Racing to stay ahead: BMW is investing heavily to survive as an independent automaker. Will it work?

A BMW promotional movie spot: In a vast hotel room, brilliant with kitsch and klieg lights, a BMW driver looks on, stunned, as his passenger, the singer James Brown, haggles with the Devil. Trying to recast a deal on his soul, Brown challenges the Prince of Darkness to a car race at dawn. "I like a wager," says the Devil, shaking his bejeweled finger. "But I like the concept of winner takes all!"

Sounds a lot like Helmut Panke's own set of challenges. Locked in a real-life contest against formidable adversaries, Panke's Munich-based BMW Group is racing into the market, determined to get ahead of the curve. And while his CEO soul isn't in danger, the stakes are just as high for the $45 billion company he's been heading for the past 18 months. Panke and his board know that this time around they have to get everything right. Experiments at BMW are over. "We don't want to waste money on trying things," says Chief Financial Officer Stefan Krause.

After a brush with disaster four years ago when BMW had to invest $5.3 billion in a failed bid to modernize Rover, the company has come back with a vengeance--bragging a boosted product range and firing off a salvo of new models. But the comeback has exacted a hefty price in terms of investment and has had to be engineered amidst a major economic downturn, with key markets sputtering, car sales slumping, profits thinning and auto shares taking a beating.

Carmakers the world over have been shifting down, laying off workers and closing plants. But BMW--backed by the Quandt family, which owns 47 percent of the company's stock--has bankrolled a multibillion dollar investment drive, hired almost 10,000 people and launched the construction of factories in Shenyang, China, and Leipzig, Germany.

But its room for maneuver--and for error--is razor thin. Can "The Ultimate Driving Machine" win the race? "I think they can," says Christopher Wills, automotive analyst at Lehman Brothers in London. "So far, they've stolen the march on the competition with their new models."

At the recent Frankfurt Car Show, the BMW lineup was, in fact, looking fresher than most of its competition. And it was a stark contrast with what the company had on offer when it was shedding Rover models four years ago. A one-brand, five-model carmaker then has by now has morphed into a three-brand, 10-model powerhouse. And there's more coming. "This isn't a one-off effort," claims Panke.

On top of their mainstay 3- and revamped 5-series cars, an executive 7-series limousine, an enormously popular, upgraded X5 SUV and the Z4 roadster, the Bavarians ate adding a baby X3 Sports Activity Vehicle (SAV), a 6-series coupe and a compact 1-series. Plus, of course, several new permutations of their saucy Mini Coopers and, finally, the Rolls-Royce Phantom cruiser.

This has effectively expanded BMW's car product range downward with Minis and 1-series models and also built it upward with Rolls-Royce, while filling the gaps in between with X3 and 6-series. The company has thus boosted its appeal to the wannabe-rich, the rich and the super-rich, all without departing from the pure premium purview.

Figuring out how to perform this balancing act is perhaps the key lesson BMW has learned from its excursion into the Rover world of mass-produced cars, an experiment that almost cost the carmaker its independence. "In hindsight," says Panke, "we shouldn't have even started with Rover. But what we learned was that mass and premium don't mix." He pauses and adds, "What I learned personally is that you have to do what you do best, and if you move up, you have to do it step by step."

The CEO and his team ate attempting to do that by pushing the premium envelope. The way they read the market, premium products stand for sustained added value in rational and emotional terms and for sustain able promise of unique performance. "Our market research shows the premium market has a higher growth potential than the mass market," says CFO Krause. "Are there enough wealthy people in the future who are willing to pay a premium? Economists will tell you that for the type of growth we want--remember, we don't want to be selling 20 million cars--there's enough growth for US."

Panke says the company has the numbers to back it up. "Our plans are based on economic forecasts and an analysis of the competitive situation,"' he says. "The mass market segment will grow 25 percent by 2015, the luxury market by 50 percent."

Moreover, he sees the market for premium SUVs--BMW X5 and X3--growing 100 percent by 2015. And the market for luxury two-seaters, such as the Z4, which has grown by more than 50 percent over the past 10 years, is likely to expand even more, especially in the United States. The U.S. is the No. 1 target for BMW: It overtook Germany as the company's biggest market in the first half of this year.

To expand its grip on the luxury market, BMW is proceeding in an unorthodox way--by questioning stereotypes. Traditionally, when car companies visualize a luxury car buyer, they see a middle-aged person, usually male, looking for ah executive or representative vehicle, preferably a larger car.

All wrong, if you ask BMW. Neither the car size nor the customer's age or income is that closely related any longer, the company's pundits say. What counts is the lifestyle that Bimmers, Minis and Rolls-Royces project: an identification with a desired social group and the resulting emotional gratification. "Such emotionality is the keystone of a deep and lasting customer loyalty relationship," says Karl-Heinz Kalbfell, senior vice president for marketing.

Merrill Lynch analyst Gerhard Grueter doesn't think that's all just marketing talk. "They're selling an emotional and aesthetic message and lifestyle," he says. "They're making customers into ambassadors of a brand. This is what Mercedes hasn't managed with its A-class."

