BMW's innovation, adaptability will be tested in the 21st century

Editor's note: This story is part of a special section in the March 7 edition of Automotive News marking the 100^th anniversary of BMW AG.

When BMW began competing against perennial archrival Daimler a hundred years ago, the company wasn't building luxury cars but engines that powered World War I propeller planes. It was only in 1960, when the company was on the verge of collapse, that BMW was forced to sell its core airplane engine business to survive.

As the company prepares to mark its 100-year anniversary this month with a celebration in Munich's Olympiahalle, it finds itself entering a disruptive digital age commonly called the Fourth Industrial Revolution. A resurgent Mercedes-Benz, slowing China car sales and rising competition from tech juggernauts Google and Apple are just some of the challenges it faces.

Under former CEO Norbert Reithofer, BMW set forth a clearly defined mission statement to be the world's leading premium automaker by 2020. And for the past 10 years, it succeeded, thanks in part to its crushing dominance of the compact segment symbolized by the 3-series sedan.

Yet BMW already is changing as it prepares for a time when it is no longer on top. "Volume is not everything," said Reithofer, now BMW chairman, in a provocative statement last March.

Indeed, many analysts believe Mercedes, currently at the peak of its product cycle, could pass BMW in its anniversary year as the world's best-selling premium brand. The auto industry is set to change more in the next five to 10 years than the last 50, predicted General Motors CEO Mary Barra at this year's World Economic Forum in Davos, Switzerland.

If so, that means new BMW boss Harald Krueger will have a lot on his plate since his tenure could very well extend until 2025, when the still-youthful CEO approaches the company's maximum age of 60 for executives.

"I don't envy Krueger, to be honest. Obviously, he's filling some big shoes," said Stuart Pearson, Exane BNP Paribas auto analyst. "BMW is a company that has been executing perfectly; it's strategically on the right track, so how do you make your mark as that guy? I think it could be very difficult for him."

As he prepares to reveal a new strategy for the group this month, Krueger knows he will need to find answers far beyond what kind of sporty sedans or luxury SUVs to develop and build.

"We see the future of mobility in an urban environment still with the car at the center," BMW board member Ian Robertson told Automotive News Europe. "But it is probably going to be autonomous to a greater or lesser extent, it is probably going to be shared, it is probably going to be zero-emissions, and it is definitely going to be accessed by connectivity."

Although Krueger took over in May, he largely has stayed out of the spotlight. He missed most of the 2015 Frankfurt auto show to recuperate from a minor health scare and skipped the Detroit show in January.

So far, his plans are a tightly guarded secret, with no volume targets or profit goals leaked in advance. Krueger, however, is expected to begin communicating his vision for BMW at the latest when the group publishes its annual results March 16.

Under BMW's previous plan, dubbed Strategy Number One and announced in late 2007, BMW cut 6 billion euros in costs over five years and ultimately eliminated 8,100 workers at a company where job cuts were something that happened to other carmakers. "It was like an alarm bell went off within the organization," one manager recalled.

Profitability became important again with new targets put in place to guarantee minimum returns on sales and capital spending over the cycle. Whether Krueger downgrades the target margin of 8 to 10 percent for the group's core auto business given a cooling China and rising r&d costs is one of the key unknowns.

"We're building upon Strategy Number One," BMW finance chief Friedrich Eichiner insisted last September. "We're not talking about a completely new strategy."

Eichiner said BMW will focus on a number of key issues. Despite 12-year lows in crude oil prices, electromobility would be a major plank as CO2 regulations become increasingly stringent. Secondly, BMW would take a more direct and systematic approach to customer relations. And lastly, the CFO said brand management paired with design leadership would be leveraged much more forcefully.

One thing Krueger cannot count on is the same tail wind from China that his predecessor enjoyed now that the country's economy has cooled far more quickly than anticipated -- something sales chief Robertson illustrated vividly.

"I landed in the middle of [last] year in Shanghai in our company plane. The normal routine is the plane drops us off and then flies to a far-flung airport to park because it's always full. But when we landed, there wasn't a single corporate jet on the ground -- not one," he recounted in January.

Although volumes in China continue to grow, the juicy profit margins of the past have all but disappeared as pricing has normalized. To avoid becoming too dependent on China, BMW decided to open a plant in Mexico to better compete in North America.

