# A Hit Parade for BMW? (Must-read BusinessWeek Article)



## Spiderm0n (Dec 19, 2001)

A Hit Parade for BMW? 
Gunning for growth in the U.S., the carmaker is flooding the luxury market with new models 


Allen Jayme loves the simple look of his BMW. He loves the quality workmanship. But mostly, the Dallas software salesman digs the nimble handling and adrenaline-pumping speed of his BMW 328i. That's why Jayme, 57, who has owned five BMW cars and one motorcycle since the German carmaker invaded the States in the mid-1970s, is shopping for a new 5-series. Says Jayme: "They're just more fun to drive."

It was that sort of naked appeal to the driving aspirations of baby boomers and social climbers that propelled BMW to the front of the luxury-car pack. Sales have grown 15% a year, on average, since 1998, while the company has kept a tight focus on performance sedans. It branched out only narrowly into entry-level luxury with the popular 3-series and luxury sport-utilities with the powerful X5. "BMW is the brand for our time," crows BMW North America President Tom Purves.

Now, BMW is planning a second-wave assault on the U.S. luxury-car market. Its goal is to boost U.S. sales by 40% in the next five or six years, to 300,000 cars a year. No auto maker has sold that many luxury cars in the U.S. since Cadillac did it in 1984, before foreign competitors began moving full force into the market. The big push is a major part of the company's global strategy: to grow from sales of 950,000 cars to 1.3 million in 2006.

But to get there, BMW is placing at risk a couple of its sacred tenets: the exclusive aura that came from limited production and its sharp focus on a narrow lineup. And the German carmaker is trying to pull off this latest campaign against an increasingly challenging field of luxury competitors. Already, it is offering discount pricing on the high-tech, $80,000 flagship 7-series sedan that hit showrooms in January--a more aggressive move than BMW has had to resort to in the past.

Suddenly, the auto maker seems to be branching out in all directions at once. A new 5-series sedan and a small SUV, the X3, are due out next year. The compact 1-series, which analysts suspect will be priced at under $30,000, should hit showroom floors in 2005. An even smaller car, the $20,000 subcompact Mini Cooper, has been a hit since its spring introduction. And later this year, the sleek Z4 convertible replaces the Z3.

It's a stark departure from the company's core lineup. But BMW executives figure they have room to grow. They have a 7% market share in Germany and 5% in the rest of Europe, but less than 2% in the U.S., where BMW sold 213,127 cars last year and 155,952 this year through August. The new sales targets do present some difficulties. BMW has always tried to engineer and design the best performance sedans and then build and sell slightly fewer of them than demand warranted. That allowed the company to maintain an aura of exclusivity, while avoiding profit-eroding rebates and discounts. "It makes people think their cars are always in hot demand," says James N. Hall, vice-president of AutoPacific Inc., an auto-industry consulting firm. The result? Customers wait months for the models they want and then pay top dollar.

To keep that dynamic working, BMW plans to expand the number of new models--and limit production on each of them. To get younger buyers, BMW will build the X3 sport-ute--a downsized X5 built on the platform of the very popular 3-series sedan. But the company's biggest play for the young will be the 1-series. The car will be smaller than the entry-level 3-series. BMW tried in the past to sell a cheap Bimmer, pushing the underpowered 318ti hatchback unsuccessfully in the late 1990s. Company Chairman Helmut Panke swears the 1-series won't just be a cheap compact, but will hark back to the 2002, a cool five-passenger sports sedan that launched BMW's U.S. success in the early '70s. Says Panke: "We will be in many segments but with premium solutions."

The trick, say competitors, is bringing to each niche the driving touches that BMW owners have come to expect. If the small 1-series, for instance, is as performance-oriented as larger, more powerful BMWs, "they can probably pull it off," says Denny Clements, group vice-president and general manager of Lexus. "Unlike Mercedes and Lexus, BMW is known more for performance than luxury." Already, the X5 is among the top-selling luxury SUVs in the U.S., while the hatchback Mini has would-be buyers lined up.

Even so, rivals show no signs of backing down. Toyota Motor Corp.'s Lexus, always a formidable player, has a new SUV that will challenge the X5. Mercedes-Benz will beat the new 5-series to market with its all-new E-class sedan coming out soon. Those cars will be engineered for better performance driving--a direct challenge to BMW's strength. Even General Motors Corp.'s Cadillac Div. is beginning to wake up, taking aim at BMW buyers with a new, performance-oriented midsize SUV, the SRX. And the Z4 will compete with an offering by Porsche, always a performance powerhouse. Says Mercedes-Benz USA President Paul Halata: "Everyone is trying to get into the upper end." Even if the economy slows again, luxury carmakers expect to do better than the rest of the industry. Through August, luxury-vehicle sales are up 7% while the overall auto market is flat. Quips Lexus' Clements: "Someone is turning 50 every 8 seconds."

BMW is being forced to respond to the increased competition on a number of fronts. The company hasn't resorted yet to fat rebates or 0% lending, as other carmakers have done. Behind the scenes, however, BMW will offer customers lower lease payments to keep sales up, says Frank A. Ursomarso, who owns a BMW dealership in Union Park, Del. Every month, BMW and its dealers track customers whose leases expire in the next six months. Then it tries to lure them into another new car, often using sweet leasing deals as bait. The company will spend up to $3,000 to cut the lease on one of its 7-series cars. The result: BMW sold 14,479 new 7-series cars through August, a 38% rise over its old model in the same period last year. "They use hidden incentives," says Jeremy Anwyl, president of Edmunds.com, which tracks car prices and incentives for consumers. But any form of discounting clearly works against earnings--and BMW's pretax profit margins are about 8%, the highest in the industry.

