GERPISA

Rseau International International Network

15th GERPISA International Colloquium 20 - 22 J une 2007 What have we learned about the dynamics of automobile firms and systems over the past 15 years ?
Paris, Ministre de la Recherche Paris, Palais du Luxembourg

THE BMW-FAMILY FROM A REGIONAL CARMAKER TO A GLOBAL PREMIUM PLAYER

Ludger PRIES
[Draft, please do not quote without permission]

BMW is the worlds second most profitable carmaker concerning the money earned per produced car (after Porsche). BMW experienced a worldwide growth in production and sales between 2000 and 2005 of more than fifty percent up to 1.3 Mio. cars only Toyota has a similar high growth rate, but even at a much higher level of about 7.7 Mio. cars in 2005. Together with Mercedes-Benz, Lexus and Audi, BMW is one of the most important premium carmakers. And BMW changed in only some ten to fifteen years dramatically from a regionally producing and thinking company to a global player. How was this possible? What are the driving forces of these fundamental changes of the consortium since the 1990s? The main argument to be developed in the following is that the successful BMW trajectory relies mainly on the impact of two specific social institutions: an engineer driven professionalism and professional thinking on the one hand and family and networking based commitments and values, on the other hand. The first argument stresses the technical approach and premium technical image of BMW as relying on the special weight of engineers. This could be shown looking at the predominance of engineers in CEO-positions, the specific role of the FIZ in Munich, the genuine R&D strategies with suppliers, and the technical perfectionism in design and technical development. The second argument, the family and network driven institutional embeddedness of the company, is based on analysing the family influence in the shareholders (Quandt), the network and long term cooperation structures with suppliers due to historically very low added value, the management careers as family like structured (quite complete internal recruitment of CEOs like in Japanese carmakers etc.), the HRM strategies and the corresponding value and mission statements, and the managementworkers relations as family structured. UNDERSTANDING THE BEGINNINGS OF THE BMW TRAJECTORY For understanding and explaining the success of BMW in the last fifteen years or so it is necessary to sketch out the historical trajectory, mainly the existential crisis of the company, during the 20th century. In 1916, the Bavarian Aerospace Factories was founded as a manufacturer of airplane engines. In 1923 the company began producing motorcycles and in 1929 it began 1/17

assembling cars (developed by BMW) after purchasing a car factory in Eisenach, Thuringia. Because this factory supplied the Nazi regime with engines, it was dismantled in 1945. After reestablishing motorcycle production in 1948, BMW resumed car production in 1951, focusing on high-income consumers, which following the war was a very unsuccessful marketing strategy. Therefore, BMW changed its product structure and developed a mini car powered by a motorcycle engine, the Isetta. The Isetta turned out to be a very successful model, due to the increasing mass motorisation in Germany. Nevertheless, the losses from the sedan business could be only partially recovered by the production of small cars, and, as sales in this low-end segment decreased, BMW found itself once again in a deep financial crisis in 1959. The climax of the crisis was a takeover bid by DaimlerBenz supported by the Deutsche Bank (offers from General Electric, Ford, and AMC had been previously rejected). This takeover bid failed, due to the resistance of the workers, their works council, retailers and small shareholders. As a consequence of this failed takeover strategies, the Quandt family bought great part of new shares that were sold to finance the development of new car models. The Quandt family represented an industrial and engineering tradition as they had made their fortune e.g. with developing batteries. Therefore, since the after World War II period the specific factors of the BMW trajectory were fixed. The finance capital driven strategy of Daimler Benz and Deutsche Bank was defended and an engineering and industrial family influenced company strategy settled. The Quandt-Clan hold about sixty percent of the shares and, by this, had and took a decisive influence on management decisions. Since then, BMW has strived to follow a long-term capital strategy, in contrast to, for example, Daimler-Benz. After entering mid-range vehicle production in 1963, the shareholders were paid a dividend for the first time in 20 years (Rosellen 1983). In 1967, through the acquisition of the Hans Glass company in Dingolfing/Bavaria, famous producer of the small car Gogomobil, production facilities in Dingolfing and Landshut were added to the main production lines and headquarters in Munich. These facilities had previously been some of the main competitors in the small vehicle market and were also oriented towards the upper end of the market. However, they were unsuccessful due to the high customer loyalty within this market range. Under the leadership of chairman von Kuehnheim (formerly the deputy chairmen of the Quandtowned industrial plants in Karlsruhe), the company increased its annual production from 147 000 units in 1969, to over 500 000 units in 1989 (BMW 1991). Primarily in the 1970s, the enterprise developed its characteristic product structure and the BMW brand image, which continues to be an important part of BMW today. Again, it was the logic of social networks based on the principles of family ties and of industrial engineering as a profession and a destination that were decisive for the recovery during the 1970s and 1980s. The basic company identity and image was sharpened in this period and condensed in the product lines of the 3-, 5- and 7-series. It was the reputation and self understanding as a provider of innovative, sporty, and comfortable vehicles. It was underlined with the gradual introduction of a new and successful product range: Series 5 (1972), Series 3 (1975), Series 6 Coup (niche product, sports model) and the first Series 7-generation in 1977 (Lewandowski 1998). Due to its fast growing entrepreneurial success, BMW extended its production facilities. It is interesting that, until the 1980s, the new plants were opened exclusively in Bavaria: the first German greenfield plant in Regensburg in 1984, the new FIZ (the research and innovation centre) in Munich in 1986, an automobile parts production facility and a supplier park in Wackersdorf in 1989. Throughout the 1980s, BMWs business activities expanded rapidly. At the same time, there was a comprehensive reorganisation within company management. First, there was a concentration on the most important development areas (development, technical planning, finishing technique, value analysis, cost control, purchasing, logistics, patent and personnel department) in the FIZ. 2/17

