electric CHALLENGE

Taking on Tesla: BMW’s mission to Mars

The 67th IAA Frankfurt Automobile Show Opening Day
Guess the word at the back. Source: Bloomberg

They’re calling it BMW’s “Mission to Mars.” In the coming years, the Bavarian carmaker wants to turn itself into a high-tech company comparable to Apple or Google, develop dozens of new all-electric and self-driving cars, and massively boost its R&D spending. The aim is to develop a mass-market “Tesla killer,” which will win back market share from the American upstart.

All at the same time as it sells more cars than ever before, and while catching up with arch-rival Daimler, maker of Mercedes.

There’s certainly no shortage of vision at BMW’s Munich headquarters. Whether the company has the money to pay for it all is another question. What’s the priority? Everything’s the priority. BMW is on a massive hiring spree, signing up electrical engineers, software engineers and artificial-intelligence specialists. On Friday, construction began on the company’s new battery center, next door to its huge new electric-car campus on the outskirts of Munich.

Nicolas Peter, BMW’s CFO, has already found an extra €700 million ($835 million) for research and development this year, with hundreds of million more to be added in the final quarter. Next year the company expects to shell out €7 billion on R&D, Mr. Peter told Handelsblatt this weekend. That’s almost €2 billion more than originally planned, and these levels will be maintained in 2019. But Mr. Peter wants to finance all this from revenues, and that means keeping margins on car production above 8 percent. In 2016, that figure was 9 percent, but it already fell to 8.3 percent in the third quarter of this year.

“Volume is not the only thing in thinking about who is ahead. It is a combination of segment share, profitability and strategy.”

Nicolas Peter, CFO, BMW

The pressure on BMW’s relatively new management team will be enormous. Not only do they have to face the challenge of an industry in upheaval, there is also the bitter local rivalry with Daimler. “Volume is not the only thing in thinking about who is ahead,” said Mr. Peter: “It’s a combination of segment share, profitability and strategy.” That may be so, but supervisory board chairman Norbert Reithofer has already publicly reminded senior executives that it is unacceptable that BMW was outsold last year.

Nor have BMW shares been setting the stock market on fire: the company has been the worst performer on the DAX index this year, although its earnings will top €10 billion for the first time in 2017. CEO Harald Krüger will be reassured by suggestions that the board is prioritizing long-term development.

But money for the future will have to be earned in the here and now, and efficiency is the new watchword throughout BMW’s global operations. Like Mercedes and Audi, BMW is simplifying of its product palette: it may be rolling out dozens of new electric models, but in fewer colors and without as many features. Purchasing costs are also under severe review. One way or another, a massive sales boost will be needed: hopes are high for the new 5-series, while the new SUVs X2 and X7 should raise revenues in 2018. Next out of the pipeline is the new 8-series, which the firm hopes to turn into a flagship comparable to Mercedes S-class.

Many unknowns haunt BMW’s grand production plans. One potential weak point is the company’s reliance – greater than its rivals – on external suppliers. When Bosch ran out of an innocuous engine part last year, whole BMW production facilities stood still for days.

As production is ramped up from 2.5 million to 3 million in the coming years, operations are bound to become more complex. The next generation BMW X3 SUV will be made in the United States, China and South Africa, with 3-series production shifting to Mexico, a move that could run into trouble if President Trump makes good on his tariff threats. Brexit is another geopolitical worry: for the moment, BMW is keeping Mini production in Britain, but in the longer term it may be moved to China or the Netherlands.

With so many factors in play, 2018 is shaping up to be a make-or-break year for BMW as its hard-pressed executives set out for Mars.

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

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