German Auto Industry in Peril?

Sections: Sales Dec 1st, 2008 27 Comments

Business Week has a great article on the general atmosphere of the German auto industry and the specific issues it faces. If you’re wondering why MINI’s prices are on the rise, this article breaks down a lot of the reasons behind it all. Highly recommended for those who want to get a picture of the challenges companies like BMW (MINI’s German parent company) face.

Here’s a quick excerpt:

Some senior executives already question whether Daimler and BMW will survive the crisis as independent companies. And close examination reveals that both companies significant Achilles heels.

The biggest risk for BMW stems from its successes in recent years. The Munich-based company risked almost everything for its goal of finally overtaking rival Mercedes-Benz. BMW has almost doubled its car sales since 1999, and since 2007 the Bavarian carmaker has been the world’s top seller in the premium class.

BMW has achieved this mainly by expanding its model line downward, with the 1 Series and the Mini. This weakened the company’s profitability. But BMW has also boosted its sales by offering customers attractive leases and car loans; today this approach is used to sell every second car the company moves off its lots. This has increased risk.

While Daimler has only about â‚¬11 billion ($13.8 billion) on its books for leased vehicles, it is almost â‚¬20 billion ($25 billion) at BMW. That is BMW’s major weakness.

BMW based its leasing calculations on an estimated residual value for the cars when customers return them after three or four years. But this value has little to do with reality these days, because used car prices fall during an economic crisis. Besides, more and more customers who purchased a BMW on credit can no longer afford their car payments. In the first nine months of this year alone, BMW had to establish reserves of more than â‚¬1 billion ($1.25 billion) to make up for the difference, and more reserves are likely to follow.

The second risk for BMW lies in the fact that customers are increasingly buying smaller models, or at least are opting for smaller engines in the larger 5 Series and 7 Series. Because of this, Munich-base engine factories have slid into the danger zone this year.

You can read the rest below:

+ German Auto Industry Facing the Abyss / Business Week

Written By: Gabe

C4

It will be interesting to see whether the Quandt family will relinquish control of the BMW Group or sell the entire operation altogether.

But one thing remains clear…. Given the worst financial crisis the world has seen since the great depression of 1932, it is likely that many of the few remaining independent automarkers will either close shop or merge with bigger enterprises. I see 10-15 years from now (Or sooner) only 3 or 4 major car manufacturers controlling the worlwide market share. Scary and interesting times ahead.
C4

And sure, the party is over folks. The days of moving metal out of BMW dealership lots with heavely subsidized lease deals are over. Now things will go back to “normal”. And that means that those who can truly afford a new BMW will either have to pay cash for it or obtain short term financing (36 months or less)at significantly higher interest rates. In other words, BMWs (And most luxury brands) will again become the realm of the well to do and not just anyone walking into a luxury car showroom seeking a vehicle they can’t realistically afford.

The crazy lifestyle that some Americans got themselves into (Building deck card castles and such… Mortgages, vehicles and debt they can’t afford) has proven to be unsustainable and sooner and later that bubble had to burst with far reaching consequences.
Mk1

Dead-on, C4. Buying and living on credit, expecting to pay with “future” earnings, and “projected” values. Individuals and Big Biz all doing it. Eventually the bill comes due.
C4

Last comment on this article…. Most customers are shying away from expensive models with large displacement powerplant. If the trend continues this could spell death to the 7-Series range and the X5 SUVs. Furthermore, this will force BMW to quickly bring to market smaller engines and/or diesels to their “Bread and butter” models like the 3-series. This is also a terrific opportunity to bring over the 1-series 5 door hatch and offer the current R56 Prince engine as the entry level powerplant (How about BMW 116i?). Trim the fat in terms of content of these vehicles and bring prices more in line with what customers are able and willing to pay for.

If BMW content and prices are forced down, then MINI will have no choice but to follow suit. $30K plus MINI Coopers is simply ridiculous and dellusional.
hank chinaski

So, what’s BMW to do with over-full lots of 3-series?

They altered their stance decades ago & balance their builds by pulling-in 3-leasers. Enthusiasts don’t believe the 3 represents the spirit that brought us the 2002.
JonPD

I think the concept of bringing the 116i is ok but since there is a razors edge price point between the brands think BMW is going to be hard pressed to move a cheaper car into the mix without acting as direct competition to their Mini brand sales. I am hoping part of what we will see is a step back from the increasing bloated size and weight that BMW has been obsessed with over the last couple of decades. During these times I am thinking that the future of car sales lives in smaller lightweight cars. I however guess that part of the issue is they would need to re-educate their owners that larger and heavier isn’t the only way to performance and safety.

