BMW VS Audi

BMW Chief Executive Norbert Reithofer sought to cast a green halo over the German premium automaker Mar. 14, highlighting a new generation of fuel-efficient engines and a new diesel-powered Mini that will get 4.4 liters per 100 km (53.4 mpg), as evidence of BMW's commitment to combat global warming.

"The auto industry is facing a fundamental paradigm shift," said Reithofer, as he touted record 2006 sales of 1.37 million cars and a 28% rise in net profit to $2.87 billion. "It cannot be overlooked any longer that the global climate is changing." Reithofer, 50, took over as chief executive Sept. 1, and will present a strategic review later this year detailing new business directions.

For now, the ambitious model expansion strategy launched by Reithofer's predecessor, Helmut Panke, in 2000 continues to fuel healthy growth. BMW's revenues rose 5% in 2006 to €49 billion ($64 billion) and profit before tax soared 25% to €4.12 billion ($5 billion), buoyed by a one-time gain of €372 million ($487 million) from an exchangeable note on shares in Rolls Royce.

Auf Wiedersehen, Gas-Guzzlers

Certain to have an impact on Reithofer's strategic review are the vocal debate over tough new emissions requirements in Europe and the risk of a public shift toward cars with smaller, fuel-saving engines. A market move to environmentally friendly cars could crimp the growth and profitability of BMW and other luxury automakers.

But Reithofer sought to cast the threat as an opportunity to develop innovative solutions while presenting BMW's 2006 financial results at the automakers' glass-and-steel research-and-development center in Munich. BMW reduced the fleet fuel consumption by 30% between 1990 and 2005, he said. The new 1 Series 118i model consumes only 5.9 liters per 100 km (39.9 mpg), down 20% from its predecessor. "In five years we will have the right cars on the road for the market (of 2012)," Reithofer vowed.

BMW aims to introduce other fuel-saving technologies throughout all its models, including brake-energy regeneration, light-weight construction, and automatic stop-start functions. But BMW's biggest bet is on a future of high-performance cars fueled by hydrogen. Hydrogen cars produce no emissions, but to keep the carbon balance positive, the source for liquid hydrogen has to be renewable—and not derived from fossil fuels.

Last year BMW started limited production of a 7 Series sedan—its biggest carbon emitter—that runs on liquid hydrogen, in an effort to convince politicians and energy companies that the best long-term solution for zero-emissions cars is a combustion engine burning liquid hydrogen derived from renewable sources such as biomass (see BusinessWeek.com, 9/12/06, "BMW's H-Bomb"). "Climate protection and high-performance driving can fit extremely well together," Reithofer said.

Stiff Competition

Transforming BMW's fleet of high-performance cars into low-emissions champions won't be Reithofer's only challenge. Competition in the premium car market is on the rise and Bavarian rival Audi is positioned to grow nearly twice as fast as the BMW brand through 2015, according to a recent report by Morgan Stanley (MS) analyst Adam Jonas. The Audi A5 coupe unveiled at the Geneva Auto Show, which runs through Mar. 15, accelerates Audi's drive to overtake BMW in key segments and markets (see BusinessWeek.com, 3/5/07, "At Geneva Cars Go Green").

Analysts also worry about a narrowing of BMW's traditionally high return on sales margin to 6.3% from 6.5% a year ago. (Group return on sales remained a strong 8.4%.) Over the past two years, BMW's profits have been hit by exchange rates and higher raw materials prices, which totaled some $2.6 billion. The erosion was more than compensated for by higher sales and a better mix of more expensive models, together with gains in efficiency.

But Audi's margins are rising, and without special reserves set aside in 2006, Audi would have matched those of BMW, analysts say. "We are more exposed to the dollar than Mercedes or Audi," says BMW Chief Financial Officer Stefan Krause. Audi sold some 80,000 cars in the U.S. in 2006, compared with BMW's sales of 300,000. "I assure you our underlying profitability is stronger."

Krause insists external pressures are forcing BMW to become more efficient, and that when the dollar strengthens, BMW's margins will get a serious boost. "If we can defend auto margins of 6% at this dollar-euro exchange rate, it is a sign of strength." This year, Reithofer said, BMW will sell more than 1.4 million vehicles and will surpass its 2006 profit, excluding the one-time gain from Rolls-Royce. Even before it goes clean, BMW will still be rolling in the green.