BMW CEO Going With the Flow

Harald Krüger, the new chief executive of BMW, faces challenges many CEOs can only dream of: How to manage soaring growth and profits. But he'd be unwise to slip into cruise control.
BMW has turned a corner.

At first glance, Harald Krüger, who will take over as the new chief executive of BMW after Wednesday’s annual shareholder meeting, can relax.

Sales were humming along nicely in the first three months of 2015 and BMW looks on course to chalk up its sixth record year in a row, aided by the weak euro. In addition, the carmaker isn’t plagued by the boardroom battles that have beset its rival VW, where Ferdinand Piëch has just quit as supervisory board chairman after losing a showdown with other board members.

At BMW, peace reigns. Mr Krüger, 49, enjoys the unqualified trust of the Quandt family that owns almost 47 percent of the firm, and shareholder representatives also backed his appointment to replace Norbert Reithofer as chief executive.

And there was nothing controversial about Mr. Reithofer’s departure, even though it was one year sooner than planned. The Quandt family simply wanted to prevent him from defecting to industrial group Siemens. The engineering giant is currently looking for a successor to its supervisory board chief Gerhard Cromme, so the Quandts offered Mr Reithofer the post of supervisory board chairman at BMW a bit earlier.

But Mr. Krüger can’t afford to switch to autopilot. The group is still playing catch-up with Mercedes, owned by rival Daimler, when it comes to the large-limousine segment and is at risk of becoming over-dependent on the Chinese market, where growth has slowed.

Boosting sales of the 7 Series is the immediate challenge. Over the medium-term, Mr. Krüger will need to manage BMW’s growth.

Mr. Krüger, who has been on the management board since 2008, first as head of personnel and then as production chief, has already ordered a strategic review of all business segments. The aim isn’t to overturn existing strategy but to strengthen the focus on the challenges leading up to 2020 and beyond: An era that will see an automotive revolution with alternative drive systems and ever greater automation.

One of Mr. Krüger’s first tasks will be to ensure the successful launch of the latest version of the flagship 7 Series luxury saloon, which BMW wants to make the star of the IAA International Motor Show in Frankfurt in September. Company sources said BMW aims to sell more than 50,000 7 Series cars per year.

The series was launched in 1977 but has failed to overtake the Mercedes S class limousine, produced by arch-rival Daimler. Success in this sector is about prestige, of course, but it’s also about margins, because carmakers usually earn more on large cars than on compact models.

That’s especially true when the euro is weak, as it is now, because both the S class and the 7 Series are exclusively manufactured in Germany and mostly sold in the United States and China. The big models are also important for introducing new technologies such as driver assistance systems and hybrid engines because the relative costs of these features are smaller in expensive cars.

Quelle: dpa
In the driving seat: Harald Krüger.
(Source: dpa)

 

At present, the gap between sales of the Mercedes S class and the BMW 7 Series is huge.

Daimler sold more than 125,000 last year of the latest S class generation, launched in 2013. BMW’s sales of its newest 7 Series cars came to just 48,000. That gap is expected to widen this year. Mercedes boosted S Class sales by a further 15 percent in the first quarter, while BMW had to resort to big discounts in the United States and China to get customers to bite.

BMW has invested heavily in the new 7 Series. Part of the body is made from light carbon fiber, the interior will be highly networked and some of the controls can be operated with hand gestures.

BMW is stronger than it’s ever been before. It has added €20 billion to sales since 2010.

Boosting sales of the 7 Series is the immediate challenge. Over the medium-term, Mr. Krüger will need to manage BMW’s soaring growth. The carmaker had originally planned to reach the two-million sales mark in 2018 but already cracked it last year with 2.17 million vehicles sold.

In addition, BMW has doubled the output of its U.S. plant in Spartanburg in South Carolina, has built a second plant in China and is building a new one in Mexico. That will add a combined production capacity of half a million cars per year by 2020 — as many as the Volvo brand sells worldwide today.