I would be surprised if BMW doesn’t fight to keep its market share. If they become more exclusive we can expect a lot of BMW factories to close soon afterwards. One thing for sure, I am happy I am not living with the responsibility to keep the brand alive during these troubled times.
Axel

Ok a likely scenario BMW/Chrysler or BMW/Ford or BMW/Chevy or BMW/GM or BMW/Citroen or BMW/Seat/ BMW/Peugoet or BMW/Fiat or even WORSE BMW/Honda or BMW/Toyota or BMW/Nissan or BMW/Hyundai or even far worse BMW/CHINESE no pun untended to my fellow minorities Having said this, all the above companies are pretty good but as we may come to a conclusion it can and may happen if BMW does not gets its sheet together!!
Shamus

I still don’t understand the idea that MINI has to be the entry-level brand in BMW’s arsenal. There are quite a few manufacturers out there with product price overlaps that have (till now) done pretty well. I think the idea of a 116i or even (gasp) a 316i could be just the right move for BMW to make. Besides, MINI is so inherently different from your basic BMW sedan or coupe, that it will always appeal to a certain market segment without encroaching on sales, even with a price overlap.
Aurel

From what I remember BMW initially wanted the MINI to be a stepping stone for owners to become eventual BMW buyers. I am sure few have stepped up but most just stayed with the MINI as they became addicted to it.
Aaron

I wonder how the economic downturn will affect the pricing and launch of the R60. It will be interesting to see how the higher pricing for the R57 will play out in sales in this economic climate…Perhaps it’s time to bring the MINI One to the US? I would also like to see the one-series five door hatch brought to the US. They do well in Europe/Africa, and if priced right, could fill a niche in the US market.

However, in general, I think BMW’s long term survival may require introduction of a budget brand (equiv to Honda/Toyota/VW vs. Acura/Lexus/Audi) as a balance to their luxury brand. MINI is a niche market and not a budget brand. Perhaps BMW can merge with Renault, Fiat, or Citroen and market the French/Italian brand as their budget auto brand. Or they can build one similar to how the Japanese manufacturers built luxury brands from scratch.
http://www.iwantamini.com MaxMCS

To be frank, I don’t see BMW going anywhere any time soon. BMW has been around since like… the beginning of time. It’s a name that can never really be killed; I don’t think the world as we know it today would let that happen. Also, not to be the pathetic optimist here, but I don’t see this financial crunch lasting for TOO long- a year or two, possibly, tops.

I do agree with C4 in saying that BMW will again become a premium brand, exclusive and rare as it once was. When I was a kid, having a BMW made you just… the business! Because you could burn the cash to get the luxury and performance. I could see that being the scenario once again.

Long live the mighty Bimmer!
DBM

BMW are more common today because the other car brands like Toyota, Honda and Ford are more closely priced to a BMW. Instead of a 3 series costing twice the price of a fully loaded Camry like in the late 80′s it is possible to get a 128 for 10-15% premium over a fully loaded Camry. Someone who is image conscious aka a yuppy, or an enthusiast does not have to stretch as much as they used to. The MCS in my opinion is the greatest value in all of BMWs product mix.
GregW

Firstly BMW is listed on German Stock market, with the majority shareholding being the Quandt family. A lot of employees have stock as well. When BMW bought Land Rover and MG Rover Group (including Mini brand) it was trying to diversify and gain 4WD and FWD technology. This deal nearly sent them to the wall. So they sold LandRover to Ford, and sold MG Rover for 10 GBP. They kept the jewel in the crown – the Mini. Years ago, BMW decided to be a luxury car maker instead of a sporty-car marque. They wanted more market share. All BMW models got bigger with each model. BMW is a victim of its own success. The cars were so good everybody wanted one. Now people want something different than their neighbour. BMWs are already being made in China for the Chinese market and the clones are already being churned out. As well the BMW India plant will soon come on stream. BMW has already restructured for the past 18 months / 2 years and laid off staff progressively. MaxMCS – BMW has not been around for that long – check your history.
Shamus

The trick for all brands will be to free up enough capital to weather the storm and/or restructure their product lines. The big three are facing that problem right now in congress.