Meanwhile the basic brand image and product lines and also the production facility structure in Germany were stamped until the 1980s, some really fundamental reorientations of the company strategy and structure took place afterwards since the 1990s. Until then, BMW had been a regionally (in Bavaria) producing company with an increasingly international reputation as sportive premium cars producer. But since the last decade the company changed dramatically in three main aspects. Firstly, the company reorganised its production and organisational structures towards flexibility and lean production long before the hype of Japanese production system strategies arrived in Europe. Secondly, maintaining and strengthening its premium segment brand image BMW managed successfully to differentiate its product structure. Last but not least, the company became more and more a global player in the sense of establishing a global production network. These three elements will be sketched out in the following section, and the two strategies of product innovation and of production internationalisation will be treated in more detail afterwards taking the example of the BMW Spartanburg plant in the USA. THE REVOLUTION OF THE 1990S: FROM A REGIONAL PRODUCER TO A GLOBAL PLAYER BMW was one of the first automobile companies in Europe to reorganise supplier relationships and production. Since the beginning of car production after World War II and due to the lack of a longer automobile producing tradition, BMW always bought a much higher share of a cars value from suppliers about two thirds than the other German carmakers. The first international purchasing office then was created in 1983 for global procurement. By the late 1970s, BMW had began to secure long-term business relationships with suppliers. This was followed by the development of system suppliers in the mid-1980s, as well as the systematic introduction of just-in-time deliveries in the late 1980s. During the 1990s the co-development of modules and subsystems with selected suppliers was strengthened by investing in suppliers technical capabilities and by organising working groups of BMW and supplier engineers in a very early stage of product development. Today, products and manufacturing methods are developed simultaneously through close cooperation with system suppliers. BMW increasingly defines itself as a system integrator, which, in the future, will integrate model and comprehensive brand component concept development in strong and direct cooperation with first tier suppliers. The portion of in-house production, and/or manufacturing has been decreasing accordingly in the past years and represents about one quarter of production value at present. This very low added value share gives BMW a high level of product and production flexibility which is complemented by a very high flexibility of the BMW production itself. Since the 1980s, BMW has undergone many changes in order to achieve the goal of attaining comprehensive flexibility within organisations, production and work structures, in the context of increased standards for product complexity and temporal reaction. Reorganised company and activity structures should simplify the leadership of complex processes. Even at the end of the 1980s, sub-sections of the company were already combined into cost and profit centres. The large production structures, which were developed during the period of growth, were to a large extent reorganised into independent cost and business units, as well as areas not connected to a particular location, which carried out full responsibility for their own results. Fields of activity were also transformed according to new process and project principles. Transsectoral subtasks were integrated into process chains in the production department, for example, secondary functions were integrated (manufacturing, maintenance, material provision and quality assurance). Employee activities were also increasingly aligned into horizontal process chains. The development department with its interdisciplinary project groups represents the beginning of this change. These reorganisations went hand-in-hand with the concentration on central processes. Thus, all necessary requirements and activities for the production of prototypes were integrated into the 3/17