 The problem is that demand in China has helped finance the heavy investments BMW needs to make in future technology, contributing as much as half of group net profit when including vehicle and part exports as well as royalties paid by its joint venture with Brilliance China Automotive. 

"There is no market to replace China," Robertson admitted. "It's not going to be India anytime soon, it's definitely not going to be Russia, and it's definitely not going to be Brazil."

The latest trend costing BMW is finding a way to give a precious commodity -- time -- back to customers through connectivity solutions and autonomous driving. Mercedes already is debuting in the new E class a technology that allows vehicles to talk to other vehicles and their surrounding infrastructure.

Eventually, a BMW will be able to crunch traffic data, warm up the interior and drive in autopilot mode from its parking spot three blocks away to pick up a customer at the door. And it will arrive 15 minutes earlier if congestion is bad.

Owning a car may no longer even be necessary. Fully autonomous capabilities could feature heavily in a new vehicle the carmaker has confirmed is in the works, often referred to as the i5, under development by its so-called "innovation" subbrand, or "i" for short.

Yet here BMW has two new competitors in Google and Apple that are attracted by the estimated 25 gigabytes of valuable data a connected car can generate every hour. Both Google and Apple are believed to be developing their own models even as they partner with manufacturers to bring their smartphone interfaces Apple CarPlay and Android Auto into a wide range of vehicles.

To usher in driverless cars while protecting customer data from what Daimler CEO Dieter Zetsche calls their mutual "frenemies," three German brands made an unprecedented move. BMW banded together with Mercedes and Audi to acquire Nokia's high-resolution mapping unit Here for 2.8 billion euros ($3.1 billion) in December.

Warding off threats from well-funded new competitors costs money, and Exane's Pearson sees a chance that BMW could increase its targets for r&d and investment as part of its strategy review, citing Daimler's decision to hike its annual development budget by nearly 10 percent and capex by about 40 percent.

"They've got a lot of spending needs. No one knows what the future of the industry is going to be in 15 to 20 years' time," he said. "Carmakers are facing some pretty big threats, and Krueger's got to cope with that. BMW knows how to deal with Mercedes and Audi -- what the market really wants to learn is how they will deal with Tesla and Silicon Valley."

What BMW doesn't want to do is become too dependent on others in its core business, preferring to use two major vehicle architectures and a modular engine toolkit for scale.

This financial security comes at a cost -- for the first time, BMW has had to sacrifice the brand's rear-wheel-drive purity to secure sufficient volume on the UKL platform underpinning vehicles in the compact class and below. While BMW did borrow a page from Daimler's playbook by teaming up with a major Japanese carmaker boasting a rock-solid balance sheet, its alliance with Toyota has been far less fruitful. Together, the two have four ongoing projects against the more than a dozen kicked off between Daimler and Renault-Nissan.

Mercedes, for example, is utilizing the Nissan Frontier platform to build its first luxury pickup, addressing a growing demand for high-end workhorses. Developing a similar BMW truck off the Toyota Tacoma likely would stretch the brand beyond its breaking point, but even their joint sports car project hasn't been given the green light despite more than three years in development.

Eichiner said in September that the two remained in talks but gave no concrete example and ruled out any kind of cross-shareholding similar to what Daimler and Renault-Nissan have done to cement their relationship.

"I think you can say that from today's perspective that both [BMW and Toyota] are interested in strengthening the cooperation in the future a bit more," the CFO added.

Decades after BMW sold its aero-engine business, the spinning blue-white propeller still adorns the hood of its vehicles as a last remnant of its heritage. If BMW wants to celebrate its next century as a fully independent company as well, it may have to undergo a transformation almost as radical to prepare itself for a zero-emission future built around the Internet of Things.

What would happen to the group's powertrain plants if the company ceased building combustion engines, for example? Reithofer asked that rhetorically during the 2014 Paris auto show.

"It's not like we're going to say, "Starting tomorrow, we are only going to build electric cars,'" said one company source, referring to the strategy announcement coming this month. "The question is how we can manage the transition from relying solely on combustion engines for profits, since not one carmaker currently earns money selling electric cars."