a standard from his staff as he expects from himself. Most other manufacturers, he says, try to straddle both side of the business — higher-end and mass market — while BMW just focuses on its three “premium” niche brands. “The two areas are completely different. In mass-market manufacturing you have to have the lowest cost base. But in premium you deliver an emotional value to the customer. When a customer decides for BMW or Mercedes, they want to have a specific characteristic. It’s about what the vehicle feels to them.” Panke, known as a hands-on CEO who routinely drop by factories and sales offices, says one of the top requirements for management of the group is the ability to say no. “We get many proposals. There are many opportunities out there that give you short-term profit potential, but you could lose what your brand stands for.” Even so, Panke admitted earlier this year that the BMW brand was failing to meet some of the high standards he expects of it. German carmakers once renowned for their high quality, have seen their cars become more prone to breakdowns as the electronic systems of their cars have grown increasingly complicated, with Mercedes particularly affected. However, BMW too has also seen its reputation slip and was last year ranked in 13th place out of 37 manufacturers for reliability and 12th for initial quality, in an influential study by ratings agency JD Power. It’s an area Panke has vowed to rectify. Another brand the BMW group has had trouble defining also happens to be its most prestigious: Rolls Royce. Despite selling 126 Rolls Royce Phantoms in the first quarter of this year, sales were still down 10% on the first quarter of 2004. “Rolls-Royce has to be positioned and re-strengthened as the pinnacle in the automotive market,” he says. “Over the past 15 to 20 years the brand has lost some of its positioning.” However, Panke dismisses rumours that the group might manufacture a budget Rolls-Royce anytime soon. “If there was a less expensive Rolls-Royce too early we would not reclaim [the brand’s] pinnacle position,” he adds. Instead BMW will focus on releasing convertible and extended wheel base versions of the Phantom. Meanwhile, the other member of the group’s triumvirate, Mini, saw sales rise by a spectacular 10.3% to 52,694 units in the first quarter. Panke says that the iconic British manufacturer has proven a valuable addition to BMW’s portfolio. “Mini is not meant to be cheap,” he says, “it’s meant to give you unique combination of extroverted chic mobility and at the same time you can only get it with front-wheel drive. That simple statement that mini really feels that you have the four wheels at the four corners of the car. No overhang or front or rear. That identity has to be driven into the minds of the customers in the world.” However, luring the customers of the world is proving increasingly difficult for automakers everywhere. The last couple of years have proven challenging times for the automotive industry because of intense competition, huge manufacturing overcapacity and enormous problems in cutting costs, especially in the West. US automotive giant General Motors recently announced first quarter losses of US$1 billion following a massive slump in sales in North America. Last year, the industry manufactured 56 million cars, yet according to some observers, global demand only adds up to 45 million. Panke, however, is unruffled by such opinions. “I disagree with those that say there are big discrepancies between supply and demand,” he says. In contrast, he predicts that aided by growth in emerging markets like India, South America and South East Asia, the global car market will grow to 65 million units in the next eight years. Another thorn in the side of many Europe-based manufacturers continues to be the strong euro, which over the last three years has risen 40% against the dollar. Despite the fact that BMW has manufacturing facilities in the US, Asia, South Africa as well as Europe, Panke is sceptical that shifting production around the world to countries where the currency is weaker is the best way to counter stark discrepancies in value. “It always sounds like the magic wand,” Panke quips, in his typically rhetorical style. “Why don’t you transfer manufacturing from the place where you have the strong currency? But to build a plant these days takes something like three years.” And no-one, he says, really knows what the exchange rate between the dollar and the euro will be in a few years time. BMW sold 10,590 units in the Middle East last year and holds about 40% of the luxury market. The group expects this figure to grow to 13,000 this year, helped in no small part by Iran where sales are forecast to boom from 350 in 2004 to 1,600. In addition Panke says that BMW will target emerging markets in Iraq and Afghanistan in the not-too-distant future. Regionally, the group has a basic manufacturing facility in Egypt that focuses on the country’s domestic market. But Panke says that BMW has no plans to expand the plant at this stage, adding that view might change if some of the red tape between neighbouring Middle Eastern countries gets slashed. Whatever happens, Panke adds any further investments the group makes in the region will, as always, be analysed meticulously. “We always calculate whether it is worth making an investment or not,” he says. But one area where BMW has invested heavily, only to achieve scant success is in Formula One motor racing. The Williams-BMW team has yet to win any of the five races so far this year and has managed just two podium finishes. “We are not happy,” Panke admonishes sternly. “It’s something where we will have to look at alternatives to see how it can be improved.” The German car manufacturer’s concerns are so great that Panke admits to looking at a number of other options. “For the 2006 season we have been approached by Sauber team and the Red Bull team to see whether we will supply engines and we are in constructive negotiations,” he says. Another possibility is for the BMW to set up a team on its own like fellow carmakers Ferrari or Renault, but Panke is sceptical of the benefits such an enormous additional investment will bring. “[To be] an independent-owned team without a partner [means] a lot [more] money that you put on top of developing and providing engines,” he says. “One has to balance what is the marketing and psychological gain.” One thing Panke makes clear is that BMW is hell bent on reclaiming winning the formula one crown. “Formula One is the premier league in motor sport and this is why BMW will continue to be in there and this is why must be successful and be champions. We have to show the world that we are not just the best carmaker on the premium side, but on the sporting side we can make the best engine. That search will continue and we will find a way to be successful.” And, given its recent results under the all-encompassing control of Panke’s astute leadership, only a fool would bet against them. ||**||

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