Halting new development is a no-brainer. Closing down dead product lines is a given. Killing off old engines was going to happen anyway. But moving manufacturing plants, introducing new small models, or entire product lines is simply NOT going to happen. How can they when doing this costs money? Nothing would be better than introducing Isetta to the world or for Fiat to bring the 500 over early to drive up sales, but the infrastructure needed takes too long to implement and (again) costs too much.

Paring down existing lines to make them more cost-effective. Cross shopping existing technology and engines between brands. Reducing overall fleet volumes in dead markets. These are measures that will ensure the continuation of a company. BMW isn’t going anywhere anytime soon.
dc11r

sounds like mismanagement of funds to me. having worked with VW’s product design teams, their problem was over-engineering and the costs that go with it. for example, if you take apart a camry and look how the fenders are bolted on, you’ll see that its just the fender and a few bolts here and there. however, if you take apart any VW, you’ll see more than a fender and bolts.. you’ll discover a hanger here and another mount there. it all adds up.

but when you have a company like BMW complaining about their profitability…. uhhhh… base model is cheap, i agree… but the prices charged compared to the cost of product on their options are ridiculous. and to make it worse, they come out with their free-service/warranty programs when their products have so many problems.

they need to attack the reliability issue first, and while doing that, find ways to do things more efficiently like the japanese have.

if they want pity from me, they wont get it because their price scheme is just retarded… theyve got to be making so much profit per new car sold than the japanese do, before factoring in labor costs and compensations.
Aaron

Wonder if BMW has any interest in Volvo?
Aaron

http://www.guardian.co.uk/business/2008/dec/02/ford-sell-volvo

(link didn’t work in post above)
C4

Volvo is a big turkey with declining market share. Not even the Volvo group in Sweden wants to take it back. (The C30 has potential but it was a half baked effort to get back at the MINI Cooper at best)

I believe BMW dismissed any interest in Volvo cars a while back.
Shamus

If I remember correctly, wasn’t Volvo the largest profitable division in Ford? It may be considered crap here in the states, but they sell like mad overseas.
Shamus

BTW, “the European Union’s tough competition regulations restrain the options for the Swedish government should it wish to support the Swedish-based car industry.” (DetroitNews.com)

I imagine the same could be said for governmental bailouts of the German brands as well.
http://Bimmerfile.com Michael

The government bail out in the EU can’t be the same at the one being attempted here… they will not give brands money to reinvest in themselves. The bail out there would only be on the financing sector bad loans etc… not money to fix the cars brands built. It is called survival of the fittest and as a free market economy here in the US you think we would follow that rule and let those pigs in Detroit (just one) learn otherwise there are no consequences to producing crap people won’t buy Since the people will end up paying anyway… if we do learn from history it is is bound to repeat itself…

It is no wonder that EU car brands while still having issues they are in a far better place than the US brands, if it was not for GM Opel would be in fine shape, same for Volvo with Ford.

Whoever made the decision to put those bigger Volvo badges on the back of cars this past fall should be fired immediately, ruined a nice piece of metal with all that plastic…

BMW has no interest in buying anyone at this time and has reached parts agreements with other brands to offset development costs and reach economies of scale.
QwaZyWabbit

GregW- BMW has been around since 1913 (officially 1917). After surviving WWI, WWII, a hostile takeover, and various economic downturns, BMW AG has always come back. It will not go away.

I spent almost a year researching the early years of BMW and wrote it here:http://en.wikipedia.org/wiki/History_of_BMW

Check it out, you will find it very enlightening. You cannot move ahead unless you understand the past.
TT

BMW has not been around for that long – check your history.

BMW has been around since 1916. That makes them only 13 years younger than Ford & 8 years younger than General Motors. I consider that a fairly long time.
http://Bimmerfile.com Michael

TT,

BMW may have been around since then but did not make its first car until 1928(9)

and was closed from 1941-1952. So in reality it is not that long.

Around 70 years total of building cars.
GregW

Thanks for the history lesson fellas, but the old BMW was making motorcycles, Austin 7′s and rebadging them Dixis, and pots and pans. Some cuddling up to Bavarian businessmen during the late 1930′s. Some involvement with aircraft engines. Was a small time company until the 60/70′s. It was BMW but not as we know it.
Shamus

GregW, why does it really matter? Hyundai is kicking major a**… and how long have they been in business? Who cares? Its an odd point to argue over when there’s bigger fish to fry.
GregW

Shamus – you are right – what the heck. But until the late 70′s BMW didn’t even make RHD cars in big numbers let alone LHD cars for export from Germany.

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