When BMW AG reports a 14% rise in car sales for 2011 to a record 1.67 million at the Detroit auto show on Monday, it will add to evidence that the luxury-car maker will post its biggest ever full-year profit and revenue.
"2011 was a year of opportunities, and we seized them," Chief Executive Norbert Reithofer said in an interview on the 22nd floor of BMW's Munich headquarters, an imposing building in the shape of four huge engine cylinders. All three brands—BMW, Mini and Rolls-Royce—achieved new annual sales records. The core BMW brand accounted for 1.38 million car sales alone last year, a 12.8% rise from 2010.
But the full-year earnings, due to be published in March, will reflect more than just surging demand for premium cars across the globe last year; the results wouldn't have been possible without BMW's comprehensive transformation since 2007, including cutting jobs and costs and pulling out of the prestigious Formula 1 racing series.
When Mr. Reithofer took over as BMW's chief executive in September 2006, the German car maker had just overtaken its archrival Daimler AG's Mercedes-Benz unit as the world's best-selling luxury-car maker, demand was surging and the world hadn't yet begun to worry about subprime loans or bad banks.
But Mr. Reithofer's predecessor, Helmut Panke, was already under pressure. BMW's strong presence in the fiercely competitive U.S. market had started to eat into earnings as the dollar softened against the euro. Profit margins at the company, which produces most of its cars and components in Europe, deteriorated. Additionally, higher risk provisions for leased cars and bad debts related to its financial-services business dented earnings. BMW was paying a hefty price to boost its sales volume.
In 2007, just months after taking over, Mr. Reithofer slammed on the brakes. He initiated a comprehensive overhaul of BMW's operations, cutting 8,100 jobs and slashing more than €6 billion in costs. This didn't go down well in some quarters, but BMW was one of very few global car makers to remain profitable during the financial crisis and the subsequent recession.
Today, the company is in better shape than ever, with healthy profit margins and a much better-balanced geographical mix. "We're highly satisfied with our development in the U.S.; China developed very well, too," Mr. Reithofer says.
Sanford Bernstein analyst Max Warburton describes BMW's performance in 2011 as "profoundly impressive," writing in a recent note to clients that "BMW's 14% margins were the stuff of dreams."
And analysts expect BMW to continue to prosper this year because of its strong focus on the lucrative premium-car segment and anticipated growth in markets such as China and Russia.
"We're starting 2012 with a very good order book and a very young model range... this should provide some momentum," Mr. Reithofer says, adding that BMW expects to "grow faster than the overall market." A big grin suggests this is one of the ultra-conservative outlooks for which BMW has become known since Mr. Reithofer took over. According to Chief Financial Officer Friedrich Eichiner, BMW is predicting a 4% rise in the overall car market next year and 8% growth in the premium segment. BMW itself is likely to benefit from the launch of new versions of some of its best-selling lines, including the 5-series, 3-series and 1-series.
Under Mr. Reithofer and his team, BMW has streamlined its development and production processes and can more easily adjust output to reflect market swings than most of its peers. When the worst industry downturn since World War II took hold in late 2008, many of BMW's rivals were still producing cars at full capacity, leading to bloated inventories and hefty losses for the industry. Additionally, BMW's early investment in fuel-efficient engines has given its cars a competitive edge.
Mr. Reithofer, who was born in the small Bavarian town of Penzberg, less than an hour's drive from BMW's headquarters, studied manufacturing engineering and business administration. More a reserved engineer than a charismatic salesperson, he is less drawn to the TV cameras than many of his industry peers. Nonetheless, BMW has won back investors' confidence under his tenure. For years, its stock was regarded as one of the most boring in the European auto sector, partly because the Quandt family controls about 47% of the company's voting stock, limiting its appeal to activist shareholders. Under Mr. Reithofer's regime, BMW's stock has outperformed the broader sector index in recent years.
But despite lavish praise from analysts, BMW can't rest on its laurels, as tightening emission regulations around the globe pose a major challenge, especially for the makers of big luxury sedans and sports-utility vehicles. Automakers are investing heavily in alternative technology, such as hybrids, electric cars or fuel cells to reduce harmful emissions. They are also pushing to increase their presence in emerging markets to benefit from growing demand and reduce their exposure to swings in major currencies.
Mr. Reithofer confirms that the search for a location for a new assembly plant in Brazil has "progressed relatively far," but a final decision hasn't been made. He also says the plan to build an additional plant in another emerging market still stands, but he declines to name the country. BMW is building a second plant in China and plans to expand its capacity in Russia and India.
In North America, BMW will continue to expand its Spartanburg plant, which produced about 300,000 vehicles last year. "We'll produce around 350,000 cars per year in Spartanburg mid- to long-term," Mr. Reithofer says, adding that he remains "very optimistic about the U.S. market's growth prospects."
"The demographic trend [in the U.S.] is much more favorable than in Europe.... I expect the U.S. market to return to the pre-crisis level in the future," he says.
Mr. Reithofer says BMW may at some point consider producing engines in China or the U.S., but he stresses that no decision has been made and the timeframe remains uncertain. At present, BMW makes engines in Germany, Austria and the U.K. The plant at Hams Hall near Birmingham in England's industrial heartland helps reduce BMW's exposure to swings between the euro and the pound.
In the U.S., BMW's fiercest competitor is Mercedes-Benz. The former market leader, Toyota Motor Corp.'s Lexus brand, lost ground as a result of supply chain disruptions last year triggered by the devastating earthquake in Japan and after its parent firm was battered by a huge recall. Mr. Reithofer says he still admires Toyota and is convinced that "Lexus will recover and remain an important competitor in the U.S."
Mr. Reithofer's respect for Toyota amounts to more than mere words. Last month, BMW signed a memorandum of understanding with Toyota to team up in research for lithium ion batteries to power electric or hybrid cars. BMW will also supply diesel engines to Toyota in Europe as part of the deal.
The cooperation with Toyota highlights a broad trend in the auto industry to forge alliances, for example in research and development, to share costs and benefit from economies of scale.
But while Daimler has teamed up with Nissan Motor Co. and Renault SA to develop next-generation small cars, and Audi benefits from significant economies of scale as part of Volkswagen AG, BMW—scarred by the ill-fated takeover of British car maker Rover Group in 1994 and the subsequent, loss-making sale in 2000—refuses to enter an equity tie-up with other car makers. This is a position that is unlikely to change while Mr. Reithofer is in charge. "Apart from economies of scale one has to keep in mind to safeguard the brand value," he says. "Safeguarding BMW's autonomy takes top priority."
Mr. Reithofer argues that BMW can boost its presence in the less-profitable compact-car segment on its own, without diluting its profit margins. BMW's small-car push will be led by a new car that "won't be a niche model, but will account for larger sales volumes," he says.
read more: Olympus Wealth Management
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