research and innovation centre in Munich (FIZ). Today, alongside the fields of automotive and motorcycle production, the BMW group also offers financial services (BMW Financial services). Concerning the spatial distribution of its production facilities, BMW had been characterised by the most regionally concentrated location of its plants. In terms of productive capacity distribution, it was more a Bavarian than a German carmaker. BMW had already gained its first international experience in the late 1950s in Portugal: In order to avoid considerably high tariffs an assembly plant was built there. Since 1973 there is also a BMW plant in Rosslyn/South Africa, which was originally supposed to produce leather parts for the whole consortium in addition to the assembly of CKD sets for the local market. This plan failed initially because of persistent quality problems. A further step was the decision to set up an engine production site in Steyr/Austria in 1980. The opening a R&D center for diesel engines was followed by the start-up of a plant for engine manufacturing with a capacity of 150,000 units per year. In spite of these international activities BMW could be referred to as an almost exclusive regional car manufacturer with a clear strategy of exportation of cars manufactured in Germany. It was until 1990 after unification of GDR and FRG that BMW bought a plant outside Bavaria in Eisenach/Thuringia. This production site the Fahrzeugfabrik Eisenach had been bought in 1928 by BMW already, but then had been expropriated after World War II due to the BMW concentration on aircraft engines production during the war. The production structure was further spread and decentralised inside Germany with the newly opened production plant in Leipzig/Saxony in 2005. But more impressive is the internationalisation of production since the 1990s which was narrowly combined with a strategy to diversify the product structure. Beginning with the 1990s the BMW consortium got aware that it had reached a growth and production level that was not sustainable for a long time. During the intensive international waves of mergers and acquisitions the company either would have to grow or would have to look for an ally or merger. As competition in the car markets turned increasingly global and international competitors as the Japanese and South Korean carmakers entered the European markets, for BMW there was no chance to just follow the traditional trails and strategies. Even in the premium segment competition intensified with the growing strength of the premium brands of Honda and Lexus (Toyota) as well as Audi (Volkswagen). For BMW it was obvious that it had to differentiate its (premium) products and to turn from a made in Germany slogan to a made by a German company motto. Mainly with Bernhard Pischetsrieder being CEO since 1993, both the production internationalisation and the product diversification strategies were intensified. Therefore, BMW developed a product innovation and differentiation strategy based on the established three series structure and, at the same time, recovering its own tradition of sportive car production and entering the growing market of Sport Activity Vehicles (SAV, the term was chosen to distinguish the premium segment from the traditional Sport Utility Vehicle type of cars). The sportive Z 3 car was developed in Germany and production began in an all new green field plant in Spartanburg/USA in 1994. In the same plant in 1998 began the production of the new SAV X 5series. When opening formally the new production plant in Spartanburg, CEO Pieschetsrieder announced programmatically: We are not going to built a new production plant in Germany, and Spartanburg is probably not the last, we are going to build abroad (Wirtschaftswoche No. 1/2, 5th of January 1995, p. 28). After some initial and severe quality problems the Spartanburg plant and the new model lines were very successful, and the Z- and the X-series later on were differentiated e.g. between Z 3 and Z 4, as well as X 3 and X5 types. In the case of Spartanburg, the double strike of product innovation and production internationalisation new Z 3 and new X 5 in a new Spartanburg plant proved to be a very good strategic choice. With additional net investments BMW also expanded its assembly plant in Rosslyn/South Africa into a full production site and integrated it into the international production network (annual goal: 45,000 3-series BMWs, 4,000 4/17

