Premium in a New Age: BMW's Jim O'Donnell at APA

Presentation by BMW's Jim O’Donnell
APA Luncheon, Detroit, September 1, 2009

Welcome. I'm glad to be in Detroit. I used to work and live in Detroit when I was with Ford – that was back from 1987-1989.

* Here’s what was going on then:

- GM was Number 1 with 38% of the total US market.

- Ford was Number 2 and didn’t have to look what was behind.

- Chrysler was a distant number three and always knew it would be number three.

- At the time, AMC and Renault were still on the scene.

* It’s important we stay in touch with you because in this newly reconstructed automobile industry, all of us that build and sell in America have the opportunity to contribute to the growth of the auto business in new and important ways. And specifically, to have a real opportunity to make the business in this country even more successful.

* Today, I’d like to provide some insight on the three ways we believe the BMW Group is – as a charter member of the club of premium automakers – helping to shape the future of mobility.

1. Developing a profitable dealer network (and ensuring it stays that way) keeps customers at the heart of everything we do and provides valuable benefits to local communities.

2. A long standing commitment to investment in America adds to the contribution the auto industry makes to this country.

3. Our significant technical capabilities help drive new efficiency, improved safety and sustainable innovation that migrates quickly to the mainstream market.

* First, our BMW and MINI dealers by virtue of their solid financial condition continue to be valuable contributors to local communities. I’m visiting them continuously, including here in Detroit and they have an interesting story to tell.

* Quick look at the local Detroit market: Not surprisingly, Lincoln, Cadillac and Saab lead the local market followed by the three Germans Mercedes, VW and BMW. And while sales are down considerably, used cars are hot and fueling dealer profitability. Not too long ago our used vehicles were deemed “impossible to sell” due to the domestic sales programs. But today, at our stores in Detroit, certified used car sales are up 34% YTD and we almost sell as many used cars as we sell new cars.

* Coming back to the national level: Maintaining a healthy dealer network is a top priority. We have one of America’s most successful automotive franchises and successful franchises contribute to local communities. Our average margin this year is more than 2% and not many can say that.

* Dealers have continued to make investments in their business, while staying profitable in these difficult times.

* The BMW network has invested over $2 billion in new facilities over the last 10 years. This year, newly opened and refurbished BMW dealerships will show a combined investment of over $300 million dollars.

* MINI is expanding its dealer network by 20% over the next 18 months to just over 100 stores as MINI prepares for further growth in the US. These new dealerships will be spread across the US with a focus on the South, Northeast and West.

* All of this is providing needed tax revenue to local communities, well paying jobs, and opportunities to the young through a comprehensive technical training system that we have long supported.

Second, premium manufacturers also have commitments to investment here in America. The BMW Group began ours over 25 years ago and today it’s visible across the country. No, our numbers don’t compete with the big volume companies but at the same time, they are a significant contributor for a company of our size.

* We have been a manufacturer in America for 15 years in Spartanburg, South Carolina.

* In 2008, we produced more than 170,000 BMW Z4, X5 and X6 vehicles – the highest production year ever for our US plant. Our anniversary is next month and we’ll celebrate 1.5 million vehicles built from this plant.

* Perhaps you didn’t know this, but the US is the sole source of production for these vehicles and last year we shipped 70% of them to world markets. This makes BMW the largest vehicle exporter in the US to non-NAFTA countries according to the Department of Commerce - and I believe we (and Mercedes) are unique as a non-domiciled automaker in the US to be a single source for building specific models that are shipped the world over.

That means, we also contribute to this country’s balance of trade.

* In 2007, Plant Spartanburg was the recipient of EPA’s Energy Partner of the Year. This prestigious award was given to BMW in recognition of developing landfill gas to provide 60% of the total energy needs of the plant. And I invite you to visit and see our solar powered trash compactor!
* We are investing $1 billion to further the commitment.
* This includes completing our Spartanburg facility for a potential capacity expansion of about 50% and this will provide more jobs in the US manufacturing sector.
* But also back in NJ, we have invested in our corporate headquarters – doubling the size and adding a state-of-the-art engineering center, a technical training facility for all our brands and motorcycle business, and a new home for our Northeast Sales Region.
* We have three Vehicle Distribution Centers in NJ, CA and GA, a parts logistics network with six regional facilities and 593 dealers representing all BMW Group products including BMW, MINI, Rolls Royce and BMW Motorcycles.
* We have three facilities in California involved in the important areas of design and technology including BMW DesignWorks, a Palo Alto advanced technology office, and an emissions lab in Oxnard.
* Put this all together and today, the BMW Group provides – directly and indirectly – about 50,000 jobs across America.
* In addition, we collaborate with major academic institutions on the East and West Coast such as Clemson, Stanford and UC Davis to involve students in America on projects focusing on vehicle efficiency, sustainability and safety – a great training ground for their future.
* This all has contributed to an incredible story of growth for the BMW Group in the US.
- The US is our single largest market, accounting for over 20% of the company’s sales.
- We have the youngest owner body of any premium brand, just a tick over 45 years of age – a number probably more than a few mass market brands would love to have.
- We’re fortunate that this year, for the first time ever, we are the Number One premium automobile maker in the US with more than 15% of this market.

