BMW's Shifting Strategy

CEO Helmut Panke says a slew of new models is meant to meet the market's demand. The challenge: Doing so while keeping margins rich

Bavarian Motor Works is embarking on the biggest product expansion in its history in a bid to increase sales of its premium autos by 40% -- to 1.4 million cars -- in 2008. In July, BMW's linchpin luxury sedan, the 5 Series, hits the market, showcasing the German carmaker's latest high-tech innovations. A slew of other new models will follow (see BW European Cover Story, 6/09/03, "BMW: The Ultimate Marketing Machine").

Chief Executive Helmut Panke, a nuclear physicist by training who's passionate about cars, took charge a year ago. The 56-year-old CEO started his career as a consultant for McKinsey in Germany and has clocked 20 years with BMW (BMW ). A former chief financial officer who also worked as head of BMW North America in 1993-95, is determined to make sure the expansion drive doesn't undercut BMW's historically high margins.

Panke, fluent in English and an National Basketball Assn. fan, enjoys strolling through Soho art galleries when he has a spare hour in New York City. From BMW's distinctive headquarters in Munich, called "the four-cylinders building" for its four 22-story rounded towers, Panke spoke with BusinessWeek Senior European Correspondent Gail Edmondson about the secret behind BMW's success and the possible speed bumps ahead. Edited excerpts of their conversation follow:

Q: Why is BMW expanding its successful core portfolio so dramatically? Don't niche models carry a greater risk of being fads that eventually lose popularity?


The product initiative allows us to be focused on market segments that we see developing in the future. Tastes are changing. Customers are slicing the market into more focused pieces. It's becoming more differentiated.

Some derivatives will lose importance, and there will be some creative destruction. The market is shifting. But satisfying the market's demand for new niche products is a strategic risk anyone in the industry has to take. To be successful, you have to fulfill 100% percent of customers' expectations.

Q: Will the move into smaller cars erode BMW's historically high margins?


All our cars are developed with the same target for return on investment (ROI), whether it's an X3 sport-utility vehicle or a 7 Series luxury sedan, a Mini, or a Rolls-Royce. It's true a new brand like Mini requires upfront expenditure. The first-generation models will not achieve this target. Nevertheless, every Mini sold generates a profit.

That target ROI constantly pushes us to increase efficiency in all of our processes, including development. One example is that over the years we've been using the same six-cylinder engine for the BMW 3, 5, 7, X5, and Z4 -- and customers don't mind. Clearly, engine development is quite expensive. We're efficient where it makes sense.

Q: Many analysts doubt Mini can make the BMW target ROI. What's your response?


We're making cars in the premium segment. Mini delivers better performance and quality than volume-market cars. Customers are willing to pay for that. On average, they're also buying more options. That's improving the margins.

Q: Could smaller cars like the 1 Series hurt BMW's brand image -- dilute its exclusivity?


There's a misunderstanding about our strategy. We're making cars in the premium segment. And premium does not depend on the size of a car.

Also, the 1 Series is identical to the size of the original BMW 2002, a car which many say was the real BMW. The 3 Series has grown over its lifecycles and now has the dimension of the first 5 Series. This leaves space for a new entry model into the BMW brand.

Q: A recent Goldman Sachs report states BMW may be considering a purchasing or production alliance with Peugeot for the 1 Series to keep costs down. Is that true?


We're not forming strategic alliances with other automobile manufacturers. We believe in using networks to be able to respond quickly and flexibly to constantly changing customer and market needs. Our [industrial] collaborations are always focused on specific needs. There are no financial associations or mergers. In every cooperative network, the BMW Group maintains control of all factors which influence the value of the brands.

What we're doing with Peugeot is focusing on building a very modern family of economical engines. Other examples of such cooperations are the diesel engine for the Mini One D with Toyota and the manufacturing cooperation with Magna Steyr for the BMW X3.

Q: What about the risk that the 1 Series will cannibalize the 3 Series, which is a more profitable model?


You won't mistake the 1 Series for a 3 Series. It will be different in design and character. It will look and handle differently. And it will be a stand-alone in that market with rear-wheel drive. People will want to have exactly that car.

Q: Where do you aim to gain market share vs. the competition? From Mercedes?


The best thing that happened to the German auto industry is that Mercedes and BMW are so different. We both push to innovate, but the shift in customers from BMW to Mercedes or Mercedes to BMW is limited. We both conquer from the mass market. We both enjoy the above-average growth of the premium market.

Q: Many believe BMW's corporate culture is a key element in its success. Could you describe it?


We're an organization with a hierarchy, but decisions are made at the level where competence rests. That's one thing that convinced me [to join BMW] when I was working as a consultant for McKinsey. I saw individuals at BMW have the freedom to get things done. No one is limited by excessive bureaucracy. Department managers have the ability to decide without a committee. They have the ability to move fast. It's a competitive advantage. This has become increasingly pronounced at BMW.

Q: What about the famous Rule No. 7 in the corporate code of employee behavior?


Rule 7 states that it's the responsibility of any manager to create an atmosphere of fun in the organization. I make a personal point of this. I believe in it -- it makes me tick. When people work in a fun atmosphere it's very motivating. I love my job.

Edited by Patricia O'Connell

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