Land Rover Defender). On the contrary, the acquisition of the British Rover group resulted a complete failure in both senses: as product diversification and as production internationalisation.1 From the standpoint of BMW, the Rover brand did not prove itself as a premium brand, and the British production sites were not as productive as expected. After the Rover disaster and its sell out in 2000 the BMW group concentrated exclusively on the premium segment strategy. The strategy to become a real global producer consisted of three main features: (a) integrated full vehicle production in main sales markets of Europe, North America und Japan and a long-term sales potential of at least 50,000 units/year, (b) CKD assembly plants for preparing market entry in countries, where CKD vehicles are 20% cheaper than imported vehicles because of higher tariffs and high shares of local manufacture of components, and (c) a double strategy for all production sites abroad: manufacturing of at least one world model and one for the specific region (see Antrecht 1995, S.52). According to this strategy, BMW pushed its CKD and SKD activities in regions outside the traditional triad markets with predicted economic growth. In 1996 there were reports of a CKD assembly plant for the models of the 5-series in Egypt in cooperation with a local partner and forty percent of locally added value. In Thailand BMW decided to incorporate a subsidiary despite of the Asian crisis and set up an assembly plant in an industrial park near Bangkok, with a capacity of 10.000 units. Also in Asia, namely in Hanoi (Vietnam) as before in Singapur, Thailand and Indonesia, new assembly lines for CKD were erected. Furthermore there were investment activities in Malaysia. The concentration of FDI in South East Asia points to the regional balance point of BMWs globalisation strategy. In the late 1990s BMW also conducted its business in Russia by installing a CKD assembly line (and a sales company) with a goal of 10.000 BMWs (series 5) and Land Rover per year in Kaliningrad. Besides new production and CKD assembly plants, the further internationalisation of procurement became a strong piece in BMWs strategy. The company improved and internationalised its organization of procurement (global sourcing) and simultaneously strived for the goal to reduce the number of its suppliers (single sourcing). During the 1990s, therefore the seven BMW offices in Spain, Italy, Great Britain, Australia, Canada and Mexico and the international procurement organizations in North America, South Africa and Steyr/Austria were closer linked with the department for supplier development. Summarizing, since the 1990s the BMW consortium turned from a regional Bavarian producer and exporter of mainly three series of high tech and high quality cars to a global producer of a broader range of premium series and niche models. The Rover deal and the corresponding strategy of expansion towards mass market segments failed. The BMW group recovered from this adventure and even more focused on the premium segment and on offering a wide range of car models and niche types. Mainly since the second half of the 1990s the company was able to invest in new car models and, at the same time, in new production facilities abroad. This was an unexpected success given the very fact that the company had almost no experience in international production. The intertwined processes of product innovation and production internationalisation and the high risks the company was ready to take are best revealed in the case of the new Spartanburg plant.

The British Rover Group, a former subsidiary of British Aerospace, was taken over in 1994 for 2 billion DM, and by doing so BMW also assumed debts of 900 million pounds; in return BMW obtained four new production sites in Great Britain: Longbridge, Solihull, Cowley and Swindon and seven other assembly plants. BMW got the brand name rights of Mini and of Rolls Royce (although the latter after a dispute with Volkswagen only since 2003).