* Now, the third contribution is one that we share with our fellow premium automakers – using our technical capabilities to drive new efficiency, improved safety and sustainable innovation.

* It is clear that in throes of recession people cut back on what they feel to be non-essential, whether out of hardship or fear of being perceived as out-of-touch.

* In the premium market, people are making more deliberate purchase decisions putting reason ahead of impulse and placing more focus on clearly defined and trusted brands that offer a strong, meaningful value proposition. With the BMW, MINI and Rolls Royce names we’re fortunate here. But what about post-recession? On one side we hear, “We have been chastised and will not indulge ourselves like before.” Another side says “Americans are optimistic and those who have the means will go back to spending and enjoying their success.”

* Whatever the direction we move, we’ll be prepared and a major weapon will be the innovation and technical advancement that drives all of us.

* At the BMW Group, we spend about 5% of our revenue on R&D – more than almost anyone else – to address future customer demands and increasingly difficult regulations. And thanks to our reputation as an enthusiastic consumer of the best of what’s new, the world's supply base brings their best technology and ideas to us first. Just a couple of weeks ago, JD Power and Automotive News singled out BMW as the best automaker for adopting innovation into vehicles.

* Here’s a short list of firsts from premium automakers to illustrate my point:
- Antilock brake systems
- Side impact restraint systems
- Throttle-by-wire technology
- Xenon headlights
- Night Vision
- Electronic Traction Control
- Automatic Stability Control
- GPS Navigation
- Multifunctional cockpit controllers
- Adaptive brake lights
- Automatic brake drying
- Park Distance Control
- Variable valve timing
- Rain sensing wipers
- Lane departure warning systems
- Adaptive cruise control

* If you look at this list, the majority is available in almost every mass produced car today. And I’d argue the migration happened quickly benefiting almost every driver in the US.

* By the way, many of these innovations also inspired our motorcycle division. BMW Motorrad pioneered ABS, Xenon headlights, and Stability Control and we are partnering with the government in their request asking for our insight.

* But that’s the past. What of the future? Increasingly, premium manufacturers are looking at non-automotive fields of innovation and many companies are focusing on four areas that will be major drivers for future innovations (read from slide):
1. Car-to-Car and car-to-Infrastructure Communication.
2. Assisted Driving.
3. Better Utilization of Drive Time.
4. More Effective Energy Management.

* Within these areas, here is just a sample of what we see ahead of us:

1. Car-to-Car and Car-to-Infrastructure Communication:
* Engine start-stop systems will be able to communicate with traffic lights saving gas waiting for the green light.
* The car will be able to exchange information with other cars on the road and with traffic control systems creating a very accurate early warning system for dangerous situations. What does this mean in real life? For example, when cars detect icy patches on the road this data alerts the city and salt trucks can be sent out immediately to fix the spots.
* Since cars will be “online” all the time, you are always connected to data services. Choosing the most efficient route or one with the least traffic disruptions will be much easier in the future.

2. Assisted Driving:
* We will see the next step of active cruise control as the car of the future will be much more aware of its surroundings using radar, cameras and sensors. Some engineers are even thinking about a “traffic jam” button. During congestion, all you do is press a button and the car maneuvers automatically through the traffic jam while you are reading the newspaper. By the way, this is not a direction BMW is following – if you do not want to drive, you should take a bus.

3. Better Utilization of Drive Time:
* In the future, you will be able to make better use of your time in the car. Internet services will be integrated seamlessly and drivers can hear and passengers can read the online edition of the papers either on built-in monitors or on their own handheld devices.

