Milberg's high-wire challenge at BMW

GOODWOOD, England — In this leafy corner of England some 60 miles southwest of London, a place of mellow stone mansions and gentle rolling hills, BMW AG is preparing to bring to market its version of what a $300,000 Rolls-Royce should be.

BMW says this bucolic Olde English setting, the site of a greenfield assembly plant that will produce the new Rolls-Royce in 2003, was carefully selected in a bid to protect the essence of the blue-blood British brand.

That is a vitally important consideration. Few doubt that BMW can do a brilliant technical job on the car, but potential buyers will have to be convinced that a BMW-owned Rolls-Royce is truly British, not German. Any hint of Bavarian engineering zeal and Bauhaus design will be spotted instantly by Rolls-Royce buyers.

An unlikely choice

At first blush, the man overseeing the relaunch of Rolls-Royce — company Chairman Joachim Milberg — seems an unlikely choice to carry out such a high-wire act. A former professor of machine-tool technology, he exhibits no hint of the dash or arrogance of, say, a Juergen Schrempp, Wolfgang Reitzle or Ferdinand Piech.

Plucked out of his classroom at Munich Technical University in 1993 by then-chairman Bernd Pischetsrieder to become head of manufacturing, Milberg was the surprise choice to become chairman when Pischetsrieder was fired in 1999.

But Milberg’s ambition for his company, and his achievements to date, belie his professorial demeanor.

Over the next six years, he says, BMW will boost its revenues by a third, enter new market segments, relaunch the Rolls-Royce brand and build a new assembly plant. And it will fund the whole program through cash flow.

Only a year after the humiliating sale of its Rover Cars subsidiary for the equivalent of $15, BMW is enjoying record profits. This year it expects to sell 900,000 vehicles, two-thirds more than it did before buying Rover.

That success gives Milberg a fat checkbook from which to fund his strategy. “We will continue to finance our growth solidly from cash flow,” Milberg says.

Over the next six years, BMW plans to spend $9 billion for product development and $15 billion on new and upgraded assembly plants.

In that time frame, BMW will introduce 20 models and three engine ranges. The group will add a BMW 1-series sedan and hatchback in 2004. Milberg also confirmed plans for an X3 sports-activity vehicle, plus a 6-series coupe and cabriolet.

The Mini, which went into production this summer, will be expanded into a family of body styles and drive lines.

Simultaneously, BMW will open an assembly plant at Leipzig-Halle in eastern Germany in 2005. The plant, with an initial capacity of 150,000 units a year, will build the 3 series and, later, the new 1 series.

By 2007, group revenue is expected to rise to $46 billion from $32 billion last year. BMW is never comfortable talking about long-range unit sales forecasts, but the investment implies a substantial sales increase.

The automaker expects that sales in the premium-car sector will rise 50 percent in the next 10 years. By contrast, sales of mass-market vehicles are expected to rise only 25 percent. On that basis, BMW must sell more than 1.3 million vehicles a year by 2010 just to maintain its position in the market.

Build to order

Although it is little known outside BMW, Milberg developed the flexible build-to-order production system that has become an essential element of the company’s success. The system allows every factory, if required, to produce every BMW model. BMW also is reducing the time required to build a customer’s car from six days to four.

A few months after becoming chairman, Milberg showed he was not afraid to make tough decisions. The aerospace industry, in which BMW has its roots, was being consolidated. In the jet engine business, BMW was a minor competitor compared with General Electric Co., Rolls Royce PLC and Pratt & Whitney.

Milberg decided to swap BMW’s share of an aircraft engine joint venture with Rolls in return for a 10 percent equity stake in its partner. It was a radical move. But it was analytical and unemotional — and undoubtedly right.

Likewise, Milberg had the resolve to dump the Rover Group despite the hundreds of millions of dollars BMW had poured into it since acquiring the troubled British automaker in 1995. That decision caused considerable in-house controversy and led to the departure of three BMW board members who opposed the sale of Rover.

Milberg seeks consensus. He defines company goals and makes sure employees know those goals — and woe to any executive who fails his assignment.

Milberg has launched a product strategy that is riskier than anything BMW has attempted. In 2003, he will unveil a Rolls-Royce model that is intended to broaden the group’s appeal.

The car was designed by a small project team in London’s tony Mayfair district — ideal Rolls-Royce territory — and is undergoing road tests. Aluminum alloy will be used for the space-frame construction and bodywork. The engineering and initial chassis construction will be done in Germany, but BMW insists the work will be transferred to the United Kingdom as soon as possible.

The engine will be a suitable Rolls-Royce version of a BMW unit — probably a V-8 — to provide high torque at low engine speeds. The plan calls for 350 employees at Goodwood to produce 1,000 cars a year.

Risky Mini

At the other end of the spectrum, BMW is launching the Mini and a moderately priced 1-series model.

The automaker’s strategy for the Mini has puzzled many in the industry. The Mini assembly plant in Oxford, England, will produce some 150,000 units a year, and the car has been priced in a range of $14,660 to $16,500.

Many wonder how BMW will make money at that price on such a modest production volume.

“We’d have to make four times that number to justify a car at that price,” says a director of a mass-market rival. “I don’t see how they can make any money on it.”

But BMW had several compelling reasons to sell smaller, cheaper vehicles. First, the company must sharply reduce its corporate emissions to comply with a voluntary industry standard. Equally important, BMW had left a gap in the market as it designed a more upscale 3 series.

“Premium cars are becoming less dependent on size,” says Michael Ganal, the board member responsible for sales and marketing. “Fifteen years ago, if you asked for an expensive car, that meant a length of 4.5 meters (15 feet).”

But his colleague, Norbert Reithofer, the board member responsible for production, suggests another reason.

“We need an entry model,” he says. “We lost those customers because we could not offer entry models.”

Think small

In the immediate future, BMW’s biggest unknown is one that all automakers face: the aftermath of the terrorist attacks on the United States. In the past, BMW has been relatively immune to economic downturns. With the notable exception of the mid-1990s, when BMW owned Rover, sales grew steadily every year for nearly 30 years.

If BMW is on the right track, it raises an important question for the rest of the industry. If BMW can outperform its larger rivals, are such companies as General Motors, Volkswagen and DaimlerChrysler correct in pursuing economies of scale? Some of today’s most successful automakers are those which rejected mergers: Toyota, Honda, Porsche and PSA/Peugeot-Citroen SA. Indeed, BMW is successful today because it sold Rover.

BMW has returned to its premium-brand values. And that is the crux of its success. Yes, it is good at product development and production. But it is consistently brilliant at marketing and branding.

There are other automakers with a strong engineering tradition. What sets BMW apart is its unwavering cultivation of the brand during the past 30 years. That has to be the underlying lesson of the company’s turnaround.

You can reach Richard Feast at

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