BMW Drives Germany

By Peter Gumbel

Cloth seats or leather? Sunroof or spoiler? Walk into any auto dealership to buy a new car, and you'll be offered a multitude of options. If it's a BMW you're buying, however, there's a twist: you can walk out of the showroom and change your mind later. Perhaps you'd really prefer the poplar interior trim to the brushed aluminum. Or maybe those retractable headlight washers would be useful after all. Your BMW dealer will be happy to oblige with as many changes as you care to make, until a cutoff point: six days before your particular car goes into production.

Not only is it a handy marketing device--"our cars are tailor-made," BMW's chief executive, Norbert Reithofer, can boast--but it's also profitable. BMW customers, it turns out, often have second thoughts. And when they do, they invariably add ever pricier accouterments. The company says customers change their orders more than 1 million times a year. BMW doesn't break out details of the additional revenue, but given the profit margins on many add-ons, "it's like a big dollop of cream on the cake," says Peter Schmidt, a British-based auto-industry consultant.

This ability to cater to fickle tastes is just one manifestation of an extraordinary flexibility that BMW has injected into a company that sold nearly 1.4 million cars last year, bringing in $65 billion in revenues. It's a flexibility that affects almost everything the firm touches, from the layout of its assembly lines to the working hours of its administrative staff to relationships with its unions and key suppliers. BMW has mastered the manufacturing fine art called mass customization: no two cars rolling through its assembly lines on any given day are identical. Its factories can cope with a model changeover during the course of a weekend without work stoppages. Detroit would take weeks.

The flexibility also extends to the rhythm of work: BMW has struck deals with its heavily unionized workforce that enable it to run its factories more or less as demand dictates. Its newest plant in Leipzig, where the 3-series and new 1-series hatchback cars are built, runs anywhere from 60 to 140 hours per week. Instead of classic two- or three-shift rosters, the company juggles some 300 working-time permutations to determine optimal use of its teams of workers, some of whom are contract "permatemps" more common in the U.S.

The new BMW is in some ways symbolic of the resurgent German economy. For more than a decade, exorbitant labor costs, unbending union rules and an addiction to red tape--not to mention the high price of unification with East Germany--put Germany into an economic straitjacket. BMW went through its own rough patch in the 1990s after the disastrous acquisition of Britain's Rover Group, but its fortunes have changed markedly since it ditched Rover in 2000. Production has increased steadily, and profits are buoyant. Pretax earnings last year rose 25%, to $5.5 billion, despite the soaring cost of raw materials and the strong euro. It has easily outpaced its historic rival, Mercedes (part of DaimlerChrysler), to become the leading premium-car brand. BMW is pushing a worldwide expansion. This spring it opened an assembly plant in India, and the company is building out a plant in Spartanburg, S.C., as part of its strategy to be less vulnerable to foreign-exchange fluctuations.

The German economy is similarly healthy, growing 2.8% last year, and it is once again acting as a powerful motor for the rest of Europe. Surging exports pushed the nation's trade surplus to more than $200 billion. Germany's economy has also undergone significant re-engineering to loosen some of its infamous rigidities. The government has cut corporate taxes and reduced the burden of some nonwage costs on business, such as pensions and health care. It has shaken up its labor market, which has led to a drop in unemployment (although the proportion of jobless, at 8.8%, is still well above the European average). The move to ever shorter working hours that culminated in the 35-hour week in the late 1980s has been reversed; millions of Germans have been working longer in the past two to three years without increased pay. The latest: 50,000 employees at Deutsche Telekom, the former state telephone monopoly, who accepted an extended workweek and a pay cut to protect their jobs.

Neither Germany nor BMW is yet in the clear. The changes brought about by corporate bosses and government policymakers have had an evident impact--BMW alone has whacked $1.2 billion from its cost structure over the past three years--but it'll be hard to sustain that pace. Global competition shows no sign of letting up. Toyota's Lexus is starting to make inroads into BMW's European turf, while at home, rival Audi is turning up the heat, and Mercedes looks like a formidable competitor once again, now that DaimlerChrysler has agreed to sell off Chrysler to a U.S. private-equity firm.

