Honk If You Are Global

A U.S. production foothold, a prestigious British 4WD marque with access to Japanese process techniques, and German engineering. How does BMW’s new CEO Bernd Pischetsrieder plan to pull these elements together?

October 1 1994 by Chief Executive


Hobbled by overcapacity and a prolonged recession, Europe‘s carmakers are reconciled to consolidation. In contrast to the defensive Volvo-Renault deal that ultimately was aborted by Volvo’s shareholders, Munich-based BMW, with $18 billion in sales last year, doubled its capacity and flanked luxury-car rivals earlier this year with the $1.2 billion purchase of Rover from British Aerospace. The $24.7 billion combination, producing 1 million vehicles a year and employing over 100,000 worldwide, promises to be one of many evolving forces reshaping the world auto market. Over 10 years ago, BMW tried unsuccesfully to buy just the Land Rover division from the British Government. More recently, it seriously considered spending about as much to develop a sport-utility vehicle of its own. In one deft maneuver, the engineers from Bavaria pocketed the lot: Land Rover, Rover cars, and several prestigious sports car names such as Austin, Triumph, MG, and Riley that were retired by Rover’s predecessor, British Leyland. (BMW tentatively plans to revive a few of those brand names.)

The move came eight months after Eberhard von Kuenheim passed the CEO baton to Bernd Pischetsrieder, 46, a trim, goateed former operations engineer and chief technical planner who joined BMW in 1973. A consensus-builder, Pischetsrieder-or BP, as he sometimes is called ,faced two diplomatic challenges that might have unraveled the acquisition. The fact that Rover, Britain‘s last full-line car manufacturer, was passing into the hands of a German owner did not go over well in the U.K., particularly given that 1994 was the 50th anniversary year of D-Day. In addition, Honda Motor of Japan, which had a 20 percent stake in Rover, felt betrayed by what it regarded as British perfidy-and was stunned by BMW’s bold stroke. Would Honda President Nobuhiko Kawamoto, in a face-saving gesture, cancel the cross-licensing agreements that enabled Rover to upgrade its production process? National feelings could not be disregarded. BP flew to Birmingham and Tokyo, where he performed his best nationality-doesn’t-matter, transnational gavotte, preserving the delicate Honda/Rover relationship. A modest fellow, BP downplays the coup, but a glint in the eye reminds one of the cat that ate the canary. Other BMWers privately admit to being astonished at their good fortune.

BP’s business challenges are clear. BMW cannot afford to be stuck solely at the luxury end of a maturing world car market. Nor does it believe it can risk building less expensive cars, even under a different nameplate, without jeopardizing the integrity of the BMW brand. One possible response, designing and marketing a sport-utility vehicle, might take years, given BMW’s lack of experience with four-wheel drive technology. Ditto for front-wheel drive cars.

BMW, as do all German manufacturers, faces another strategic worry. German autoworkers earn 23 deutsche marks per hour in wages, but employers must pay another 21 D-marks in social benefits. That’s equivalent to more than $27 in total hourly compensation. With workers queuing up to apply for $12-per-hour jobs at BMW’s recently opened Spartanburg, SC, plant, it will not be difficult to undercut German labor costs. But thinning margins demand that the company address head-on the productivity dilemma at home. Work-rule changes such as the new 5.5-day, 99-hour production week at the company’s newest plant in Regensburg are a start. But the Bavarians will have to push harder. When the first 318i comes off the Spartanburg assembly line this month, the moment of truth will be at hand. When the operation reaches full throttle, 2,000 employees are expected to produce 80,000 to 90,000 cars per year.

Also at the top of BP’s agenda is BMW’s distribution. In general, U.S. dealers sell twice as many cars as their European counterparts. BP brought Karl Gerlingerwho ran BMW North America-back to Munich to work with its German dealers.

Elsewhere in North America, the company established its own subsidiary in Mexico, taking over functions previously carried out by its Mexican importer. New dealerships are expected for Mexico City, Monterrey, and Guadalajara.

One worry BP won’t have is a takeover. Johanna Quandt owns almost two-thirds of BMW’s shares; she is the widow of Herbert Quandt, who rescued BMW from near collapse in 1959. CE ‘s J.P. Donlon talked with Pischetsrieder at BMW’s Munich headquarters about the company’s global initiatives.