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BMW SPARTANBURG: A GREEN FIELD PLANT WITH AN ALL NEW CAR2 The Spartanburg plant in the USA is the first fully integrated production plant of BMW outside Germany. This best reflects the major shift in the overall firm philosophy that was based on a made in Germany production strategy (BMW means Bavarian Engine Factories) and a market strategy oriented towards the premium segments of the sportive middle and upper class automobiles. The company's overall strategy had been and was to build high quality with high product flexibility (in time and scope) and high production flexibility. In Germany, the latter had been guaranteed by a combination of a medium level of production technologies, of an open and flexible work organisation and of highly committed semi-craftmen with high employment stability. But could these elements of the BMW production system be transplanted to the new Spartanburg plant? What about the technical design, the work system and the labour regulation in the new plant? The decision and announcement of opening the plant was made in June 1992 (therefore globalisation of the consortium began at the beginning of the 1990s and not until after the more general automobile crisis of 1994). Production of some BMW cars of the 3-series began in September 1994, and exactly one year later the first Z 3 sportive Roadster model was produced. The factory was an all new plant: new country, new facility site, new product, and new production system. The latter was an explicit aim of the new plant: to make experiences with new and Japan oriented production systems. This distinguishes the starting point of the BMW-Spartanburg plant from the Japanese transplants in the USA of the 1980s. Meanwhile the latter came with a clear and successful production model (and products already produced in Japan or elsewhere), the former aimed just at learning from other production experiences (and make a completely new car). On behalf of the production system as a whole, the BMW headquarters did not make many prescriptions. The guideline was to use the new plant as a type of laboratory for new production methods. From the beginning there was a certain orientation towards the Honda-production model focusing on high product and production flexibility and high innovation. This led to the recruitment of a great number of managers mainly from the Honda and other Japanese transplants. The strategic decisions on location, products and investment were taken in the headquarters in Munich/Germany, the operative design of the production model and system was developed in a mix between the headquarters and the US-American managers with experiences in Japanese transplants. One of these managers said: we decided to have a mixture so we brought in American know-how from some of the Japanese transplants, in particular Honda and Toyota and then we brought in Germans. Why? Because we needed liaison to Munich. From the beginning the plant made efforts for its local embedding and to appear as a South Carolina company in a relatively dense and traditionally industrialised but non-union-region. The regional unemployment was low (less than two percent). Stimulated by special financing programs, at the end of the 1990s about two thirds of all BMW employees drove a BMW car, reflecting by this way their high company loyalty. Another factor that reveals the efforts of local economic and social-cultural integration is the Visitors Center with many activities that not necessarily are related directly with automobile production. The Spartanburg plant is the only plant worldwide producing all the different models and series of the sportive BMW-Roadster. Although it appears as one model, concerning the body specifications (length and distance of axles, body distance to road, special strengthening of certain body parts etc.) there are actually five different car models: Z3 Roadster 1,8-2,0 litre, Z3 Roadster
For details see Eckhard et al. 2000 and Martin 1999; see also http://de.wikipedia.org/wiki/BMW for the BMW group in general.
2

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2,8 litre, M-Roadster, Z3 Coup, and M Coup. As there are at least four different motors available for the models, twelve outside colours, ten inside colours and three options for inside materials (textiles or leathers), the product flexibility is enormous. Starting from 1999, the plant produced also the new X 5 Sports Activity Vehicle. Taking into account the overall annual production of about 60.000 cars, the broad scope of models and variations reveals the core of the consortium wide BMW product structure and market strategy and one of the secrets of BMWs success: to produce highly individualised, high quality sportive cars. Concerning the production objectives and strategic orientations it is interesting that from the beginning the plant in Spartanburg was thought to produce 40% of production for the local US- and NAFTA-market and 60% for exportation towards the World market. The Spartanburg plant is the only factory in the BMW-consortium that produces the Roadster models and more recently the X5SAV. This differs completely from the strategies of all other international automobile companies: to use the relatively high waged US-context to produce German-imaged cars that are in its majority oriented towards exportation all over the World! The highly differentiated product structure and the corresponding 'economies of scope' obviously require a highly individualised and flexible production system. According to the strategic function of the plant in the overall consortium structure and due to a relative compact group of US-American managers with experiences in Honda transplants, the production model began initially with a quite radical and experimental Honda design. There was no spatial separation between production and administration, there was no clear formalisation of job functions and decision authorities. There existed only some procedural standardisation as a type of 'guide-rail-control', but the majority of production activities were regulated in a decentralised manner by the working groups. In 1997 the plant produced about 61.000 cars with some 2.000 employees, that makes 30.5 cars per employee and year. At that time, the technical production system included body shop, painting and an assembly line. 18 first-tier-suppliers - many of them German originated global players - were located in an industrial park nearby, and the share of added value by the BMW plant is low at about 25 to 28%. The assembly line has the innovative form of an @ (beginning outside and ending in a spiral circle at the center) that facilitates the direct communication between different areas and stations of the assembly line. There were only 18 industrial robots indicating the overall regular or low level of automation. Daily production was of about 220 units (of an installed theoretical capacity of 300 units per day). At the beginning there were not planned any buffers, in 1998 there existed few buffers between body shop and painting (18 units) and between painting and assembly (120 units). But the suppliers were forced to recompense the rigidity of the production system with their own and extensive buffers (see also Martin 1999). Concerning the work organisation there were four levels of hierarchy (managers, coordinators, supervisor and team-members). A work team consisted of an average of 60 teammembers and was divided in about three to five pots. Due to the high requirements of flexibility the variation of working contents was about 60% of the whole work tact, that means that a unit which required a lot of working time represents 60% more time in some working places than a unit with few operations. As the technical equipment was rigid (transportation by a ground-chain-drive without separate boxes, no computer aided line re-balancing), the work organisation itself - that means: the teams and pots - had to absorb the flexibility requirements of the production system. Tact-times was of about 3.7 minutes. With a high product variation and job rotation at the level of the pots errors and defects seem to be natural. For the plant it was hard to fulfil the quality audits and aims. Relative much re-work was needed, there were about 80 re-working-workplaces and 26 quality inspectors. 7/17

