PALM SPRINGS, Calif. — After three years of playing second fiddle to Mercedes-Benz in the annual U.S. luxury sales race, BMW started 2019 with a bang. The automaker bested Mercedes in sales in the first quarter and reported three consecutive months of gains this year, while Mercedes extended its string of consecutive monthly losses to five.
"We are bringing brand-new products for the right consumer in the right quantity," BMW of North America CEO Bernhard Kuhnt said here during a press event. "I'm very optimistic for 2019."
Even so, the blustery environment of trade tensions could blow BMW's momentum off course.
"The biggest headwind, without any question, is uncertainty about what's going to happen with the tariffs," Kuhnt said. "Those tariffs would affect consumers, they would affect our dealer network and ourselves."
U.S. President Donald Trump is expected to delay by up to six months a decision to impose tariffs of up to 25 percent on imported cars and parts citing U.S. national security. Last year, BMW imported nearly 40 percent of vehicles it sold in the U.S. Most of those vehicles were made in Europe.
"We would like to have free trade on both sides and let the consumer make the choice of which product he would like to have," Kuhnt said. "If that doesn't happen, and we are going to have 25 percent or more tariffs, it will hurt because the prices will go up ultimately."
Even so, a global footprint of factories, which includes Latin America, Europe, Africa and Asia, insulates BMW somewhat from shifting geopolitical winds.
BMW is in a "perfect situation" to source product if the company faces additional tariffs in any one market, Kuhnt reiterated.
Kuhnt, 51, spoke with Staff Reporter Urvaksh Karkaria about why he's optimistic for 2019, his thoughts on the new X7 crossover and the future of Mini. Edited excerpts follow.
Q: BMW entered the large luxury crossover segment with this year's launch of the X7. How much early interest has it generated? What makes it an important vehicle?
A: It's the vehicle we were waiting for. We received the first volume of X7 in February. We sold about 4,500 in the first few months. I would have loved to have the X7 even earlier. It's a true seven-seater. It talks to different customers, so a lot of conquest. We are seeing customers in our brand who always wanted to have a BMW, but were kind of limited by their need to transport more people or more goods.
We believe we did a very educated forecast on what we believe we can do on the X7. But at the same time, we don't want to flood the market with any car. So it needs to be that right balance. If we find out we don't have enough, that's not the worst position to be in.
How is BMW's car-truck mix?
Two years ago we were only about 40 percent trucks. That was for us a disadvantage because we didn't have enough crossovers. The mix now is more like 55-to-45 percent toward SAVs (crossovers) or trucks.
But we still strongly believe in sedans. There are consumers who simply want a sedan. The 3 series is a lot of fun. It's exciting. It brings people to the brand. On the other hand, the market in America wants SAVs.
Beyond trade tensions and potential new tariffs, what is a major concern for the business in 2019?
Rising interest rates has many effects. For a dealer's inventory level with rising interest rates, he has to pay more for his flooring. We work very closely with the dealers and our financial services arm to monitor or find the right balance, and give flexibility to our dealer network. Overall, rising interest rates are something we saw last year already. The market still grew, specifically the premium market, and I am optimistic for 2019 as well.
BMW Group in March announced a plan to save more than $13 billion by the end of 2022 that includes cutting models and development time. How might that affect the U.S. lineup?
I don't foresee any major changes. We've always streamlined our model and engine offerings. Our offering is very tailored to the U.S. market. In a modern world, we as a company want to have quick results to meet demand. We definitely look into how can we improve model life cycles and development cycles. We are now talking about next generations of cars being more influenced by the U.S. than they have ever been before.
Mini has struggled to increase sales, and that has hurt dealer profitability. What's being done to turn that business around in the U.S.?
We need to right-size the business in the U.S. We've got too many dealers, without any question. The whole small-car segment is under pressure. With SUVs growing, and the overall market not growing, the car market is under pressure.
We are working together with the dealers and the Mini dealer board on intelligent solutions, which can mean store integrations where it's appropriate, and standalone stores where it's appropriate. Together with the dealer network, we need to focus very clearly to find the right path going forward. With Mike Peyton (who will lead the brand in the U.S.), we've also got a person who I'm 100 percent convinced is going to move the business forward.
We have a Mini dealer meeting happening in July, when we are going to give them a glimpse of the direction we're taking as a brand and as a company. We are about to launch the Mini Electric in the U.S. I believe an electric is a very good fit for the market and the brand.
BMW Group plans to offer 12 full-electric vehicles by 2025. Can BMW roll out the product plan profitably?
We've got experience with electrification with the i3 and i8. We have good experience with plug-in hybrids. I am completely confident that we can make it also profitable.
At the National Automobile Dealers Association Show in January, you said BMW would tweak the stair-step program in 2020 to be more realistic and dealer-friendly. How's that going?
It's about setting realistic targets. For 2020, we are working together with the dealer subgroups in order to define how we can find a balanced, positive way to reward the network, as well as ourselves. It's a fair system that rewards people doing the right thing. If you've got 100 dealers, or 1,000 dealers, you'll always get the overachievers and some who basically didn't achieve targets. We need to reward people who go the extra mile.
What is BMW doing to help dealers further improve their fixed-ops business?
We work together with the dealers on processes to serve the customer in a better way. How can we get cars out of the shop quicker? What can we do before the customer comes in for service? How can we schedule him? How can we look into his loaner car better?
We're working with the dealers to look into parts pricing to make it more attractive for consumers. We are very strong in the first seven to eight years of ownership in keeping the customer. We are now concentrating on how can we fill those service centers with consumers who have not been in the shop before by making offers and specific packages.
About a year ago, BMW launched a vehicle subscription pilot in Nashville. Any plans to expand it?
It's at a very early stage and it could go either way. It could be something very successful, or something we say we're no longer going to do.
The subscription model is something we have to learn as we go along. You have to have the right network, you have to have the right product spread. We had a different initial package.
We learned that the package wasn't received that well, so we changed the content and pricing of it. It's too early to make a judgment. Is the consumer ready to buy a car through subscription? The jury is out.