The other risk to broadening its product offerings is that BMW has more chances of disappointing its fanatic customer base. Despite impressive sales, the new 7-series has raised a ruckus among car buffs. Some consider its bulbous rear end an automotive eyesore, going so far as to urge the firing of BMW chief stylist Chris Bangle. And the 7-Series' iDrive, a high-tech system that runs the car's audio and environmental controls, has been derided as too hard to learn. Even Purves concedes that it takes about two hours to master.

All told, it was enough to make Eric Woo, a 34-year-old chief information officer for a hotel real estate firm in Vancouver, B.C., cancel an order for a new 7-series and buy a Mercedes instead. "I'm very good with gadgets, but iDrive is not easy to memorize," Woo says, adding: "I find the styling quite ugly." BMW is getting the message. The new 5-series will be toned down a bit compared with the 7-series, it says.

BMW is out to make a luxury car for every taste. And it has set a high standard, boasting that every one of its vehicles qualifies as "The Ultimate Driving Machine." But if it's going to fend off newly energized rivals, BMW has to prove that it's capable of extending its trademark mix of top-line engineering and luxury cachet into the farthest reaches of the auto industry.


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## Spiderm0n (Dec 19, 2001)

No comments?  What do you guys think about the 1 series? Is BMW going to lose its 'exclusive aura'?

I also find it interesting that they say that BMW "branched out only narrowly into entry-level luxury with the popular 3-series". I don't know my BMW history, but aren't BMWs roots in the smaller sedans?


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## Cliff (Apr 19, 2002)

Yes, it seems to me like they're aggressively trying to grow market share. I think they'll dilute the value of their brand in doing so. I don't think they'll be punished financially for this, in fact I'm sure they'll be rewarded. 

I think there is a risk that as the company broadens its product focus, they'll dilute the nature of their products. Some here obviously argue they already have and that the E46 has lost sight of its roots. I don't think they're right, but if the next generation of the 3 series is larger or softer than the current one, then it will have lost its focus and it will die in the marketplace.

The 1/2 series might be a nice opportunity for BMW to market a car to the same audience that was buying the 2002/E21/E30. Keep inexpensive versions available, and create an M1/2 version for the track junkies.

My 2¢


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## Plaz (Dec 19, 2001)

Seems like a good strategy to me. Even if they expand their market share, making sure that they are the premium offering in each segment they enter shouldn't dilute the strength or exclusivity of the brand too much.

Long-time enthusiasts just need to come to terms with the fact that they will never be the small, almost secret club they were back in the 70s. But it looks like they will have offerings to appeal to those buyers as well, if the 1-series does indeed adhere to the principles they say it will.

My feeling is that this strategy is probably necessary if they wish to remain independent in this age of runaway corporate consolidation.


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## aardvark (Apr 15, 2002)

Pretty accurate article except for the following:



> * It branched out only narrowly into entry-level luxury with the popular 3-series *


Branched out? The 3-series has been at the core of the business since the '70s.



> *Already, it is offering discount pricing on the high-tech, $80,000 flagship 7-series sedan that hit showrooms in January--a more aggressive move than BMW has had to resort to in the past. *


Oh, come on. BMW has discounted here and there before.



> *.The compact 1-series, which analysts suspect will be priced at under $30,000*


Since it's possible to get a minimally equipped 325i for under $30,000, BMW execs would have to be insane to try to sell a smaller, 4-cylinder car at the same price. I think $20K-$25K is more like it.

I'm looking forward to the 1-series/2-series. I really like the look of the CS-1 concept car. Build a hard-top version of that and I'll place an order tomorrow.


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## PhilH (Jun 7, 2002)

Will BMW lose its exclusive aura? Did Mercedes lose any of its aura over the new C-class sport coupe? I don't think so. Instead, the sport coupe is selling slowly from what I've heard.

The sales figures they quote are interesting, and there is definitely an attempt by BMW to raise overall sales, but I don't think Business Week's analysis is very revealing.


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## Spiderm0n (Dec 19, 2001)

Plaz said:


> *
> My feeling is that this strategy is probably necessary if they wish to remain independent in this age of runaway corporate consolidation. *


Good point. I would much rather have a real BMW produce a 1 series than have a Ford owned BMW produce a 3 series that shares a platform with the Taurus! :yikes:


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## rbright (Aug 18, 2002)

Spiderm0n said:


> *
> 
> Good point. I would much rather have a real BMW produce a 1 series than have a Ford owned BMW produce a 3 series that shares a platform with the Taurus! :yikes: *


That is TRUE!!! I actually test-drove an X-type and I currently drive a Taurus. I could hardly tell the difference except the seats were plusher and the ride was lower. In fact, I think my engine is better in my taurus.

What worries me about the lower 1/2 series is the flood of lower priced cars in the service line at the dealership. Since MB introduced they C class, their service has never been the same. There service department is now flooded with these little cars to maintain and repair (they do not hold up as well as the more expensive line), and the higher priced customers are having to wait longer as a penalty.

BMW now has the Mini using the same service departments at many dealerships and with the introduction of a "mass-marketed" 1/2 series in the $20-25K range, what will that do the already slow BMW service centers?


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## operknockity (Apr 19, 2002)

rbright said:


> *with the introduction of a "mass-marketed" 1/2 series in the $20-25K range, what will that do the already slow BMW service centers? *


Opens an opportunity for more independent BMW shops. :dunno: :dunno:


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## Plaz (Dec 19, 2001)

operknockity said:


> *
> Opens an opportunity for more independent BMW shops. :dunno: :dunno: *


One would think so, but they can't do warranty service.


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## JPinTO (Dec 20, 2001)

Spiderm0n said:


> *
> 
> Good point. I would much rather have a real BMW produce a 1 series than have a Ford owned BMW produce a 3 series that shares a platform with the Taurus! :yikes: *


Exactly!


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