IN THE FAST LANE

BMW’s recent construction of a plant in the U.S. and its acquisition of the U.K.‘s Rover propels the company in a new direction. Do these moves indicate an emerging trend in global automobile competition?

The policy is a logical extension of the internationalization of the organization we began 15 years ago. The decision to locate a plant in the U.S. was related to market policy and the improved quality of U.S. suppliers.

In regard to Land Rover, some time ago, we concluded that the value of the brand and the need to extend the business base made it appropriate to acquire different brand names. It was a coincidence that this decision was made at roughly the same time we chose to open a U.S. plant.

The key to success is continuously changing your focus over the long term. For example, in the 1970s, we concentrated on establishing an international wholesale network and building the brand identity. In the ’80s, we focused on enhancing the engineering process. The key emphasis for the ’90s is globalization of the entire business, including financing, product engineering, styling, designing, manufacturing, sourcing.

When do you expect the new Spartanburg, SC, plant to achieve your projected capacity of 80,000 to 90,000 units?

We’re starting off with a derivative of the existing entry-level 300 series and will then launch a roadster car. We will produce approximately 50,000 to 60,000 units the first quarter of 1996. That is because we first must train people and avoid rushing into high-volume production.

What synergies exist between BMW and Rover?

We have more purchasing power because of the increased volume of components we buy-resulting in lower supplier costs. In addition, BMW has a strong wholesale and retail network in many countries where Rover isn’t present, and vice versa. We will utilize that, not by selling Rover cars and BMW cars in the same showroom, but by using the distribution organization.

Will they have separate production facilities?

Yes. They might use common drive-trains and access platforms, but in order to maintain their separate identities, the cars shouldn’t be manufactured in the same plant. In addition, any transfer of plant capacity would cost a lot of money.

Will you use the same sales strategy for Rover in North America and Europe?

The global approach dictates that a car being sold in Europe and in the U.S. has to be targeted at the same customers. Thus, we will have one global strategy.

You were quoted as saying that North American dealers can sell up to twice as many BMWs per dealer as your European or German dealers. Why is that?

My remark didn’t relate to the BMW dealer network but rather to the entire European dealer network. In Europe, there are 60,000 dealers, and about a third of that in the U.S. selling a comparable number of cars.

BMW dealers in the U.S. and Germany average the same number of car les per year: approximately 230. But this doesn’t mean anything, because some dealers in the cities sell a thousand cars p r year, while others in more remote area. sell 60 or 80 cars. However, we need to have a presence in those areas, and we have to be there to provide service. So this type of network will remain intact. We now have discussions between Rover and BMW about how we can join forces. Rover has found that the dealer network in Germany is nothing to write home about. Land Rover has about 80 dealers in the U.S., some 20 of which are already dealers with BMW. And we might award BMW franchises to some of those Land Rover dealers or vice versa.

How about offering package deals-buy one, lease the other?

I must admit I hadn’t considered that. It’s a good idea.

MARGINAL COSTS

Entering into a smaller market with Rover means you have to deal with lower margins and higher volumes-something BMW is not used to. What adjustments will you have to make?

Even with Rover, we don’t aim for the mass market. Rover products won’t compete with mass-manufacturers’ cars such as Opal Astors. They are aimed at car specialists and won’t be produced in large volumes. Thus, lower margins might not be a problem. Nevertheless, both BMW and Rover will focus on continuous productivity improvement to cut costs and improve margins. Please note that I am not talking about the superficial productivity comparisons you see in the media. The number of people producing one car does not reflect the company’s production, because at the end of the day, the direct-labor costs-including body shop, paint shop, and trim shop costs-comprise only about 10 percent of a car’s cost. Productivity should be measured on 100 percent, not on 10 percent.

So how do you measure it?

Only one figure counts: value-added per employed person, or the company’s profit. It doesn’t help to have only two employees assemble a car if that approach produces losses.

We aim for an annual productivity increase of 4 percent. It derives from three elements: higher value-added per car for customers, higher volume, and continuous process improvement.

German industry has prided itself on technical excellence and manufacturing prowess, but lately many German companies question whether this system stifles innovation and whether its costly labor structure hasn’t priced its industry out of world competition. How are you addressing this challenge?

