Bmw's ComebackJohn Templeman
When Karl H. Gerlinger checked into his hotel on the eve of the Detroit Auto Show in January, 1990, a front-page newspaper item made his eyes pop. Atop a list of trends was: "What's out--BMW. What's in--Lexus." For the marketing whiz who had been sent over just five months earlier to be president of BMW of North America Inc., it confirmed his worst fears.
The Munich carmaker was, in fact, staring into an abyss in the U.S. The soaring German mark, plus luxury taxes and stiffer levies on gas-guzzlers, made its cars too expensive, and the end of the '80s boom left its "Yuppiemobile" image badly tarnished. What's more, the company had misjudged the challenge from Japanese rivals such as Toyota Motor Corp.'s Lexus and Nissan Motor Co.'s Infiniti. U.S. sales slumped from a peak of 96,000 in 1986 to a low of 53,300 in 1991.
Gerlinger quickly huddled together with market-research gurus, dealers, and BMW buyers. Travel bills soared, as he and colleagues from Munich and U.S. headquarters in Woodcliff Lakes, N.J., crisscrossed the Atlantic for crisis meetings. Executives gathered at such spots as the Ho-Ho-Kus Inn, in Ho-Ho-Kus, N.J., and hatched a plan for a comeback in the all-important U.S. market.
First, they would reposition BMW's 5 and 7 Series cars--in plain English, cut prices. Then, they would launch smaller, more affordable models. That meant BMW risked losing even more money in the U.S. until the plan paid off. Back in Munich, recalls Gerlinger, "initially, no one was waiting with open arms to welcome the plan." A blunter co-worker adds: "Lots of people thought we were crazy."
But before long, CEO Eberhard von K nheim had come around. Gerlinger got the go-ahead to cut prices. Then, BMW lucked out: German unification in 1990 led to a boom in auto sales in Europe, easing the financial pain. At the same time, von K nheim accelerated the risky transition to a generation of forty-something managers, who have reinvigorated the company's stodgy culture. Plans were set in motion to make more of its parts outside Germany, to build a factory in the U.S., and even to snatch Britain's Rover PLC, maker of such upmarket cars as the Range Rover, from under the nose of Honda Motor Co.
At first, it wasn't clear BMW could revamp its image quickly enough--from a symbol of affluence to a bastion of safety and value. But today, BMW has clawed its way out of the pit. Sales in the U.S. shot up 23% in 1992, and U.S. market share now stands at a record 7.3% of the luxury-performance sector.
ON A DIME. At the heart of BMW's battle plan was the decision to fight the Japanese on their chosen playing field: price. BMW cut prices on its full-size 5 and 7 Series, the company's flag carriers in the U.S. By mid-1990, BMW had slashed the price of its 318i sports coupe to $7,500 less than the 325i--until then, its cheapest performance car. BMW really roared back in the U.S. in August, 1990, with the 318i sedan, priced at $19,900, cheaper than anything comparable from the Japanese--and $5,000 below the lowest-cost BMW anywhere. The sales tailspin stopped on a dime.
Coping with lower prices focused the spotlight back on Germany and its high labor costs. Fortunately, BMW had begun to tackle the problem earlier. Back in 1988, it had persuaded the powerful IG Metall union to work Saturday shifts at BMW's big Regensburg plant. It was also one of the first producers to cut staff. It slimmed down its 73,500 work force by 3,000 as early as 1992--and is still pruning by attrition. The layers of management were cut from five to three.
All that created tension at BMW's tubular-tower headquarters in Munich. After presiding over annual sales growth of 17%, compounded over two decades, the courtly von K nheim, a Prussian, was nearing retirement as CEO. Then, as von K nheim bowed out in May, 1993, after 23 years, he tapped Bernd Pischetsrieder, 45, a relaxed Bavarian engineer with 20 years at the company, to replace him. The choice stunned industry pundits. But Pischetsrieder had earned his spurs leading the SWAT team that picked the site for BMW's first-ever full-blown overseas factory, a $400 million plant in Spartanburg, S.C., that will initially assemble 318i models from parts mainly shipped from Europe, starting at yearend.
DARING RAID. The plunge into U.S. production is proving to be the crucible through which all of BMW's new generation of leaders will pass. In fact, it's one of their defining traits: They all believe that making it in the U.S. is a must to becoming a global player. Says R&D Director Wolfgang Reitzle: "The U.S. market is the toughest in the world. If we are not successful there, we will finally lose the whole battle."
But Pischets-rieder wasn't just stopping there. After moving into the top job, he revved up to pounce on Britain's Rover car group, 20% owned by Honda Motor Europe Ltd. After initial rebuffs, he persisted, and on Jan. 31, BMW announced it had plunked down $1.2 billion in cash to buy British Aerospace PLC's 80% stake. "It was a very big surprise for us," says Honda Europe President Shojiro Miyake. "We were very disappointed." And angry, too: Through Rover, BMW becomes a 20% shareholder in Honda U.K. Manufacturing Ltd. as well as the supplier of all the stamped parts that go into British-made Hondas.