In 1997, the plant had about 2.000 employees, 1.400 of them working in two shifts in the assembly lines. Very few of the team-members had experiences in automobile production before. There was only one wage-labour-category for team-members, a second one for technicians and a third one for staff-employees. Payment followed the 'pay for skill'-logic taking into account the number of jobs a person is able to do. The average hourly wage was at about 19 US $ at the end of 1998. The firm paid an annual bonus depending on the overall plant results (not on individual performance), normally being about 5% of the annual basic wage. In 1997 this bonus was 8.5% due to the good plant performance. In general, interviews revealed a high commitment of the teammembers with the company, although some managers criticised the 'slow Southern swinging rhythm of doing the work'. Although in Germany all BMW plant have a recognized Works Council as the workers interest representation body, in BMW-Spartanburg there existed and exists no union representation, although the UAW local 5841 had organised some regional suppliers since the 1990s. The aim of the plant management explicitly was to prevent becoming a 'bargaining unit' in the sense of the right-to-work-legislation. Therefore the management tried to control and reduce at a minimum the rate of work accidents, which often is a good 'entry port' for a union. The plant also paid relatively high wages and impeded all formal acts that could lead to a union campaign (like workers injuries, giving the working teams union-like authorities etc.). By this way, even if there was no formal union representation, the pressure of the unions and of collective bargaining agreements reached in other parts was always very present. The outlined plant profile of BMW-Spartanburg combines the traditional BMW company philosophy of individualised high quality and high scope production with some radically new elements such like the strategic orientation of the plant as an export platform for all the World and the Japan-oriented production system. The latter was thought from the beginning as an experimental system testing extremely decentralised, not formalised and at the same time highly 'lean' and flexible production relations and processes. German product, quality and technical standards were merged with Japanese or 'transplanted Japanese' work organisation mechanisms and US-American style of job-oriented management and work. The mixture of these three different 'philosophies' certainly had some strength and success: In very few time this all new plant reached quite considerable levels of production. After five years of an already broad range of different products, in 1999 the plant began producing additionally the new X 5 Sport Activity Vehicle. But there were also some structural problems. Until the end of the 1990s the plant could not fulfil the internally defined quality aims. Productivity was not optimised as expected, and a lot of re-working was even necessary. To a certain extend, the different 'philosophies' clashed, and their coexistence - besides the obvious synergy potentials - created tangible tensions. The general Japanese and in concrete: the Honda principles of decentralised and few formalised organisation of production and work with flexible responses of high qualified and highly committed workforce were contradictory with the German and in concrete: the BMW principles of highly formalised technical prescriptions for the product and the processes and also with the US-American jobmentality and semi-qualified, middle-aged workers without previous automobile experiences. At the end of the 1990s there were severe concerns and tensions on how to obtain the 'economies of scope' (product and production variety) and high productivity and quality at the same time. Some of the interviewed experts were worried about how to get some degree of formalisation, responsibility and accountability in the working process. There was no clear model thinking in the sense of a 'Japanese production model' or a 'Honda production model' or a 'BMW production model'. The interviewed managers expressed different points of view, different ways of attributing success and failures (for example, very tangible differences between 'German principles' of 8/17

