# So, Jon, what do you think of the Business Week article?



## DaveN323i (Jan 17, 2002)

Hi Jon,

I am not sure whether you read the Business Week article regarding BMW. One of the points it made is that BMW tries to produce cars at a number it perceives to be below demand. In this way it keeps the prestige up. I wonder whether this strategy may work when more and more models show up (the 1 series, X3, 6 etc). For example with the 1 series, if a customer can't find the car in the showroom, he/she would be tempted to get a lot of available arternatives. What are your thoughts?


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## Jon Shafer (Dec 15, 2001)

DaveN323i said:


> *Hi Jon,
> 
> I am not sure whether you read the Business Week article regarding BMW. One of the points it made is that BMW tries to produce cars at a number it perceives to be below demand. In this way it keeps the prestige up. I wonder whether this strategy may work when more and more models show up (the 1 series, X3, 6 etc). For example with the 1 series, if a customer can't find the car in the showroom, he/she would be tempted to get a lot of available arternatives. What are your thoughts? *


Hey Dave,

You trying to test my comprehension of Micro Economic Theory,
or what??
:dunno:

Your question is a good one... BMW is absolutely wise
in maintaing production levels which do not create a situation where the market 
is flooded with their vehicles. No doubt there
is a very fine line between too few and too many...

Here is my take on BMW's Marketing strategy:

*Strong resale value* is key to keeping the current roll
going, to maintain the very strong market position that 
the brand is currently enjoying. _Everything_ that the company 
does to maintain this strong resale value will keep both the 
manufacturer, and the dealer body "healthy" for many years
to come. You see it everwhere within the policies of the retail
organization.

Take for instance, BMW's CPO program. Here's how it works;
retailers sign an agreement to buy back the lion's share of
their lease portfolio as it matures. Off-lease BMWs then avoid
the auctions, which keeps the resale value high.

Now, with these higher resale values, we can set our 
residual values higher for our leases (because the remarketing
values support it), and consequently, we can then offer our
new car buyers even lower payments, The cycle becomes
self-propelled...

Dave, if BMW "over-produces", and floods the market with
product (e.g. the current Porsche Boxster), the consequence
can be devastating... Gross profits slip, inventories stack
up, and the manufacturer has to start pouring on the incentives
just to move the product. Resale values take a shit, and
the next thing you know, the brand is in trouble...

**Brands lose their esteem in the marketplace when that 
happens - BMW doesn't want to go there...

Dave, the 1 Series is the only carline that concerns me.
While there were some devout 318Ti lovers out there,
the car was not a retail success (you would think that Daimler-
Chrysler could have learned their lesson (the C Coupe) 
vicariously, but they didn't... The X3 will be a huge hi 
volume success, and the 6-Series, well.....

:thumbup:

Damn!!


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## DaveN323i (Jan 17, 2002)

*Re: Re: So, Jon, what do you think of the Business Week article?*



Jon Shafer said:


> *
> 
> Damn!!
> 
> *


Hey Jon, thanks for the response. Damn? Thinking of how to get more allocations? 

I guess the other side of the coin of this strategy is that dealers struggle to get more cars into the inventory.


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## Jon Shafer (Dec 15, 2001)

*Re: Re: Re: So, Jon, what do you think of the Business Week article?*



DaveN323i said:


> *
> 
> Hey Jon, thanks for the response. Damn? Thinking of how to get more allocations?
> 
> I guess the other side of the coin of this strategy is that dealers struggle to get more cars into the inventory. *


You've nailed it, Dave!

Inventories are really, really low right now.

There's currently about a 2 weeks' supply on the ground....


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## mp330ci (Dec 31, 2001)

*Help me here...*

So John, if the BMW business model depends on high resale value how do you explain the current M3 engine situation? The current hysteria flys in the face of your theory.

It should be obvious to any sentient being that the resale value of the E46 M3 is being, or will be hurt drastically without a strong statement from BMW. I don't think I have to spell out what that response should be.

Can you state "for the record" that BMW will stand behind the owners of these cars post 4/50?

If not "for the record", then perhaps "wink, wink, nudge, nudge"?

I'm ready to pull the trigger and trade up if the answer is affirmative.

thanks,

mike


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## Jon Shafer (Dec 15, 2001)

*Re: Help me here...*



mp330ci said:


> *So John, if the BMW business model depends on high resale value how do you explain the current M3 engine situation? The current hysteria flys in the face of your theory.
> 
> It should be obvious to any sentient being that the resale value of the E46 M3 is being, or will be hurt drastically without a strong statement from BMW. I don't think I have to spell out what that response should be.
> 
> ...


Frankly, Mike, I don't know what they are going to do...

Does anybody here remember the remedy for buyers
of the 1995 7-Series??

That was my first year with BMW; if I'm not mistaken,
they "sleeved" some motors, and offered an augmentation
to the warranty (gratis) to 100K mi...


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## ·clyde· (Dec 26, 2001)

*Re: Re: Help me here...*



Jon Shafer said:


> *
> 
> Frankly, Mike, I don't know what they are going to do...
> 
> ...


