Official BMW Group press release: The BMW Group is entering a decisive phase in the implementation of its strategic realignment. “We are doing our homework to ensure our business success in the future. The implementation of our new strategy is not a 100-yard dash. This year, we are laying the foundation for a turnaround in profitability, ” said Norbert Reithofer, Chairman of the Board of Management of BMW AG, at an event with analysts in London on Wednesday. “By creating this new strategy, we have defined our own road to future success. All of the steps we take are designed to secure the future and increase value, ” he emphasized.
As part of the new Number ONE strategy, which the BMW Group presented at the end of September 2007, the first series of steps have already been triggered and will be taken as early as this year. In addition, further initiatives and projects were launched, the results of which will help the company hit its ambitious targets. The BMW Group aims to have its Automobile segment achieve a return on capital employed (ROCE) of more than 26% and a return on sales of between 8% and 10% by 2012.
Ganal: material cost-savings potential of 750 million euros p.a.
In order to achieve these targets, the BMW Group intends to improve costs and performance by about six billion euros by 2012, as compared with the company ‘s original plans. “We believe that the lion ‘s share of the targeted potential can be tapped in the area of material, production and development costs, ” BMW Group CFO Michael Ganal said at the same event. At some 25 billion euros, the cost of materials is clearly the company ‘s biggest cost factor.
“In concrete terms, we expect that in this area, we will be able to realize two-thirds, or four billion euros, of the total potential, which amounts to some six billion euros. If we assume that we will reduce the cost of materials by 3% per year, this will translate into an annual potential of roughly 750 million euros. By 2012, this would result in approximately 4 billion euros, ” Ganal added.
Personnel cost reduction as another of the strategy ‘s building blocks
A further step en route to achieving the targeted return goals is the reduction in personnel costs. Comprehensive efficiency enhancements – above all in manufacturing – will allow the company to decrease headcount by around several thousand employees. In this area, the BMW Group will primarily take advantage of the flexibility afforded by employing temps, who commonly go to another company on expiration of their work contracts.
Measures are also envisioned for the permanent workforce. These solutions are socially compatible and have been agreed on as a result of a constructive dialogue with the Works Council. These involve allowing personnel to enter into partial retirement arrangements starting in 2008 as well as not re-staffing vacancies. Furthermore, staff members will receive offers relating to the voluntary termination of employment relationships. “With the help of this package, we want to realize a total of up to 500 million euros in cost savings per year, starting in 2009, ” Ganal emphasized. With a view to rising to the diverse challenges in the future as well, the BMW Group will continue to hire highly qualified skilled workers and executives worldwide.
Further profitability improvements through cooperation
The BMW Group will continue to leverage its cooperative ventures in order to improve its profitability. For example, the company is in talks with other manufacturers to explore the possibility of using shared components or engines in order to achieve economies of scale and cost reductions. “The talks are making good headway, but they have not yet been finalized, ” Ganal said. Today, the BMW Group already derives an economic benefit from its joint venture with PSA that supplies engines for the second-generation MINI brand cars. “The importance of cooperations in the field of drive-trains is evidenced by the fact that engine costs account for about 25% of a vehicle ‘s total production cost, ” underscored Ganal.
The BMW Group also intends to tap further synergies internally by stepping up the use of components based on a construction kit system for various models. The company sees a lot of potential, especially as regards the construction kit approach. Drive engineering is another area where the BMW Group wants to become more efficient. In the next few years, the company aims to reduce variant engineering costs, despite the rising number of variants caused by differences in emissions regulations worldwide.
“Besides cost-cutting, we are focusing on placing the company ‘s future on a firm foundation, ” Ganal emphasized further. The BMW Group will invest in emission-reduction technologies and new, attractive premium cars and motorcycles in the upcoming years as well. Says CFO Ganal: “Unlike other companies, we do not want to positively influence earnings by dramatically reducing our research and development expenditure ratio. In addition to efficiency enhancements, our list of targets includes technology and innovation leadership with a view to securing the company ‘s future. As company management, we feel committed to this vision. ”
Nevertheless, the BMW Group aims to achieve a significant reduction in its R&D quota. This is the ratio of research and development to revenue. In the last five years, it accounted for an average share of 6.1%. In the next few years, the company intends to spend between 5.0% and 5.5% of revenue on new products and technologies.
BMW Group plans to reduce dependence on foreign exchange rates
A large portion of the adverse effects on the company ‘s earnings in recent years has stemmed from negative currency effects. In light of its successful retail trend in the USA, the BMW Group wants to expand its natural hedging sustainably over the medium term and thus significantly reduce its dependence on volatile foreign exchange rates. “It will take some time to step up natural hedging, although we have already achieved some substantial improvements in the past. Therefore, we will not set our sights on achieving a return on sales between 8% and 10% in the automobile business over the short term, based on current foreign exchange rates, or entirely independent of currency exchange rates, ” Ganal underscored.
The BMW Group will expand production capacity at its US plant in Spartanburg from some 150,000 to 240,000 units by 2012. Plans for the expansion are already underway. Capacity at the Oxford MINI plant is to be increased to 260,000 units per annum-without making further investments in infrastructure. The BMW Group will take the first step towards expanding its capacity in China by raising it from 30,000 to 44,000 units a year.
Furthermore, the company will work on strategically increasing purchasing in US dollars. One aspect is the local content of the vehicles manufactured in the USA. In recent years, it was increased from about 30% to more than 60%. Another aspect is purchasing in the NAFTA region for production in Europe and other regions. In 2006, the NAFTA region accounted for some 9% of BMW ‘s global purchasing.
BMW Group set to tap new business fields
The BMW Group will continue to grow by introducing new models going forward. In addition, the company will develop new fields of business and operate along the vehicle lifecycle as well as along the value-added chain. This includes the planned development of new sales channels in the accessories business. In the pre-owned vehicle business, the company operates in the premium pre-owned segment. Both activities are lucrative, since a mere 25% of the revenue generated over a vehicle ‘s lifecycle stems from the new car business. Moreover, the BMW Group plans to offer entirely new individual mobility services as well as service modules.
By adopting this new strategy, the BMW Group has set the course for a future of success. “We will continue to write the BMW Group ‘s success story. Our entire management team is committed to this, ” Reithofer declared.