Tesla Competition

BMW throttles back on indirect costs

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It's electric. Picture source: Reuters

BMW plans to drastically cut its spending on logistics, information technology and procurements to pay for increasing costs to develop all-electric vehicles and driverless cars.

“We want to save at least a billion euros in indirect costs by 2019,” Markus Duesmann, head of purchasing at the carmaker, told Handelsblatt. “Development costs are climbing, and we have to finance them in part through cost-cutting in the coming years.”

After six consecutive record years and an unprecedented increase in production and sales volumes, BMW is now looking to tighten its belt. “Development costs are rising and we have to finance this in the coming years through savings,” Mr. Duesmann said. Over the next three years, company head Harald Krüger wants to spend a total of €2.4 billion on development, or an increase from €5.2 billion annually, to €6 billion.

This is to finance the development of electric and autonomous vehicles. It’s a mammoth task – since BMW’s targeted return of at least eight percent before taxes must be met, according to company headquarters in Munich. Everyone is watching BMW right now because it’s tied with Daimler for the worst-performing company on the DAX.

And it’s not just BMW looking to cut back. At Mercedes, Volkswagen and Audi the company controllers are increasingly taking charge. These corporations are in a tricky situation. Diesel sales may well fall. A switch back to gasoline is out of the question, as those cars will incur EU penalties from 2020. The only remaining option is the introduction of hybrid and electric drives, an area where the German auto industry has been dragging its feet. But that will be twice as expensive.

From Stockholm to Shanghai, signs point to a major turning point for automobiles with the electric car replacing the combustion engine.

Audi head Rupert Stadler wants to cut one third of all conventional model and engine variants. Audi’s parent company VW is preparing to eliminate 23,000 jobs in Germany. Meanwhile, Volvo announced on Wednesday it will no longer invest in the development of combustion engines. From Stockholm to Shanghai, signs point to a major turning point for automobiles with the electric car replacing the combustion engine.

There are also certain increasingly difficult markets, such as the US, where BMW has been falling for months, because it’s not bringing the right models to the showroom floor. Tesla does not have such worries. The electric car pioneer is financing its loss-making expansion with ever new capital increases.

Nicolas Peter, BMW’s new chief financial officer said part of the problem is that customers are given too much choice.

“We have more than 100 steering wheels on offer,” he said, suggesting that the company could just offer a handful of its most popular models.

There is still the “direct purchase” of gearboxes, seats and the thousands of items that are installed in every car manufactured. BMW has quietly increased its purchasing cooperation with archrival Daimler in recent years from €1 billion to almost €5 billion.

Together they can buy car parts like belt tensioners or window lifters for less. However, putting further pressure on prices and streamlining supply chains is a risky game. BMW’s susceptibility to supply chain breaks was evident at the end of May. Its main supplier Bosch stopped production at several BMW plants because the manufacturer of castings for gearboxes wasn’t able to deliver. Bosch had noticed too late that an Italian sub-supplier ran out of liquidity and stopped production. This led to major production crunches for the two auto heavyweights

“The interruption in production has cost us a mid-level double-digit million figure. On top of that, there is the cost of late deliveries,” Mr. Duesmann said. At least 8,000 cars were delayed in reaching the customers during the production interruption. BMW is seeking compensation from Bosch for the disruption but whatever the outcome, its relations with its supplier will be disrupted when it needs it most.

 

Markus Fasse specializes in aviation and automobile industry news and works from Handelsblatt’s Munich office. To contact author: fasse@handelsblatt.com

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