19 Jul 19

New BMW CEO Oliver Zipse tasked with making ACES profitable

The BMW Board yesterday appointed current board member for production Oliver Zipse the successor to Harald Krüger, who will step down on August 16 folllowing increased shareholder pressure.

Zipse will have the difficult task of ensuring medium and long-term profitability for the company, the automotive division of which posted its first loss in a decade in the first quarter of 2019. Global trade tensions are slowing down vehicle sales and putting pressure on margins. Also, the company had to set aside €1.4 billion to cover a potential fine by EU regulators for allegedly having colluded with Daimler and VW. On top of that, the transition from NEDC to WLTP has cost BMW – like any other OEM in Europe – vast amounts of money.

To top it off, declining diesel sales and slow uptake of electrified vehicles means BMW Group is heading towards a hefty fine for not hitting the 95g CO2 target in 2021. These factors pushed the company to initiate a €12 billion savings plan and announce a hiring freeze.

Strategic error in electrification

Adding to the financial negativity are the disappointing commercial results of the i3, which launched in 2013 as a high-tech urban electric vehicle. It cost BMW billions in development and never really lived up to the expectations, even though it ranks in the top 3 of EV sales on most European markets. Moreover, BMW has not added any electric models to its line-up since then - something that some consider a strategic error by Krüger, so today it has nothing to fight off the likes of the successful Tesla Model 3, the Jaguar I-Pace, the Audi e-tron or the highly anticipated VW I.D.3.

The Tesla Model 3-rivalling BMW i4 will not arrive before 2021 - e year after the (Volvo-related) Polestar 2. The electric iX3 will be available in about a year’s time to combat its arch rival from Stuttgart, the Mercedes EQC, as well as the Audi Q4 e-tron. Until then, all hopes are on the recently unveiled Mini Electric. The Mini Hatch’s current customer base mainly use their premium urban car for shorter trips in and around the city anyway, giving the Mini-E a good chance of convincing them to switch from petrol to electric.

The Mini Electric won’t suffice to make the company profitable again, though: margins on small electric cars are neglectable and the volumes are not quite high enough. And let's not forget Brexit - the zero-emission Mini will be built in the UK.

Faster and better ROI on ACES

Zipse will have to find a way to get a better return on investment faster, and not just as far as electrification is concerned. The other letters of the ACES (autonomous, connected, electric, services) acronym also enter the equation.

Service-wise, ride hailing and car sharing have not been profitable. By teaming up with Daimler, economies of scale could make the difference between being in the red or the black. As to autonomous vehicles, BMW and Daimler announced two weeks ago they would be strengthening their partnership in a bid to launch their next-gen self-driving technology in passenger cars by 2024.

Zipse will probably have retired before this business returns a profit. Being a production guy, his approach to ensure profitability is likely to focus on further industrial rationalisation. With the new 1 Series, which now uses the front-wheel drive platform of the Mini Clubman, the first step has already been taken. Also, the 3 Series GT and the 2 Series Convertible won’t get a successor. BMW has also announced it will be axing a number of smaller engine blocks, such as the 1.5 diesel, because they are too costly to make them comply with the new emission standards.

Finally, BMW Group will surely look to extend its industrial partnerships. So far, it has not shared its EV platforms with anyone - it has only recently announced it would be co-developing electric drivetrains with Jaguar Land Rover. There is at least one OEM out there that would be very interested in gaining access to the Bavarian knowhow: FCA (Alfa Romeo, Fiat, Chrysler, Jeep, Maserati, Dodge, Ram, Lancia) is virtually nowhere in the electric scene.

The question is whether another partnership fits in Zipse’s vision – and what FCA has to offer in return. It is more likely that instead, BMW will deepen its relationship with Daimler in this area, too. Perhaps an alliance Renault-NIssan style is in the making.       

Authored by: Dieter Quartier