Thus, the German carmaker has realized that younger and older people now have more consumption-oriented lifestyles and more disposable income than the industry has grown to expect. "BMW has rejuvenated its clientele, who used to be around 50 when they bought their first Bimmer. It has pushed the age register wide open to between 18 and 80 years old," says Grueter. "Here, you're talking about quite different volumes."

BMW was pleasantly surprised at the surge of demand for the Mini and its derivatives. Not only has the number of cars sold far exceeded any expectations in Munich, but buyers have been gobbling up Minis loaded with options, often adding as much as 20 percent to the price of the initial version they looked at, which started at $17,000-plus.

Mini success reflects cultural shift

Moreover, Mini is setting a new benchmark for cross-selling at BMW,, as more than 30 per. cent of its customers own at least one BMW car as well. In addition, Mini buyers are on average seven years younger than BMW's 3-series customers, allowing the company to access a brand new customer group.

As a result, BMW is in a rare and enviable position: "The number of cars they can sell will be determined by the number of cars they can turn out at the plant," says Lehman's Wills.

Analysts reckon the company could sell more than 180,000 Minis this year, up from the 144,000 that left the Oxford, England, plant last year. Actually, the sales target for 2002 was only 100,000. "Not only have we achieved "all the strategic targets we set for ourselves, we have overachieved them," boasts Michael Ganal, a member of the management board of BMW Group responsible for sales and marketing.

The Mini success reflects shifting social and cultural trends, BMW strategists say. In their view, upward social transition has been broadened and accelerated. "We have people who want to move up the quality of their consumption and are looking for an expression of their particular lifestyle," explains Panke.

Panke says BMW is considering introducing "new cars that have more flexibility and functionality." This kind of talk intrigues analysts. "I think they are looking ata highimage, high-performance minivan, a luxury performance vehicle for a family with four kids," says Wills. "But it would be a BMW take on the van. It wouldn't look utilitarian and it would have panache and luxury."

Not only has the carmaker reinvented its product range; it has also redrafted its sales territory. Take Asia, for example. This region was pegged until a few years ago as a market whose sales potential was too limited to establish more than a distribution presence or, at most, a knock-down assembly plant. But no longer. "The fastest growth of all will be happening in Asia hi the coming years," says Panke, who wants to double sales there in five years, to 150,000 cars a year from about 80,000 now.

So, in a joint venture with China's biggest minibus maker, BMW is building up a factory in Shenyang in northern China, where it will turn out 30,000 cars of the 3- and 5-series and sell them throughout the region. In the first half of this .year, BMW sold 40,417 cars in Asia, up more than 10 percent, while globally its unit sales were basically flat.

Another booming region, Central and Eastern Europe, still isn't ready for BNIW production, says board member Ganal. "In 10-20 years, things will be very different," he says. Flexibility is the name of BMW's current game. To get its new X3 SAV to the customers as quickly as possible, the company outsourced its entire production to Austria's Magna Steyr. "First-to-market was more important to us than maintaining absolute control of keeping all the revenue," explains Panke.

Panke's personal style is decidedly low key, perhaps reflecting his background as a nuclear physicist, but he is credited with injecting even more intensity into an already intense BMW culture. "Our success is an extreme mix of corporate culture and mentality that is very focused and driven," says Panke. "When you walk through our corridors, you get the impression that people there are walking faster than in other places."

Krause also believes that corporate culture is the key to BMW's performance. "Maybe it stems from German culture, this desire to be perfect and to be technologically at the cutting edge," he says.

One of the cultural conflicts that has cropped up in German-American dealings is the German penchant for planning versus the American desire for swift action. Krause says BMW also spends a long time planning. "After you've made your plan," he says, "you're committed and you're basically not allowed to deviate from the commitment."

What about making adjustments on the go? "At BMW," he says, "you're supposed to have thought ahead and built in provisions for any eventuality. Americans are more open to taking a chance: 'We tried it, if didn't work, we've spent some money, we lost it, so let's move ahead.'"

At the same time, BMW's team approach is unusual for a German company, says Krause. "We are much more informal than an average German company," he says. "If there's an unforeseen situation, you create an ad hoc team and work together across hierarchies and areas of responsibility."

Continuing the rapid turnaround

Whatever the precise BMW culture is, it seems to be working. Panke, being a bit conservative perhaps, says earnings will be roughly flat this year. But some analysts believe BMW is being overly cautious. "By the end of this year, I think the earnings will rise 50 percent," says Lehman's Wills. He figures the costs of developing and launching the new models will no longer weigh down BMW's earnings next year. "I think we're looking at a company in a very rapid turn-around starting now," he says. So far, BMW's stock has outperformed all other European auto shares, including that of archrival, DaimlerChrysler.

Panke admits that BMW and Mercedes-Benz have a lot in common. "Similar thinking, similar approach," he says, "but totally different execution and different customers."

BMW sees the money-losing DaimlerChysler situation as akin to what BMW was facing at Rover four years ago. (BMW sold the company, but kept the Mini and the plant where it is made.) In October, DaimlerChrysler CEO Jurgen Schrempp promised a long-awaited Chrysler turnaround for 2004. A better option might be to shed the underperforming unit. That would make Daimler a much more formidable adversary. In global auto wars, there is no test for the weary.