Into the Mystic

The Great Contraction is no longer a theoretical construct. It’s here.

First cross my hand with silver… (c) cwallpapersgallery

The era of unfettered expansion and niche-filling is not only over, it would appear to be in the process of being unceremoniously dumped at the hard shoulder. As European carmakers face a deeply uncertain commercial and regulatory future, previously inviolate marque-orthodoxies are being stuffed into hessian sacks and abandoned, as auto executives contemplate an epochal shift.

While this is a phenomenon affecting the entire industry, it is one that appears to be hitting one with particular force. Already somewhat embattled, having rather publicly persuaded its former CEO to step down, Bayerische Moterenwerke, as reported by Automobile magazine recently by veteran German automotive soothsayer, Georg Kacher, appears to either be (a) in worse shape than their compatriot prestige rivals or (b) is taking decisive (if not precipitous) action to arrest matters now, before matters truly come to a head.

One should of course tread with caution here – BMW remain a healthy, profitable business and it would be both unfair and inaccurate to portray them in less favourable terms. However, beneath the surface, it does appear (if Mr. Kacher is entirely correct), that the words of concern as previously expressed upon these pages were not wilful Bimmer-bashing, as some may have posited.

According to Kacher, since 2015, BMW’s European share price has fallen almost by half, while car division earnings last year dropped by 22%. Over the same period, return on investment dropped from 9.2 to 7.2% and official estimates suggest it’s likely to fall further to between 6.5 and 4.5 % this year. Hardly catastrophic and amid the wider industry, probably not as bad as some, but nevertheless, for a carmaker with a reputation both for financial prudence and impressive profitability, it does raise eyebrows.

Like its major domestic rivals, BMW is facing huge EU fines over alleged anti-trust abuses, and like the entire industry, must enact a difficult and hugely expensive transition from fossil-fuelled powertrains towards partial and full electrification. Similarly, like everyone else, the Veirzylinder is poised to be hit hard by any imposition of tariffs by the current US administration.

Couple the foregoing with China’s deflation, the risk of another Global recession and the likely deleterious impact of a putative disorderly departure of the UK from the European Union this autumn and really, one wouldn’t wish to be in the business of making cars at all.

Kacher reports that with BMW also facing additional punitive EU sanctions should they fail to reduce their overall fleetwide-emissions by 2021, the necessity to hybridise or fully electrify more of their product offer means that massive cost savings must be found to pay for it all. Hence model derivations and engine options are in the process of being slashed, while those now in development will skip the prototyping phase and will instead spend more time on simulators.

But the biggest shift comes in the form of a sweeping product cull, and while some of BMW’s kill-list is perhaps unsurprising, others make for astonishing reading. So while we’ve already bid our tearful farewells to the three door 1-Series (and its RWD identity), the 2-Series Tourer, and 3-Series GT, it would be advisable to prepare wreaths for the 2-Series Cabrio, the short wheelbase 7er, the recently-introduced Z4 and both slow-selling, short-chassis Achter models – once their current product cycles end. Allegedly, were it not for the fact that the current 6-Series GT remains a personal favourite of BMW Chairman, Norbert Reithofer, it too would be for the long walk.

But all is not lost, it would seem. By compensation, BMW aficionados can console themselves with the prospect of a forthcoming X8 coupé-crossover model (which has reportedly been signed off), and if the latest X6 model is any reliable barometer of style, they really are in for a treat. On the EV front, the i3 is to be phased out in favour of a conventionally engineered crossover-based replacement and will be joined in 2021 by the larger iNext crossover EV. Also imminent are rebodied EV versions of the 3er, next-generation 7 and 5-Series.

A further move which illustrates the Bavarian’s urge to bolster its bottom line is an Autocar report last week that suggests that BMW intends strengthening its technology-sharing deal with Jaguar Land Rover. Already providing the beleaguered UK Midlands carmaker with 4.4 litre V8 powertrains, and collaborating over development of electric motors and inverters, Autocar allege that a deal is imminent to employ BMW’s FAAR FWD platform to underpin a new range of compact crossover models, to be shared amid Jaguar, Range rover, brand-BMW, and MINI.

And while (if Autocar is to be believed), this development is hardly likely to supercharge BMW’s cost cutting purge, it would make a good deal of sense from a scale perspective while also aiding brand-MINI’s current rather marginal viability. For JLR themselves there does appear to be a lot in it, not least the fact that the BMW-link has for now at least, batted the feverish speculation over their future into the tall grass.

Interestingly however, given the British-based carmaker’s well publicised financial woes, their approach appears to be one in  diametric opposition to that of BMW, insofar as JLR seem to be in the midst of a product offensive as a means of clawing their way out their current impasse. JLR’s lower volumes means they do have a bit more breathing space before the EU places an officious hand on the back of their necks over fleet-emissions, but ultimately, they face the same issues as that of their German rival-turned-ally.

