How BMW plans to remain No. 1 in fast-changing premium mobility race

When BMW first 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 BMW celebrates its 100-year anniversary today with a celebration in Munich's Olympiahalle, it finds itself entering a new 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 midsize segment symbolized by the 3-series sedan.

Yet BMW is already 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 past 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 2026, when the still-youthful CEO approaches the company's maximum age of 60 for managers.

"I don’t envy Krueger to be honest. Obviously he’s filling some big shoes," said Exane BNP Paribas auto analyst Stuart Pearson. "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 last May, he has largely 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. That means Geneva offers him his first real chance to connect with customers, business partners and other stakeholders from around the globe.

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 on March 16.

Under BMW’s previous plan, dubbed Strategy Number One, 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 corridor of 8 percent 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 are the same tailwinds 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 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 new plant in Mexico to better compete in North America.

The problem is demand in China helped finance the heavy investments BMW needed to make to remain an innovation leader. Analysts estimate that China may contribute as much as half of BMW's 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 any time 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 their customers through connectivity solutions and autonomous driving. Mercedes already is debuting in the new E class a pioneering 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 a quarter of an hour 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 operating systems 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," the three German brands took an unprecedented move. BMW banded together with Mercedes and Audi to acquire Nokia's high-resolution mapping unit HERE for 2.8 billion euros in December.

Warding off threats from well-funded new competitors costs money, and Exane's Pearson sees a chance that BMW could increase its target corridors 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 even 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 had to sacrifice the brand's rear-wheel-drive purity in order 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 only have four ongoing projects against the more than a dozen kicked off between Daimler and Renault-Nissan.

Mercedes, for example, is utilizing the Nissan Navara's platform to build its first luxury pickup truck, addressing a growing demand for high-end workhorses. Developing a similar BMW truck off of the Toyota Tacoma would likely 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 flatly 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 companies [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-emissions 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 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."