BMW Shares Details of Cost-Cutting Plans; Fails to Inspire Investors

BMW's Chief Financial Officer (CFO), Michael Ganal, has detailed the company's plans to cut costs by 6 billion euro by 2012 as part of a global financial roadshow embarked upon this week (see World: 4 February 2008: BMW CEO Seeks to Allay Investor Fears Over Profitability). In a statement released yesterday he said that the premium carmaker intends to achieve 4 billion of this target overall through reductions in materials, production and development

"We expect that in this area, we will be able to realize two-thirds, or 4 billion [euro] of the total potential... If we assume that we will reduce the cost of materials by 3% per year, this will translate into an annual potential [saving] of roughly 750 million [euro]," Ganal said in a statement.

BMW also detailed how it intends to cut personnel costs and improve efficiency, especially in manufacturing, by cutting staff numbers by several thousand (see Germany: 24 December 2007: BMW Confirms "Thousands" of Job Cuts in 2008). BMW's plans in this area include hiring more temporary staff, partial retirement schemes starting in 2008, as well natural attrition. Additionally, staff members will receive offers to voluntarily terminate their contracts. Ganal said there are plans for the permanent workforce following a "constructive dialogue with the works council." "With the help of this package, we want to realize a total of up to 500 million [euro] in cost savings per year, starting in 2009," CFO Ganal said.

Ganal also said that ongoing talks with Daimler and other carmakers, about cooperation over sharing components or engines in order to achieve economies of scale, saying that "the talks are making good headway, but they have not yet been finalized."

BMW announced a management board restructure and new sales and profitability targets as part of a broader strategic overhaul in September after the company's rising sales have failed to translate into better profit margins.

Outlook and Implications

BMW's announcement that it seeks to cut 4 billion euro from its materials, production and development failed to cheer the financial community, as BMW shares fell 3% on the DAX blue chip index following the statement. The news will do little to cheer its engineers or clients either, as BMW's search for greater profits through cost-cutting in this area will inevitably lead to pressure on product quality somewhere along the line. BMW will of course deny this vehemently, but whichever way you look at it, 4 billion euro in cost savings is a huge number and has to tell somewhere.

Arch-rival Mercedes proved this theory late last decade as it sought to reduce costs through reductions in materials, engineering development and production—the result was W210 E-Class, which trashed the brand's hitherto cast-iron image almost overnight. From around 1998 to 2004 Mercedes released a number of models that irreparably damaged the company's reputation and sent it into financial crisis. Mercedes has subsequently recovered some of this lost ground, but there are an awful lot of cars still lingering on the roads to remind Mercedes of its mistakes. BMW's declared intentions steer dangerously close to following the same route, something it must avoid at all costs.

In truth, BMW must seek to achieve what efficiency gains it can in Germany without any perceptible drop in quality, but also further develop its global manufacturing footprint to better insulate the company from fluctuations in currency exchange rates. To this end, BMW's operations in the United States, China and even South Africa will need significant investment in their production operations to expand the range of models produced there to support these profitability goals. BMW has already begun down this route, with expansion in the U.S.-produced sports-utility vehicle (SUV) model line up and plans to expand production in China and Russia, although this is predominantly expected to meet rising local demand.

BMW profits have not kept pace with the company's sales performance largely because of the persistent weakness of the U.S. dollar, as the United States is BMW's biggest single market, but the vast majority of its cars and components are made in Europe in the Eurozone. Rectifying this by cutting jobs, materials and engineering in Germany may solve some of its immediate issues, but may lay the foundations for trouble in the future. Further investment in its global manufacturing footprint would appear the better solution for the long term future of the company's finances and future brand integrity.

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