Pischetsrieder's daring raid also pokes a finger in the eye of German archrival Mercedes-Benz. Analysts say it will power BMW into the ranks of such carmakers as General Motors Corp. and Volkswagen, which turn out more than 1 million units a year. Indeed, the combined group will be the 13th-largest auto company in the world and have about 7% of Western Europe's market, nearly double Mercedes' share.
Already in the works is a slew of new products to roll out during the next three years. In mid-1994 comes a new model of its top-of-the-line 7 Series. Two 3 Series variants will also be launched: a compact in the spring and the station-wagon-style "Touring" in the fall. By 1996, a new model of BMW's mainstay, the mid-range 5 Series, is due.
Sustaining BMW's comeback will require a kind of permanent revolution against costs. Analysts figure the company's unit labor costs are in line with GM Opel's, the German industry leader. But Pischets-rieder, like other young technocrats, is keeping the heat on employees: His first edict was to demand 6% annual productivity gains as a permanent goal. That requires BMW to become one-third more efficient every five years and produce each model generation with at least a 20% drop in costs.
Amid much gloom in Europe's auto sector, financial markets are upbeat about BMW, particularly after the Rover deal. The stock shot up nearly 8%, to $420.60, after the announcement. Schr der M nchmeyer Hengst & Co., a private bank, rates it "first choice" among auto stocks. "BMW is the only [European] company making money and cars at the same time," says Thomas R. Holmes, a senior manager at the bank in Frankfurt. Indeed, BMW is a member of the most exclusive auto club in the world: Only Toyota and BMW have made net profits in each of the past 30 years.
To keep the BMW revival on track, Pischetsrieder is attempting to change the company's entire culture. To break through the stifling formality typical of German companies, the CEO has started using his co-workers' first names and the familiar Du form of "you." Communication has become a great deal more direct. "Folks, this is garbage--we've got to do better," Pischetsrieder told colleagues at a recent meeting. And instead of pushing memos up and down the command chain when he wants information, Pischetsrieder picks up the phone and talks to the person who has it, however junior. "Leadership," he says, "is one thing, and decision-making something else--and 95% of the decisions should be made by the people directly involved."
LITANY OF FLOPS. The acid test of Pischetsrieder's stewardship will be carving a success at Spartanburg. The new plant, eventually slated to turn out 90,000 units a year of its new car, aims to break a long-running jinx on Europeans' efforts to manufacture cars in the U.S. Mercedes-Benz and its Freightliner Corp. unit showed they could make trucks. But so far, passenger cars have been a litany of failures: France's Renault flopped with American Motors Corp. in 1987, and Germany's Volkswagen fled that year after piling up losses in Westmoreland, Pa.
To round out its management team, BMW has lured two manufacturing mavens from Honda's Marysville (Ohio) plant to gear up production in Spartanburg. If the South Carolina plant works, it will prove, says Gerlinger, who is now back in Munich heading sales and marketing in BMW's core German, Swiss, and Austrian markets, "that the Japanese are not the heroes who just march into markets and sweep up everything."
Quality will be a further challenge. Dealers are happier now, but the latest mid-1993 ratings from J.D. Power & Associates Inc. show BMW is improving--but still lagging on quality and consumer satisfaction.
WORLD STANDARD. R&D Director Reitzle and colleagues spent several days in the U.S. in January in a blitz on quality. Easy problems, such as batteries installed in Germany that went dead during the sea voyage to America, have been fixed by installing locally made batteries. Leather upholstery in U.S. models is simply stretched less tight to give softer seating. But BMW doesn't want to to make customized models for each of its markets. The car built in Spartanburg, for instance, will be shipped all over the world.
BMW builds in even more quality control by combining the purchasing function with R&D and design. For new-model projects, the teams include designers, engineers, purchasing agents, and manufacturing people. The method, unique to BMW, allows the company to work on friendlier terms with its 100 systems suppliers. All the same, it results in efficiency gains and quality improvements. A sun roof, for example, which used to be assembled by BMW from 60 different parts bought from outside suppliers, now comes semiassembled with only three parts.
The integrated approach, say BMW officials, is yielding cost reductions of at least 20% and up to 40% in some cases. That's significant for Pischetsrieder's drive to increase companywide productivity by 6% a year.
To that end, BMW has resisted the industry trend toward faster model cycles because of the huge capital burden.
Reitzle insists on eight years as a norm, recouping the typical development costs of $1.2 billion per model over a longer period than many competitors. BMW keeps the lines fresh during their extended shelf life by an aggressive variants policy. The 3 Series, for example, now has four distinctly different versions. The strategy helps catch fickle market changes and keeps manufacturing volumes higher for longer.
BMW's against-the-grain style offers lessons for Germany Inc. as a whole. As BMW's top team is breaking out of the rigidity that's typical of the German corporate mentality, it's also making itself into a major-league global player.
TABLE: BMW SNAPS BACK IN THE KEY U.S. MARKET 1994 BMW 530i $42,600 1994 MERCEDES-BENZ E320 $42,500 1994 LEXUS GS 300 $41,000 BASE PRICES, U.S. PORT OF ENTRY, WITH AUTOMATIC TRANSMISSION. EXCLUDES TRANSPORTATION AND TAXES