Germany is still far from being a freewheeling economy. It remains suspicious of Anglo-Saxon finance, for example, and has been seeking to curb the power of hedge funds. There's also little sign of substantive change in the historic--some say hide-bound--system of labor relations, under which unions are represented on the supervisory boards of companies. Kenneth Rogoff, a Harvard professor and former International Monetary Fund economist, sees Germany's improved fortunes as being largely the result of the private sector finding ways to bypass continuing structural roadblocks in the economy. The recovery "has legs," he says, because there's still room to catch up with U.S. productivity levels. But he warns that the current economic upswing "won't last forever without more transparent institutional reforms."

CEO Reithofer is more upbeat. Faced with low-cost competition from Asia and Eastern Europe, he says, "many German firms did their homework, and now they are benefiting from it." He thinks Germany could go further, for example, in reducing high nonwage labor costs. But Germany still has competitive advantages, he says, pointing to its traditional engineering prowess combined with a newer ability to cater to the needs of individual clients. The challenge, he tells TIME: "It's all about mastering complexity."

Drop in on BMW's Leipzig plant, and you can see what he means. It's the firm's newest, having opened just two years ago, with a luminous open-plan central building that houses white-collar workers and managers. It was designed by London-based architect Zaha Hadid, and its most striking feature is a conveyor belt that meanders inside the building just below roof level, carrying a steady stream of cars from the body shop to the paint shop. You can see it from almost everywhere in the building, including the cafeteria.

Robots do most of the work in the body shop, welding, riveting and bonding hundreds of components together. Robots also apply the four layers of water-based paint to each car. But it's on the assembly line that BMW differentiates itself from even its Japanese rivals. To be able to customize each car requires highly sophisticated logistics. Workers stationed at regular intervals on the line reach back for components in wire baskets that have been rigorously sorted into the right sequence. The complexity is visible to the naked eye: halfway along the line, just past the section where car bodies are bolted onto the drivetrain and chassis, a gray three-door 1-series sticks out amid a convoy of silver 3-series cars. In theory, the plant is set up to handle five or six different BMW models simultaneously, although for the moment it handles two.

The factory has been designed so that new production processes can be added to the assembly line at any time without disrupting the work flow. That's a huge advantage over more traditional lines, which need to be shut down for any changeover or addition. Several key suppliers are based in the plant, rather than in a nearby supplier park. Joerg Baumheuer says that makes for easy communication when problems arise. He's a manager at the French auto-parts firm Faurecia, which assembles cockpits and seats for BMW in Leipzig and some other plants. The advantage for Faurecia is that it doesn't need to truck in finished parts; it simply assembles them on the spot. That cuts inventories and improves speed and reliability; the firm needs just 20 minutes' notice to put together a customized cockpit. "It cuts out the last step of the supply chain," Baumheuer says. Moreover, since Faurecia's workers eat lunch at the same cafeteria as BMW's, interchange is easy and natural.

The degree of customization that is required means BMW isn't as ruthlessly efficient as Toyota in some respects, including the number of cars produced per worker per day. But there's a trade-off. "BMW is not prepared to sacrifice its ability to give consumers the car they want. The alternative would be reduced costs but not the ability to charge a premium for customized cars," says Garel Rhys, an auto-industry expert at Cardiff University. In the end, he says, BMW's marginal revenue from customization is higher than the marginal cost advantage it gives up.

That's not to say there's no pressure on costs. Reithofer is a process engineer by training and set up the customized-production system. He's insisting on efficiency gains of at least 5% annually, "an iron goal," as he puts it. Every year BMW sits down with its suppliers to discuss specific savings targets, but it also canvasses them for creative ideas about possible cost cuts they can undertake together. Klaus Richter, a former McKinsey consultant who's now BMW's procurement man, says some 10,000 such suggestions have been made in the past three years, of which about a third have been put into practice. The savings, he says, amount to hundreds of millions of euros.

BMW has also driven some hard bargains with its workforce. It began to back away from rigid German working hours in the late 1980s, when it opened a new plant in Regensburg to produce the 3-series. Its goal even then was to decouple the union-regulated workweek from the amount of time its factory was in operation. Management made flexible working hours a condition of its investment in the plant. The demand infuriated the powerful German autoworkers union, IG Metall, but the syndicate had little choice. "Without these restrictions we wouldn't have come up with these solutions. We had to be creative," says Ernst Baumann, the board member responsible for personnel.