Germany has the most holidays, the shortest annual working hours, the highest wage rate per hour. This is not going to change in a hurry. So we must catch up by cutting costs in other areas. For instance, outsourcing components outside Germany by utilizing the U.S. supply base for both Rover and BMW will reduce costs and perhaps pressure German suppliers to cut their prices in order to compete. Some companies rely on the shelter of a favorable exchange rate to narrow the gap, but that’s only temporary.

There’s a worldwide auto production overcapacity, so when two globally midsize companies combine, something has to be rationalized. Might that be the executive-level Rover cars, since they compete with BMW products?

You’re right to say something will be rationalized, but it won’t necessarily be the model ranges in areas that superficially appear to overlap. For example, Rover 800 sells in the U.K. for between 16,000 pounds ($24,848) and £30,000. Some BMW products, such as the 3 Series and the 5 series, sell for the same price. But while a BMW is a technical, driver-orientated sports car, a Rover is a comfortable, more conservative-but still technically advanced-car. Therefore, Rover would appeal to a market segment BMW’s image didn’t serve.

If you combine Rover sales and BMW sales within the price bracket I mentioned, the total is approximately 10 percent or 12 percent of the market. We plan to fight for the remaining 88 percent of the market by offering better products and sharpening the BMW identity and a completely different Rover identity.

Many of Rover’s cars use Honda components and technology, while Rover supplies body panels and other parts for Honda models made in the U.K. What will happen now that BMW owns Rover?

Although the 20 percent cross shareholding links between Rover and Honda’s U.K. manufacturing subsidiary were swapped in May, leaving BMW in 100 percent control of Rover, all of Rover’s existing product- and technology-sharing arrangements with Honda will continue. Honda and Rover will still collaborate on the Theta-Honda HH Program, which will include a new family car to replace the present Rover 200/400 Honda Concerto.

Were you surprised by the nationalist furor in the U.K. over BMW’s purchase of Britain‘s last independent carmaker?

We knew this was a sensitive area, but I think we thoroughly investigated whether a corporate policy for the new company would comply with the national interests in the U.K. And we never considered forcing Rover plants to make BMW cars, even if it made sense from a bottom-line point of view. That would have caused a major outcry in the U.K., our third largest market, and obviously would have harmed our BMW business there.

INFORMATION EXCHANGE

What specific competencies are you trying to build within BMW?

We aim to improve our product-engineering process-meaning the online communication among suppliers, manufacturing engineers, and product engineers through computer software that enables them to work together on designing and manufacturing products and processing orders.

Communication is key. You must know what people think. You see what they’re doing, but you don’t know why they are doing it if you don’t have proper communication. This applies to our suppliers as well as employees. We hold joint quality council meetings with our suppliers and advocate quality training programs. When all is said and done, all our people, even the blue-collar worker in the Munich plant, have to know they must satisfy their customers’ demands whether they are in Los Angeles or Buenos Aires. The majority haven’t fully grasped this concept yet.

How much demand will there be if BMW carries out its plan to revive some of the brand-marks in smaller sports cars such as MG or Austin Healey?

We won’t know until our market investigation is finished. Reviving a traditional brand name is only worthwhile when there is a demand for a car that complies with that image. It doesn’t make sense to resurrect MG as the brand name of a minivan. First, we investigate in the major world markets the value of an old brand name, such as MG or Riley. We also examine potential consumers’ memory of the brand name. Obviously, we wouldn’t bring back the brand simply because I’m personally fond of Riley, but nobody else outside my office knows what it is.

So far, we have made a lot of progress on the MG name, mainly because Rover already launched RV8 in the MG name in Europe.

MAY THE MOST APPROPRIATE MAN WIN

On your appointment as chairman, board member Eberhard von Kuenheim made the curious remark, “We did not choose the best man but the most appropriate.” What does that mean?

I believe there is no such thing as a good man or a bad man when you’re in business. There is a man who is best for a particular position, but this doesn’t necessarily mean that in global terms he is best or worst. Many times, I have seen someone fired for not performing well in one position, and then do an excellent job in another. The art of management is not to say Mr. X is bad and get rid of him but to find the most suitable position for him.

What milestone do you look forward to achieving before you step down?

The international automobile world is constantly changing. Today, Korea is in the limelight as companies are focusing on low wages and high productivity; in the year 2000, it will be another country. But everything is relative. For example, last year, it was enough that we emerged from the recession ahead of our competitors. My objective is not to sell more cars than the competition. It cannot be measured in numbers. Rather, I want BMW to be among the worldwide image leaders.