But BMW will have to keep a close eye on quality and on costs, and will need to stay flexible to avoid being saddled with surplus capacity.

Take China, for example. Rivals Audi and Volkswagen have a far bigger exposure there, but BMW, too, couldn’t resist the temptations of the world’s biggest car market. It is now BMW’s largest single market, with sales having doubled to 456,000 in the past three years.

 

BMW Results-01

 

BMW, like other carmakers, doesn’t separately report profits generated in China, but they’re likely to be disproportionately high. The Chinese, after all, mainly buy big limousines such as the 7, 6 and 5 Series and the lucrative X sports utility vehicles.

But the risks of the Chinese market became evident in January when BMW had to pay almost €700 million in compensation to its Chinese dealers who had suffered losses last year because their sales targets were set too high and they couldn’t sell BMW’s ageing fleet of vehicles.

The Chinese car market has slowed from double-digit growth levels in recent years to below 10 percent this year. The 5 Series is in the second half of its lifecycle and the 7 Series is at the end of its cycle.

BMW said a “new normality” had taken hold in the Chinese market and admitted that its first quarter in China was marked by “intense competition” that was exerting downward pressure on prices. The days when the Chinese bought everything the Germans offered them are over. Demand for compact sports utility vehicles assembled locally is high, and BMW is responding by expanding its output of such cars there.

 

2015-05-12 BMW Sales by Region-01

 

The carmaker is also thinking hard about its electric vehicle strategy, where competition is strong. It rolled out two electric cars, the compact “i3” and the hybrid sports car “i8” in 2013 and plans to broaden the range with half a dozen hybrid versions of its existing combustion engine models. For BMW, this is an essential step to meet tighter EU carbon emission limits coming into force in 2021.

But the“i3” will have to be reworked, because it only has a range of 150 kilometres and is expensive. At the end of 2017, U.S. electric cars manufacturer Tesla plans to launch a compact electric limousine with a range of 320 kilometers costing just $35,000 (€31,000).

German competitor Audi is also working on a new generation of electric cars. BMW plans a further sports car called the “i9,” and is also considering a new limousine, the “i5,” with less carbon-fiber components but significantly better range.

 

2015-05-12 BMW Slaes by Division-01

 

Those are the challenges. On the upside, BMW is stronger than it’s ever been before. It has added €20 billion to sales since 2010 and its revenue of €80 billion exceeds that of Siemens, which employs three times as many people.

And while BMW is smaller than VW and Daimler, it is more profitable relative to sales. Its earnings before interest and tax reached €9.1 billion in 2014 and its pre-tax profit hit €8.7 billion, exceptionally high levels compared with its peers.

It has raised its dividend by €0.30 to €2.90 for preferred stock and €2.92 for common stock, keeping the dividend payout ratio in its target range of 30 to 40 percent that of previous years. That means BMW is in a position to keep its share attractive with a high payout, while financing growth without having to eat into its capital base.

 

2015-05-12 BMW Sales per Employee-01

 

Its sales growth last year wasn’t even that big — at 5.6 percent, it was only middle of the road compared with its rivals and behind Daimler, Fiat and Hyundai. But its net return on sales of 7.2 percent is well ahead of Daimler and VW with 5.5 percent each.

That’s because BMW’s production and distribution costs are lower, while its research and development expenditure, at 5.7 percent of sales, is similar to VW and 0.6 points above Daimler. BMW is more efficient at producing cars and selling them.

As challenges go, Mr Krüger’s are pretty luxurious. But they are sizable nonetheless.

BMW has grown into dimensions at which it will become more difficult to maintain the pace of growth in earnings and sales. The weak dollar will provide a boost in 2015, no question. But that won’t last for ever.

 

WTB 2014 - Neu 2015-03-20-01

Markus Fasse is a Handelsblatt correspondent specializing in the auto and aviation industries. To contact the author: [email protected]