Wall Street Journal
BMW Tackles Energy Challenge
[font=Times New Roman,Times,Serif]Bringing Technology to Market Costs Money,
But Falling Behind the Curve Could Be Fatal
May 9, 2005[/font]
To get some perspective on the troubles in Detroit, have a look at what German luxury-car icon BMW is up to these days.
BMW has become a powerhouse selling smooth-handling, gasoline-powered cars under the slogan, "The Ultimate Driving Machine." It built an enviable franchise in America selling precisely-tuned cars with similar styling executed in three sizes.
But early in this decade, BMW concluded that its 1990s formula wouldn't be good enough for the 21st century. We won't rehash the design story: BMW faces competitive pressures in all areas, starting with what's under the hood. Sometime between now and 2008, BMW plans to offer a select few American consumers the chance to lease a 7-Series sedan that can run on hydrogen. In roughly the same time frame, it may also start offering diesel-powered cars clean enough to pass environmental muster in 50 states.
"We think that could happen in 2008," says Tom Purves, head of BMW's U.S. operations. Mercedes-Benz and Volkswagen have diesels in the U.S. now, but they aren't sold in California and certain other clean-air states. BMW's policy is that it won't sell diesel cars in the U.S. until it has the technology to offer them everywhere.
Mr. Purves expresses concern that to American consumers, the terms, "diesel engine" and "ultimate driving machine" don't go together. (Anyone who's driven BMW's 5-series diesel in Europe might argue that Mr. Purves has nothing to worry about.)
But in a country where the funny-looking gas-electric hybrid Toyota Prius is practically sold out, and dependency on Middle East oil is a hot topic again, BMW cannot afford to stand pat with near-perfect gasoline engines.
Instead, Mr. Purves says, BMW will take on the challenge to show that "you don't have to give up fun to be clean in energy terms."
In the meantime, BMW fans will have to make do with a new 3-Series sedan that features a long list of advanced technologies, such as an engine with a magnesium-aluminum block and an advanced valve train that nets out at about 30 pounds lighter than the old 3-Series engine. So what? By using a magnesium block – BMW claims this is a first – engineers were able to make the new 3-Series safer and a skoosh larger inside while adding only 88 pounds to the weight of a 330i model.
Pushing advanced technology into production is expensive business. But in the circle that BMW inhabits, falling behind on technology is worse than expensive. It's potentially deadly.
"We argue that our R & D budget is part of our marketing budget," Mr. Purves says.
The menu of features in the new 3-Series is long – run-flat tires that can roll deflated for 150 miles at 50 miles per hour are standard equipment. Front and rear side-curtain airbags are standard. There are headlights that see around corners, six-speed manual and automatic transmissions, cruise control that automatically slows the car down when another car cuts in front, and, of course, more horsepower (255 vs. 225 in the 330i.)
And guess what? BMW will quickly find that competitors in the 3-Series segment, roughly defined as compact sports sedans priced between $30,000 and $40,000, either already or soon will match the new 3-series feature for feature, and probably go it better, starting with horsepower. That horsepower boost in the 330i shows you that Infiniti's G35 sedan has Munich's attention.
All of this goes to show how unforgiving the auto industry has become. Consider BMW's situation, and the competitive challenges its management sees, and it becomes more clear what a fix Detroit icons General Motors and Ford are in right now.
GM and Ford are each several times larger than BMW in terms of global sales volume and revenue. But the battle to keep up with the rapid pace of technological change and shifting consumer tastes has left even these giants winded. Last week, the big debt-rating agency, Standard & Poors, consigned GM and Ford to the purgatory of "junk" credit, effectively telling the world that investors should beware of lending money to these one-time pillars of American industry.
The symbolic wallop of GM and Ford being classified as "junk" rattled stock and bond investors, even though the inevitability of this slap has been the talk of the markets for months. As a practical matter, GM and Ford aren't deemed to be at risk for default in the short term, and should be able to raise capital through various means, such as selling car loans made by their finance units.
But having a junk label hung around their necks will make it more expensive for GM and Ford to go out and raise the money they need to keep up with the likes of BMW, Toyota-Lexus, Honda-Acura, and Nissan-Infiniti. These companies are all solidly profitable, and carry far lighter burdens for health care and other overhead than their larger Detroit rivals.
Take transmissions. The Cadillac CTS, a good car that has helped refurbish Cadillac's image and sales, offers an optional five-speed automatic for 2005. But the new BMW 3-series' optional automatic has six speeds, which help to better balance improved fuel economy with satisfying performance. The new Audi A4 likewise offers a six-speed automatic, and others are headed in the same direction. Cost to stay in this contest? Give or take $1 billion for each new transmission, according to industry executives.
Features like headlights that peer around corners and aluminum suspensions and free maintenance four years or 50,000 miles – included with new BMWs – all cost money. Mr. Purves politely declines to play guessing games with journalists as to how much four years of free upkeep on a 3-series costs his company, but it's definitely a number with three zeroes in it. So how much more than a 2005 model will a comparably equipped 2006 model 3-series cost? BMW says that when the features and options are equivalent, a redesigned 325i will be about $150 more, and a new 330i will be $100 less – and that's notwithstanding the dent that the euro-dollar exchange rate puts in BMW's accounts when profits are translated back in Munich. The BMW 3-series may be the benchmark in its class, but the pricing reflects the reality that the competition is right on BMW's tail.
The car business is not a gentleman's game. If a company as charmed as BMW now has to run scared, GM and Ford, which have had less luck pleasing customers during the past 20 years, can't expect any breaks. GM and Ford have proud histories, but for most consumers, they are only as good as their last car or truck and their last deal. The message to Detroit's Big Two from Wall Street is unpleasant, but clear. Get up and fight, or go to the junkyard.