Meanwhile VW (read Audi) appear to be betting the farm on EVs (assuming they can obtain a reliable battery supply) and Mercedes are as ever, ploughing their own furrow. It appears, according to Mr. Kacher that talks between BMW and Daimler over an ambitious platform and technology sharing deal have stalled owing to tribal rivalries and a ‘not invented here’ mindset affecting both entities. The cost savings could have been transformational, but it currently seems about as likely as Ford and GM agreeing to join forces.

What is apparent is that these plans (and you can read about them in full at The Automobile) are legacies of discredited former CEO, Harald Krüger, a man for whom much of BMW’s ills has become synonymous. How much of the current malaise he’s responsible for is debatable, although it has to be said that a visionary he was most definitely was not. (Who is these days, one asks rhetorically?) Meanwhile, what deviation there is likely to be to these plans under new BMW chief, Oliver Zipse remains a question that comes too early to answer.

So where do mystic Georg’s prognostications leave us? Certainly little wiser and definitely unedified. What is clear is that the next few years will be extremely turbulent for all carmakers and whatever certainties we previously clung to are likely to be worthless in the ensuing melee. Furthermore, commercial and existential realities seem likely to make for very strange bedfellows indeed.

Author: Eóin Doyle

Co-Founder. Editor. Content Provider.

4 thoughts on “Into the Mystic”

  1. The onward march of the German premium trio into both the mainstream market and numerous imagined niches always had a whiff of arrogance and hubris about it, and those chickens may now be coming home to roost. “Premiumness” has to be about more than just perceived (if not actual) quality and (increasingly distant) heritage: relative rarity must also be a factor, and the sheer ubiquity of the sub D-segment models from these manufacturers must ultimately be destructive of the brand image and, hence, value. How can a 320d be considered “special” if there’s one on every third driveway in the executive housing development, interspersed by similar numbers of C-Class and A4 models? BMW’s “Black Label” branding nonsense is not just a bad idea (more like to offend the majority of BMW drivers than it is to flatter the minority) but it’s also a tacit acknowledgement that the brand has simply been stretched too far downmarket.

    In an efficient market, the share price of a public company is an indicator of not just its current value, but also the market’s collective perception of its future profitability. The fall in BMW’s share price is a reliable measure of the market’s anticipation of the squeeze in margins. I’ll leave it to someone more energetic than me to examine the price/ earnings ratios of BMW compared to other premium and mainstream manufacturers (difficult because many of these companiess have interests other than car manufacturing in their consolidated accounts), but my guess is that, if BMW wants to behave like a mainstream manufacturer, the market will value the company as such.

    1. It’s possible to be the market leader in both economy car sales and luxury car sales. GM did it in North America for many decades.

      It is not possible to extend a premium brand downmarket to volume segments, and also maintain exclusivity and a luxury image for the low volume higher priced products.

    2. Hi Angel, certainly GM did it, but via a hierarchy of individual brands, each with a noticeably different market positioning. The market knew there was significant sharing of engineering across these different brands, but didn’t care as long as they could buy and have their Oldsmobile serviced at a franchised Olds dealer, and it didn’t blatantly resemble a Chevrolet. Even then, GM occasionally pushed the market too far: the Cimarron by Cadillac* was all too clearly a Chevrolet in its Sunday best, and the market shunned it.

      * Even Cadillac was embarrassed by the Cimarron, hence the inversion of the usual naming convention.

  2. It might be difficult enough now, but it’s going to get a damn sight harder for Herbert, Ola, and Zippy.

    Product proliferation was thought to be the answer to every question in the last two decades, but for the most part it was just dim-witted compulsive parroting of whatever the two rivals came up with.

    Now cost-cutting is seen as the only route to salvation. The drift of production to Eastern Europe, Spain, and Turkey is intensifying, and – perhaps more significantly – we are witnessing the rapid decline of the Mittelstand. The family-owned suppliers who provided the foundation of the German auto-industry’s reputation for quality are selling out to Chinese, Mexican, and Brazilian component makers paying handsomely for the German name and reputation, then moving production to low-wage nations.

    The German auto industry’s approach to the electrified future mirrors its fragmented state in the mid-to late 1950s – sometimes inspired, often misguided, always too expensive. (Is the BMW i3 the 600 re-imagined over half a century later? – that’s a discussion for another time…)

    The real nemesis is that while the Germans strutted outwardly but dithered behind the scenes, China has cornered the value chain of electric and autonomous vehicle production. All that will be left is the lipstick, the wallpaper, the icing on the cake. Fun for the designers and image-makers, but the profits will go elsewhere.

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