Look Who's Building Bimmers

BMW is farming out production of its new SUV. The auto industry is all eyes

When BMW cut a deal in 2000 to outsource the engineering and production of its new X3 compact sport-utility vehicle, it was no simple handshake agreement. The complex technical and commercial details swelled the contract to 5,000 pages. The reason? BMW and Austrian auto supplier Magna Steyr were pioneering a huge handover of in-house engineering and production technology -- an especially high-stakes move for a premium-brand manufacturer like BMW.

The Germans' demands were daunting. BMW was in a hurry to get the X3 to market, so Magna Steyr agreed to bring the new model from concept to production in a record-breaking 28 months, beating BMW's average in-house performance by several months. Magna Steyr assigned some 500 engineers, who set about cloning BMW's vaunted engineering, production, and quality processes. At BMW's request, the Austrians also pledged to develop advances in four-wheel drive technology. Plus, the new model had to match the innovation, road feel, and quality evoked by the BMW brand, lest the carmaker's reputation suffer. Magna had already produced cars for Mercedes-Benz (DCX ), Audi, Volkswagen (VLKAY ), Jeep, and Chrysler (DCX ). But the X3 is the largest and most complicated job Magna has tackled. "We had to use the same processes, or it wouldn't be a BMW," says Herbert Hüdl, executive vice-president for marketing & corporate planning at Magna Steyr in Graz.

With the X3 hitting showrooms in Europe in January and the U.S. the following month, the global auto industry is riveted. Based on strong early reviews, analysts are predicting sales could hit 150,000 in 2004, nearly double BMW's original forecast. If successful, the approach may lead more auto makers to adopt outsourcing to meet growing demand for niche models. Until now, the practice has been limited to small-run models, like convertibles, to avoid big engineering and production outlays.


Will outsourcing reshape the global auto industry? Not right away. But there's plenty of room for carmakers to shift a greater chunk of development and production out-of-house. Europeans are leading the trend, but even Chrysler Corp., Ford Europe, and GM's Opel unit have tapped the growing pool of expertise. The biggest benefit is lower capital investment, which boosts returns. "Auto makers are experimenting more, using suppliers in new ways," says Tom Vollman, professor of manufacturing management at IMD in Switzerland.

As outsourcing deals multiply, variations of the subcontracting model are developing. In September, Sweden's Volvo (F ), a subsidiary of Ford, announced a joint venture with Pininfarina, of Turin, Italy. The smaller design and engineering company will handle process engineering, prototyping, testing, and production for Volvo's next-generation convertible. Pininfarina also picked up the auto-engineering business of France's Matra. Germany's Karmann last year stepped in to help struggling Chrysler build the flashy $40,000 Crossfire roadster. And Sweden's Saab, a GM subsidiary, has contracted with Magna Steyr to engineer and produce its 9.3 convertible.

No question, Magna Steyr is kingpin in the global ranks of suppliers capable of producing whole cars on contract. Over the past five years, business has soared. Magna Steyr, a subsidiary of Canada's Magna International, (MGA ) now produces eight models on four production lines at factories nestled at the eastern foot of the Alps. This year, it will churn out 116,000 cars and light trucks, up from 25,000 in 1997. More than 80% of its business comes from full-vehicle engineering and development. As new models hit the market, Magna's production is forecast to top 200,000 over the next two years.

BMW was hardly the first to hand over control of its tony image to a supplier. Magna already had taken over the complete engineering of the Audi TT from the concept drawings Audi provided to serial production. It also produced cars for Volkswagen and Mercedes, including the luxury E-Class four-wheel drive. And its can-do reputation was a plus. In 1998, when Mercedes asked Magna how fast it could set up a production line to handle surging demand for its hot M-Class SUV, Magna put it together in eight months -- breakneck speed for the industry. Not only that, insiders whisper that the quality of Magna's M-Class beat that of Mercedes' Alabama plant. "Magna has an impeccable record," says Tom de Vleeschauwer, a consultant at Global Insight Inc.'s automotive practice in London.


With 2,000 engineers spanning the globe from Poona, India, to Detroit, Magna boasts an alluring brain trust that can spare auto makers heavy investment in personnel to develop new models, not to mention the $1 billion outlay for a new plant. To oversee the transfer of technology from BMW to Magna, BMW dedicated a team of just 30 engineers to monitor development engineering, processes, and production. Magna's engineers, meanwhile, did four-week training stints at BMW's plants and research and development center, immersing themselves in BMW's culture and products, right down to how a Bimmer drives. Magna's engineers even matched BMW's vaunted ability to innovate: At BMW's behest, Magna Steyr pioneered a new four-wheel drive system that instantly transfers torque between the front and rear axles as the terrain demands. Now, BMW plans to adapt the technology to its larger X5 SUV.

Managing four production lines for four different manufacturers is taxing. Magna's supply-chain systems and operations have to dovetail with a mishmash of client systems. For BMW, the company adapted its data networks to handle orders for custom-built cars. Magna had done the same for Mercedes-Benz, but there was no way to use the same technology for BMW.


That wasn't an isolated case. Every day, Magna's purchasing agents, engineers, and production workers must immerse themselves in each auto maker's culture. This has made Magna Steyr a kind of polyglot of engineering and production cultures, able to pool best practices and improve on them. In designing the X3 model, Magna slashed development time by building two prototypes instead of three, as requested by the client. "We did more on computers," says Hüdl. "It saves our customers time and money."

Outsourcing isn't always win-win, especially for smaller engineering houses. When Porsche (PSEPF ) contracted out the bulk of production of its Boxster sports cars to Finland's Valmet Automotive, Valmet took the lion's share of production -- and the most risk of a downturn in sales. At first, sales of the $52,000 roadster boomed, and by 2001, Valmet was churning out more than 23,000 per year, or 84% of production. Since then, sales of the aging model have declined 22%.

Analysts estimate the BMW deal could net Magna over $1 billion. But if X3 sales soar, BMW could well decide to produce the next generation in-house. For now, Magna isn't worrying. "We're thinking of new locations and new markets," says Hüdl. "This isn't the end of the story." As long as consumers remain hungry for an ever-expanding universe of new models, he's probably right.

By Gail Edmondson in Frankfurt

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