BMW Tackles Energy Challenge
[font=Times New Roman,Times,Serif]Bringing Technology to Market Costs Money,
But Falling Behind the Curve Could Be Fatal
May 9, 2005[/font]
To get some perspective on the troubles in Detroit, have a look at what German luxury-car icon BMW is up to these days.
BMW has become a powerhouse selling smooth-handling, gasoline-powered cars under the slogan, "The Ultimate Driving Machine." It built an enviable franchise in America selling precisely-tuned cars with similar styling executed in three sizes.
But early in this decade, BMW concluded that its 1990s formula wouldn't be good enough for the 21st century. We won't rehash the design story: BMW faces competitive pressures in all areas, starting with what's under the hood. Sometime between now and 2008, BMW plans to offer a select few American consumers the chance to lease a 7-Series sedan that can run on hydrogen. In roughly the same time frame, it may also start offering diesel-powered cars clean enough to pass environmental muster in 50 states.
"We think that could happen in 2008," says Tom Purves, head of BMW's U.S. operations. Mercedes-Benz and Volkswagen have diesels in the U.S. now, but they aren't sold in California and certain other clean-air states. BMW's policy is that it won't sell diesel cars in the U.S. until it has the technology to offer them everywhere.
Mr. Purves expresses concern that to American consumers, the terms, "diesel engine" and "ultimate driving machine" don't go together. (Anyone who's driven BMW's 5-series diesel in Europe might argue that Mr. Purves has nothing to worry about.)
But in a country where the funny-looking gas-electric hybrid Toyota Prius is practically sold out, and dependency on Middle East oil is a hot topic again, BMW cannot afford to stand pat with near-perfect gasoline engines.
Instead, Mr. Purves says, BMW will take on the challenge to show that "you don't have to give up fun to be clean in energy terms."
In the meantime, BMW fans will have to make do with a new 3-Series sedan that features a long list of advanced technologies, such as an engine with a magnesium-aluminum block and an advanced valve train that nets out at about 30 pounds lighter than the old 3-Series engine. So what? By using a magnesium block – BMW claims this is a first – engineers were able to make the new 3-Series safer and a skoosh larger inside while adding only 88 pounds to the weight of a 330i model.
Pushing advanced technology into production is expensive business. But in the circle that BMW inhabits, falling behind on technology is worse than expensive. It's potentially deadly.
"We argue that our R & D budget is part of our marketing budget," Mr. Purves says.
The menu of features in the new 3-Series is long – run-flat tires that can roll deflated for 150 miles at 50 miles per hour are standard equipment. Front and rear side-curtain airbags are standard. There are headlights that see around corners, six-speed manual and automatic transmissions, cruise control that automatically slows the car down when another car cuts in front, and, of course, more horsepower (255 vs. 225 in the 330i.)
And guess what? BMW will quickly find that competitors in the 3-Series segment, roughly defined as compact sports sedans priced between $30,000 and $40,000, either already or soon will match the new 3-series feature for feature, and probably go it better, starting with horsepower. That horsepower boost in the 330i shows you that Infiniti's G35 sedan has Munich's attention.
All of this goes to show how unforgiving the auto industry has become. Consider BMW's situation, and the competitive challenges its management sees, and it becomes more clear what a fix Detroit icons General Motors and Ford are in right now.
GM and Ford are each several times larger than BMW in terms of global sales volume and revenue. But the battle to keep up with the rapid pace of technological change and shifting consumer tastes has left even these giants winded. Last week, the big debt-rating agency, Standard & Poors, consigned GM and Ford to the purgatory of "junk" credit, effectively telling the world that investors should beware of lending money to these one-time pillars of American industry.
The symbolic wallop of GM and Ford being classified as "junk" rattled stock and bond investors, even though the inevitability of this slap has been the talk of the markets for months. As a practical matter, GM and Ford aren't deemed to be at risk for default in the short term, and should be able to raise capital through various means, such as selling car loans made by their finance units.
But having a junk label hung around their necks will make it more expensive for GM and Ford to go out and raise the money they need to keep up with the likes of BMW, Toyota-Lexus, Honda-Acura, and Nissan-Infiniti. These companies are all solidly profitable, and carry far lighter burdens for health care and other overhead than their larger Detroit rivals.
Take transmissions. The Cadillac CTS, a good car that has helped refurbish Cadillac's image and sales, offers an optional five-speed automatic for 2005. But the new BMW 3-series' optional automatic has six speeds, which help to better balance improved fuel economy with satisfying performance. The new Audi A4 likewise offers a six-speed automatic, and others are headed in the same direction. Cost to stay in this contest? Give or take $1 billion for each new transmission, according to industry executives.
Features like headlights that peer around corners and aluminum suspensions and free maintenance four years or 50,000 miles – included with new BMWs – all cost money. Mr. Purves politely declines to play guessing games with journalists as to how much four years of free upkeep on a 3-series costs his company, but it's definitely a number with three zeroes in it. So how much more than a 2005 model will a comparably equipped 2006 model 3-series cost? BMW says that when the features and options are equivalent, a redesigned 325i will be about $150 more, and a new 330i will be $100 less – and that's notwithstanding the dent that the euro-dollar exchange rate puts in BMW's accounts when profits are translated back in Munich. The BMW 3-series may be the benchmark in its class, but the pricing reflects the reality that the competition is right on BMW's tail.
The car business is not a gentleman's game. If a company as charmed as BMW now has to run scared, GM and Ford, which have had less luck pleasing customers during the past 20 years, can't expect any breaks. GM and Ford have proud histories, but for most consumers, they are only as good as their last car or truck and their last deal. The message to Detroit's Big Two from Wall Street is unpleasant, but clear. Get up and fight, or go to the junkyard.