Translating sales into profitability through tighter control on costs
A traditional problem affecting the growth of BMW over the last decade is the difficulty in translating sales volumes growth into net profits. In fact there is very little correlation between these two parameters in BMW's case. While deliveries of automotive products to customers have grown by an annual average of 2.2% starting from 1999, profits have been rather less proportionate because of some bad financial performances especially in 1999 and 2008. This takes us to the new strategic guidelines BMW's management board have set with their Number One strategy which was presented in 2007. The first ...view middle of the document...
As Jim O'Donnell, CEO of BMW US, put it to Automotive News, "It is wrong to push in a market that is declining".
Ultimate goal: independence
With car markets expected to decline by 10% to 20% in 2009, no reliable earnings outlook can be forecast. According to BMW's Chief Executive the challenges of 2009 come with a set of financial priorities: liquidity, free cash flow and working capital. All of this to ensure the German car maker's future independence in a struggling automotive sector. This goes against the tide of the general consensus forecasting accelerated consolidation in the industry, with BMW as well as PSA and Fiat seen most vulnerable in Europe for the low economies of scale they can benefit from compared to rivals. While a competitor of the calibre of Audi is surely gaining ground also because it is well established in the Volkswagen galaxy, BMW denied interest in the ailing mass car maker Opel and will probably go for a 7% share-swapping deal with archrival Daimler. This chiefly depends on beating the resistance of BMW's majority shareholder, the Quandt family.
1. Production strategy
Shaky growth forecasts In addition to profitability, the Number One strategy which BMW set as overriding policy for the company's development foresees growth as another key point. A growth which is forecast to be achieved in terms of volumes. BMW’s top executives declared to have an installed capacity of 1.5 million vehicles per year. They had forecast an increase of sales up to 1.8 millions by 2012, but then retreated to 1.6 million during the last financial analyst conference on March the 18th. BMW CEO claimed to be "absolutely sure" the OEM will achieve the 1.6 target and the ambitious financial targets it set are within reach even with this reduction in forecast sales. Reaching the goal would require an increase of capacity by 100,000 units by 2012. During the last few years BMW has distinguished itself for having less overcapacity compared to other mainstream OEMs thanks to its highly flexible plants. One of the areas where BMW has achieved manufacturing excellence is built-to-order, with its Customer Oriented Sales and Production Process (COSP).
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Thanks to this approach to the joint management of sales, logistics and manufacturing, the Bavarian car maker has an outstanding advantage in adapting actual production to the tastes of the final customer. US apart, fairly stable production footprint
The footprint of BMW's production is not likely to see major changes in the next four years. The share of German production will remain stable at over 60% of total production. The only alteration is a slight increase of US production levels (from 10.5% of total production in 2008 to over 13% in 2010) with more output from BMW's Spartanburg (South Carolina) plant. The North American plant is to see a US$750m investment to increase installed capacity from 160,000 units to 240,000 in 2012. This...