The biggest risk for BMW stems from its successes in recent years. The Munich-based company risked almost everything for its goal of finally overtaking rival Mercedes-Benz. BMW has almost doubled its car sales since 1999, and since 2007 the Bavarian carmaker has been the world's top seller in the premium class.

BMW has achieved this mainly by expanding its model line downward, with the 1 Series and the Mini. This weakened the company's profitability. But BMW has also boosted its sales by offering customers attractive leases and car loans; today this approach is used to sell every second car the company moves off its lots. This has increased risk.

While Daimler has only about €11 billion ($13.8 billion) on its books for leased vehicles, it is almost €20 billion ($25 billion) at BMW. That is BMW's major weakness.

BMW based its leasing calculations on an estimated residual value for the cars when customers return them after three or four years. But this value has little to do with reality these days, because used car prices fall during an economic crisis. Besides, more and more customers who purchased a BMW on credit can no longer afford their car payments. In the first nine months of this year alone, BMW had to establish reserves of more than €1 billion ($1.25 billion) to make up for the difference, and more reserves are likely to follow.

The second risk for BMW lies in the fact that customers are increasingly buying smaller models, or at least are opting for smaller engines in the larger 5 Series and 7 Series. Because of this, Munich-base engine factories have slid into the danger zone this year.



VW has two major shareholders, Porsche and the state of Lower Saxony. Although the two are locked in a power struggle, they agree on one thing: Both are more interested in long-term development than short-term profits. In Daimler's case, pressure coming from the capital market prompted the company to buy back €5 billion ($6.25 billion) of its own stock.

The carmaker could have invested the money in the development of more environmentally-friendly cars. But this would only produce long-term profits, while reducing profits in the short term. It should thus come as no surprise that BMW has a small lead in the development of fuel-efficient technologies (including a start-stop automatic transmission and recovery of braking energy).

There is also another reason the crisis is causing such distress at Daimler. Normally, luxury cars like the world-famous sedans with the Mercedes star on the hood are not as sharply affected by an economic slump as mass-market models. But this appears to be changing. "The affluent still have the necessary money," says Daimler CEO Zetsche, "but some feel that it is no longer appropriate to drive a big car" -- because of the crisis, but also in deference to the climate protection debate.

The mood is gloomy in Mercedes-Benz dealerships. At some dealerships, there are days when not a single new car is sold. When a customer does buy a car, it is more than likely a slightly used car with just 5,000 kilometers (3,100 miles) on the odometer -- but already available at a 40 percent markdown.

Because many dealers also sell Mercedes trucks and this business has come to a virtual standstill, they are fighting to survive. Daimler has already provided its dealerships in Germany with €53 million ($66 million) to make up for losses, and €10 million ($12.5 million) for demonstration models. Now the company-owned dealerships, which expect combined losses of about €200 million ($250 million) this year, expect financial assistance.

In this crisis, CEO Zetsche is coming under growing pressure to search for a large-scale solution, in addition to the usual cost-cutting programs, to broaden the company's base. A joint venture with BMW would be one possibility. The second option, say experts, would be close cooperation with a technology company that could help the carmaker develop new drive technology. Under this sort of arrangement, Daimler could also be protected against takeover attempts through a capital investment by the new partner.

But even the VW Group faces a serious challenge. The board must correct its model strategy. Until now, developers at VW headquarters in the central German city of Wolfsburg were fixated on developing more and more powerful engines. In addition to a 16-cylinder engine, the company has two different 12-cylinder engines -- which not even BMW or Mercedes-Benz can offer. But this does Volkswagen little good, because smaller, fuel-efficient engines are now in demand.

It must have taken will power for Winterkorn, powerful engine enthusiast that he is, to see his company building three-cylinder engines. But the VW CEO has recognized that the future of the company depends more heavily on whether it can become the leader in this model class than on new, high-performance engines.

Winterkorn must also question his growth strategy, which involves almost doubling VW sales by 2018. This would have meant job security for the group's 330,000 employees. But because there is likely to be no growth at all in the next two years, VW has the problem of having too many employees, and company executives assume that VW will have to eliminate several thousand jobs. This will most likely affect some of VW's 18,000 short-term employees and its 25,000 temporary workers.

The board's initial goal is to prevent too many cars from being produced, since they could only be sold at a deep discount. The Christmas break at VW's Wolfsburg plant, already extended to last from Dec. 19 to Jan. 4, will likely be expanded even further.

For German automakers, the year 2009 will begin with eerie silence. It will be quiet in almost all plants, in Stuttgart, Munich, Regensburg, Rüsselsheim, Kaiserslautern, Cologne, Emden, Hannover, Braunschweig and Wolfsburg. All assembly lines will be shut down.

"We are about to face a serious test," says Daimler CEO Zetsche, and yet this does not make him pessimistic about the future of the German auto industry, not by a long shot. It is still more competitive than many other auto industries, not just from the United States, but also from France and Italy.

The crisis "is also a time of renewal," says Zetsche. "We will now see how well-prepared for the future our industry is."

 

well written article, stated big problems within bmw that i mentioned before, and it's been brewing for long, and it's true that with economy slumping in 09, it will haunt them

 

One of the major reasons why BMW is able to lead in the luxury market is its benchmarking performance technology whether it's in the powertrain or drivetrain. A sudden lost in the cash reserve means cutting back from the R&D, the affects due to this wouldn't show up in the near term future but will definitely play a role in the following generation of cars to come.

 

Their leasing makes up way too much of a majority of the cars they move. Nobody want's to buy a BMW because of the headaches. So when vehicle values plunge like they're doing, the company has to cough up the difference between what the original forcasted resale value would be and the new lower values. Same bad thing happened to all the truck and SUV leases.
Companies lost billions on returned leases when gas soared.

 

yup, but at the same time dealerships try to be greedy and put up a high used car price to begin with, that's why at one time bmw dealerships were stuck with so many used cars they didn't really want to see people doing lease return

 

Hmm, I wonder which of the German Big 3 here will be on top in five-ten years...