They've replaced a hell of a lot of engines. The problem while most of the bad engines will fail before 100k, many won't fail until after 100k and BMW won't replace the engines until they fail. If your driving style was such that it wore more slowly, preventing failure until 120k you get screwed. And if for some reason it appears that your engine won't ever fail due to the sulfer/sleeve issue, and you want to sell, you still get screwed because no one wants to touch a 5 or 7 series with that engine if it's anywhere near or above 100k if the engine hasn't been replaced.

If BMW cared that much, they would replace every one of the bad engines when it fails due to the sulfer issue no matter the age or milage.


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## ·clyde· (Dec 26, 2001)

*Re: Re: So, Jon, what do you think of the Business Week article?*



Jon Shafer said:


> *Strong resale value is key to keeping the current roll
> going, to maintain the very strong market position that
> the brand is currently enjoying. Everything that the company does to maintain this strong resale value will keep both the manufacturer, and the dealer body "healthy" for many years
> to come. You see it everwhere within the policies of the retail
> organization.*


You're forgetting one thing there, Jon. Strong resale vs other makes keeps the customers happy too as well as makes them more likely to make their car a BMW as well.


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## mp330ci (Dec 31, 2001)

*As long as we're talking about mkt strategy...*

Jon, your 'take' on the marketing strategy makes sense.

On another note, M POWER is both a trademark, and a marketing statement as well. Would you agree? Why else would BMW invest huge resources with Williams. My point is this, M POWER has a very loyal customer base. While the number of M models is small-M Coupe, M3, M5, they are, IMO the "Flagships" of the brand. A flagship does not have to be a boat! ;-)

As we all know, that trade mark has been, and is being tarnished via the failed bearing issue.

I'm not going to waste my bandwidth and yours on what BMW needs to do, but I will say this; silence is the worst thing that they could be doing to "maintain strong resale value".

Right now, I'ts my feeling that a purchase of an M3 would be a huge risk and a fiscally stupid thing to do. But, If BMW would issue some sort of statement that would alleviate my fears, I'd buy one tomorrow. And believe me, I want one bad!



mike


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## Jon Shafer (Dec 15, 2001)

I agree that something (significant) needs to be done...

Does everyone remember just how many times the 
launch was pushed back for, shall we say, unknown
reasons??

Fortunately, the production volume has been low enough
that we're not really talking about that many units...

Maybe BMW should have chosen the easier way out
to begin with (i.e. forced induction)??
:dunno:


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## Guest (Sep 18, 2002)

*Re: As long as we're talking about mkt strategy...*



mp330ci said:


> *Jon, your 'take' on the marketing strategy makes sense.
> 
> On another note, M POWER is both a trademark, and a marketing statement as well. Would you agree? Why else would BMW invest huge resources with Williams. My point is this, M POWER has a very loyal customer base. While the number of M models is small-M Coupe, M3, M5, they are, IMO the "Flagships" of the brand. A flagship does not have to be a boat! ;-)
> 
> ...


There are more than enough potential buyers out there who are ignorant of the problem to buy up all of the units produced.

The only people who lose out are enthuisiasts such as yourself who both really would like to buy the car but are also aware of these issues. Oh, and those ignorant of these issues who inadvertently end up buying these cars used in a few years.


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## SteveT (Dec 22, 2001)

Huge risk, fiscally stupid...ignorance? I'm not sure you understand what you are speaking about. What do you expect them to say? Yes, they had a problem with engines produced during a period of time last fall. BMW has also stood behind those failures and replaced engines. Just as they should. If you look at the statistics you will see that the failures are clustered during a certain production time. Production beyond that time has had very few failures...almost none. Speaking about these cars used, anyone who buys a performance car used and isn't very careful, is vulnerable to trouble from the abuse of the previous owner of the car. None of these cars (M3's of any vintage) is indestructable. Years ago, in the mid 60's, Chevrolet had a similar problem with the 396/427 Corvette. I worked at a Chevy dealer then and remember them replacing engines. In the long run, I don't think it had much of an affect on the value of the used cars.


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## ·clyde· (Dec 26, 2001)

SteveT said:


> *Years ago, in the mid 60's, Chevrolet had a similar problem with the 396/427 Corvette. I worked at a Chevy dealer then and remember them replacing engines. In the long run, I don't think it had much of an affect on the value of the used cars. *


I don't know what things were like before the early 80s (which was when I was old enough to start paying attention), but by the early 80s all vettes more than a few years old were worth significantly less if they didn't having matching numbers (VIN and block). As the C1, C2 and C3 vettes have aged further, the gap in prices for identical condition vettes with and without matching numbers has only gotten wider.

It's probably not much of an issue for the first 5-10 years, but as the cars turn from daily drivers into collector playthings it becomes an issue (more so for some cars than others...anyone's guess where the E46 M3 will fall). How would you feel if after 20 years you went to sell your car with it's replacement engine and found that was only worth 1/3 what your neighbor's car (identical model, worse shape overall, but with original engine)?

I don't think that I could ask BMW to be compensated for a potential difference in value 20 years hence with a straight face, but if I had planned to own the car for 20 years I'd be plenty pissed and probably wind up selling it pretty soon after the new motor was installed.


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