4. More Effective Energy Management:
* This is currently the most discussed area and includes both innovations reducing energy consumption and lowering vehicle emissions. Examples:
* New eight speed automatic transmission.
* More use of lightweight materials like synthetics.
* New techniques to reduce air drag. A cut of just 10% offers a reduction in fuel consumption on the road by more than 2.5%. Just two months ago, the BMW Group opened its new Aerodynamic Test Center in Munich investing some $250 million US dollars in this area alone.
* Thermo electrical generators. Working like a “reverse fridge” this devise converts exhaust heat in electricity. Tests at our research facility in Palo Alto have shown that this generates sufficient energy to power the A/C.
* More clean diesel engines. In Europe, BMW has just introduced a V8 diesel in the 7 Series and we are currently working on an all new 4-cylinder diesel family. Compared to a gasoline engine, Diesel typically requires 30% less fuel and produces 20% less CO2.
* More sophisticated exhaust gas recirculation, resulting in cleaner vehicles. We are currently working on this project at our Palo Alto facility.
* Within the BMW Group, you’re seeing all of this evolve today with our comprehensive package of technologies large and small throughout our product range called EfficientDynamics. EfficientDynamics is BMW’s approach to reduce fuel consumption and greenhouse gas emissions while at the same time increasing the joy, the fun and the performance of the vehicle.
* As a premium player, we can provide a lot of elements in our vehicles that may get “thrifted” by a mass manufacturer because of the necessary focus to eliminate costs no matter how small. However, by making a number of these work, together, in harmony, we can achieve impressive results.
* Apart from these areas of innovations we are also working on finding answers to two mega-trends: mega-cities and size.
* Let’s talk about mega-cities first. Most manufacturers also want to play a role in protecting the freedom of mobility where 80% of the world’s population growth will come from in the next 20 years – the mega cities of the world.
* We call our work on this “Project i” and our all-electric MINI E vehicle already in “mega-city” use today is just the first chapter. Over the next few years more changes will unfold and each will bring a new level of innovative thinking. We recently announced the first production vehicle will be a sub-brand of BMW so we believe we’ll be able to capture hearts and minds and customers with the brand’s strength behind it.
* We achieved a significant milestone this June when the MINI E program successfully delivered 450 vehicles to consumers in Southern California and the NY/NJ Metropolitan area.
* New York City is a top “mega city” already playing a significant role. We partnered with the City of New York and have provided ten of these zero-emission MINI E electric vehicles as part of the city fleet that daily traverse all five boroughs morning till night and they will soon add another dimension to helping find ways to enhance big city mobility.
* We also believe the world will go much further in accepting size is no longer a point of entry into the club of premium.
* MINI broke this mold in the US seven years ago and will continue to set the tone. New variants are on its way, including a MINI crossover. At the Frankfurt Auto Show in two weeks, we will show some additional fresh ideas including something with 2-seats.
* Now, back to reality. How could I be here on sales day without providing news of our BMW and MINI sales this month?
* First, a few words of context. The premium market in America runs on the momentum of three geographic areas of the US – the Northeast, the Southeast and the West.
* Until 2008, BMW enjoyed 16 years of uninterrupted growth in America because all three were humming. Mid way last year, the West lost pace, but the Northeast and Southeast held up for the first eight months.
* August sales last year were a reflection of this. We all know what happened in September and in particular, it brought the Northeast to a screeching halt and we’ve been playing catch-up since. And so has every other premium brand.
* So, what are some of the elements we measure our success by in this environment when volume growth is no longer in our own hands?

Here are four:
1. Market share - Everyone’s volumes are down so can we gain strength for the future?
2. We strive for continual growth to new members of the BMW and MINI brand families – this is the reason Certified Pre-Owned vehicles have become a central element to our dealer’s business – 49% of CPO buyers are new customers and a third of those buy new later.
3. Lifecycle Management - We can’t always be the “newest” so we need to concentrate on keeping our “family jewels” successful throughout their lifecycles. For our largest volume models, we effectively managed the revenue, cash, market share, and image strength, which has been vitally important to our success.
4. Cash contribution – This year through two quarters our company improved its cash position by 3.8 billion Euros and as the largest region, we’ve made a solid contribution.

* Report of August 2009 sales BMW of North America
* Let me conclude.

* The BMW Group is serious about adapting to a changing environment and is determined to stay at the leading edge of the market. In fact, our chairman, Norbert Reithofer, recently announced that we will change our definition of “premium,” adding sustainability as an equal customer expectation to the classic BMW values of dynamic performance, quality and joy.

* Since I have this podium today, I’ve used examples from our company to highlight the three areas of importance in the automotive market where premium automakers play a vital role. However, we know the efforts that all of our premium competitors provide to America’s mobility advancement and we applaud all of their efforts as well. They do great work and keep us on our toes.

* Premium automakers are a necessary and valued part of the automotive landscape. All of us provide the innovation that quickly migrates to millions of vehicles in the mass market – and we like it even better if we can occasionally remind everyone where some of it came from!

Thank you.