Winning union approval for even greater flexibility was easier in Leipzig. In part, that's because other German automakers, particularly Volkswagen, were threatening to move some of their production outside Germany altogether because of high costs. In the end, the union agreed to extend working hours without extra pay. That has been a boon to the whole industry--and the German economy. Reithofer acknowledges that the wage restraint "has been a fundamental contribution to making Germany competitive again."

BMW gained particular concessions from its workers because Leipzig is in formerly communist eastern Germany, where unemployment has been about double the western German level and wages have lagged. Under the negotiated agreement, BMW doesn't pay higher rates for Saturday work in Leipzig, and employees put in on average two more hours a week than in western German BMW plants. Moreover, about half the 5,000 workers in Leipzig are not on BMW's staff; they either work for suppliers such as Faurecia or are so-called lease workers employed by specialized agencies and used by BMW when needed. That's a relatively new but fast-growing phenomenon: the number of lease workers nationally has more than tripled in the past decade, from 160,000 in 1996 to about 600,000 today, according to the Federal Labor Office.

Union representatives generally rate BMW a good employer, and they characterize overall relations with management as good. The feeling is mutual. "German law is better than its reputation, and so are the unions," says Leipzig plant director Peter Claussen. Still, the use of so many lease workers in Leipzig is a sore point. Jens Koehler, the workers' main representative in Leipzig, reckons that lease workers receive about two-thirds the monthly pay and fewer benefits than colleagues who are BMW staffers. Calculated on an annual basis, once Christmas bonuses and profit sharing are included, lease workers are paid only about half as much. "It's not right. They're like second-class citizens," Koehler says. IG Metall, for one, is pushing for lease workers to be given a better deal nationally, but so far with little effect.

Putting BMW on a more efficient footing at home has enabled it to expand its product line in all directions. Over the past decade, it has evolved from a group with six model families--with the 3-, 5- and 7-series cars accounting for the vast majority of sales--to one with 11 model families grouped in three distinct brands, BMW, Mini and Rolls-Royce. Three new model families are in the works, including a luxury sports car. The Mini, a remnant of the otherwise disastrous 1994 Rover acquisition, has far exceeded all expectations, and BMW is expanding its production capacity in Britain. The company had anticipated selling about 100,000 Minis by 2005. In fact, it sold double that number, and production will hit 240,000 this year. Rolls-Royce won't sell nearly that amount, but it makes up in price and prestige what it lacks in volume.

BMW's critics say its product-line expansion hasn't solved all its growth challenges or given it much protection from the increasingly competitive luxury segment. Helmut Becker, an auto consultant and formerly BMW's chief economist, says the idea behind the failed Rover deal--to turn the firm into a two-brand company, one for the mass market and one a premium brand--was a smart one, since it would have enabled BMW to spread the huge cost of new-car development over a far bigger group. "BMW's main weakness is that life is getting ever narrower in the premium segment, and it needs volume growth. I'm not sure where it can get it from," Becker says. But other analysts such as Cardiff's Rhys reckon that BMW can continue to forge ahead because of the skillful management of its brand name and underlying business. "They need to have the best cost base possible and make a product consumers want," Rhys says, "but BMW will be fine for another decade."

Reithofer pooh-poohs the pessimists. "Size and success have got nothing to do with one another," he says. BMW's rapid sales expansion in the past few years provides some economies of scale, he says. He points out that the firm is also pooling its resources with other manufacturers, developing engines for the Mini together with Peugeot and hybrid-engine components together with Mercedes. Looking around the world, he makes a sharp distinction. Toyota, the world's biggest and most profitable car company, "is strongly process driven," he says. BMW, by contrast, "is more product driven--and I wouldn't want to bet on who will be more successful in 10 years." That's bravado, of course, but in itself such self-confidence is a sign that a new, more flexible Germany is bouncing back. HIGH PERFORMANCE With steady increases in production and profits fueling its stock surge, BMW has become the leading premium car brand [This article contains a chart. Please see hardcopy of magazine.]