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BMW Opens Door to Tech Alliances
Sharing Costs May Help
Independent Car Maker
Rev Up Profit Growth
By JOSEPH B. WHITE
August 31, 2007; Page A6

BMW AG Chairman and Chief Executive Officer Norbert Reithofer has a simple way of stating the problem confronting the luxury-car maker.

"If you have increasing turnover," Mr. Reithofer said, referring to company revenue, "the profit has to increase with it. That is the real issue."

That isn't happening now at BMW. Second-quarter profit fell 23% despite a 7.3% rise in revenue. Mr. Reithofer, in an interview at BMW's U.S. headquarters in Woodcliff Lake, N.J., said he's "not satisfied."


The solutions aren't simple. With European and U.S. regulators and consumers demanding that all car makers significantly boost fuel efficiency, BMW faces rising costs from developing and deploying new fuel-saving technology. Complicating that effort, the company faces cost issues related to the strong euro and higher commodity prices.

Mr. Reithofer acknowledged that BMW will need to do more of what others in the industry have done: Forge alliances with rival car makers to spread costs over a larger volume base. The challenge will be balancing the need for partners with BMW's long-term commitment to remaining independent and staying above the competitive fray in the automotive mass market.

"Independence is in our genes," he said.

Rival high-end German brands with big corporate parents, such as DaimlerChrysler AG's Mercedes and Volkswagen AG's Audi, have reported surging sales and profits lately. Asian luxury brands such as Toyota Motor Corp.'s Lexus and Nissan Motor Co.'s Infiniti are more aggressively targeting BMW in the U.S. and Europe.

Mr. Reithofer has launched a management-board review of BMW's structure and strategy, accelerated the company's efforts to expand production outside the euro zone, and pushed to roll out new fuel-saving technology across BMW's model lines. The cost of the latter move includes a boost in advertising budgets to sell its fuel-efficiency efforts to consumers typically drawn to BMW's speed and power.

Mr. Reithofer said BMW won't fall short of its previously stated goal to bring in profit this year above the ?3.75 billion ($5.11 billion) earned last year, excluding a ?372 million gain on the sale of certain securities. "Not with me as chairman," he said.

Mr. Reithofer said he won't be ready to discuss conclusions from the management review until October. Still, some elements of a revamped BMW approach are becoming visible, including the possibility that fiercely independent BMW will rely more on rivals to share the burden of costly new technology.

BMW's planned initiatives are costly, particularly for a relatively small company. BMW expects to sell about 1.4 million vehicles this year, compared with more than 10 million projected by Toyota.

BMW and rivals face pressure from European regulators to drastically reduce the carbon-dioxide output of its fleet -- effectively, a mandate to boost fuel efficiency. This year, BMW says 40% of its cars will meet a voluntary emissions target of 140 grams per kilometer. But European Union regulators are talking about 130 grams per kilometer as a standard. The U.S. government, meanwhile, is weighing proposals to boost fuel-efficiency standards by more than 25%.

Mr. Reithofer said BMW is responding by pushing across its fleet a suite of fuel-saving technologies. Among the features are technology that shuts off the engine when the vehicle is stopped, turns off accessories such as the air-conditioner compressor when they aren't needed, and dashboard lights that prompt the driver to shift gears to achieve the best fuel efficiency. BMW will outfit its European 3 series sedans with these technologies this fall.


In the U.S., BMW's big technology push will be the introduction next year of vehicles with a new three-liter diesel engine clean enough to be sold in all 50 states. Diesel engines can achieve significantly better fuel economy than like-size gasoline motors. In the U.S., diesels have remained a marginal technology in the passenger-car market, in part because of tough clean-air standards and consumer perceptions that diesels are noisy and dirty.

BMW said research-and-development costs jumped 22% during the first half to nearly ?1.5 billion. That represented 5.5% of revenue, compared with 4.8% a year earlier.

Big tie-ups in the auto industry have largely fallen out of favor after the collapse of DaimlerChrysler's global strategy and the expensive breakup of the cross-owning alliance between General Motors Corp. and Italy's Fiat SpA. Mr. Reithofer said BMW isn't looking for a strategic partner and he doused speculation that BMW might seek to expand its sales base by acquiring Volvo from Ford Motor Co.

But with competition intense and costs high, the industry is developing looser alliances to come up with the industry's next generation of technology. BMW already has deals to develop hybrid gasoline-electric drive technologies with GM and DaimlerChrysler and builds four-cylinder engines for its Mini line with PSA Peugeot Citro?n SA. The difficulty with more such alliances: BMW would become more dependent on the moves of its partners, which may also be competitors in some markets.

Also high on Mr. Reithofer's to-do list is accelerating the growth of BMW production outside Western Europe. BMW is ramping up capacity in the fast-growing economies of Russia, India and China, where demand for the auto maker's vehicles is high among the newly wealthy.

BMW has expanded its reach by broadening its vehicle lineup. Next year, the company will take a coupe version of its European 1 series model to the U.S., offering consumers who have the means to buy a well-equipped Honda Accord or Chrysler 300 the chance to own a BMW instead.

Mr. Reithofer indicated BMW will focus next on the upper end of its range. At last fall's Shanghai auto show, BMW showed a concept for a large, sporty sedan called the CS. "I want to have that car," Mr. Reithofer said.


Write to Joseph B. White at joseph.white@wsj.com