management and an 'American way' of doing the things) and opposing manners of re-constructing the short history of the plant. The Spartanburg plant reflects best the dominant strategy of the BMW group during the 1990s, that was, to rapidly differentiate and broaden up the product and model range and, at the same time, to internationalise the production structure of the consortium. Despite the concerns and defects of this new plant in details, in the longer run it strengthened its position in the overall international production network. Nevertheless, the most important new plant opening in the BMW consortium during the first decade of the twenty first century was not abroad, but in Germany. Whereas the new Spartanburg plant stands for the internationalisation strategy of the 1990s, the new Leipzig plant in Germany reflects the focus on high flexibility during the 2010s and the high institutional embeddedness of the BMW group in general. A NEW PLANT IN A HIGH COST COUNTRY WHEN NEW EU MEMBER STATES ARE AVAILABLE? The decision to build a new production plant was announced in 2000, and must be interpreted in the context of steady growth in units produced and sales (see the following section). Years before this decision, the company had begun to develop more new models and product lines. One the one hand concentrating on the classic series 3, 5, and 7, the BMW group had developed a very successful product structure and marketing strategy of new niche cars like the Mini, the Z 3 and the X 5. Because of the ever-increasing total production volume the strategic decision to build a new plant was made. The annual capacity was calculated to be of 160.000 units per year. In the first stage, a set of desired criteria regarding the choice of production site was established. The list of the criteria that were hierarchically and sequentially analysed, to evaluate different production site location possibilities is given in Table 1. Table 1: Explicit location criteria for new BMW production site 1 Feasibility and general socio-economic conditions; 1.1 Location and physical-geographic characteristics of the terrain (completely even and smooth without inclination, high ground stability, connections to the four points of the compass, secure and cheap supply of energy and materials, waste disposal, etc.); 1.2 Availability of qualified human resources (sufficient in quantity and quality, adequate legal and collective agreement conditions, attractive environment, language and culture, etc.); 2 Integration in the overall plant production network, economic viability and flexibility; 2.1 Economic advantages (current labour and logistics costs, investment costs and financial assistance); 2.2 Integration of suppliers and general flexibility; 3 Efficiency in realising the investment and starting production in spring 2005 (speed in approvals and licences, local cooperation in labour recruitment, etc.); 4 Close proximity to main customer markets. Based on these location criteria, 250 sites around the world were considered. Following various selection rounds, five options remained: Augsburg, Schwerin and Leipzig in Germany, Arras in France, and Kolin in the Czech Republic. In the final stage, Leipzig won out over Kolin, although the Czech site offered a 30% overall labour cost advantage. In July 2001 the then BMW CEO Milberg clarified that approximately one fifth of the total costs related to automobile production stem from labour costs; therefore, institutional location criteria, such as qualified workers, logistics infrastructure and market proximity are also very important factors. As Rudolf 9/17

Reichenauer, BMW personnel chief, explained, the local labour market influenced our decision strongly [] in the Czech Republic we would have had to make much greater efforts to get the right collaborators. The CEO of the new Leipzig plant, Peter Claussen, in 2003 pointed also to a lack of qualified managers and specialists necessary for quality assurance in eastern Europe in comparison to Leipzig. What was not publicly admitted but a strong argument for Leipzig were the experienced difficulties in Spartanburg plant to obtain qualified workers and to reach the expected quality levels of production. Besides these and other soft factors, which explain the decision for Leipzig over Kolin for the location of the new BMW plant, there was also an important hard factor: BMW received the maximum amount of financial support from the EU fund for disadvantaged regions. Initially, the EU agreed to pay 32% of the total investment. Although this amount was later reduced in 2002, BMW ended up receiving approximately 360 million in EU regional development aid (in this context it is worth underlining that BMW would have received a similar portion of investment had it invested in the Czech Republic). Besides this financial incentive, other important arguments for the Leipzig location were the already existing network of logistics and automobile suppliers there. Volkswagen, Opel, and Porsche had already opened assembly plants in the Leipzig region, which has a tradition of automobile production going back a century. The supplier industry was well organised in the AMZ initiative (Automobilzulieferer Sachsen), which served as an advantage for BMW, as it did not have to deal with hundreds of possible individual suppliers. The motorway and railway network in Leipzig was also much more developed and modernised than its counterparts in the Kolin area. All of these factors, combined with the local public administration and location management, assured the speedy implementation of the production project for BMW. When dealing with highly complex product and production processes, as in the case of the automobile, management of complexity, knowledge, the economy, flexibility and speed all play decisive roles. Last but not least, one final and decisive advantage in Leipzig was labour and production flexibility. This point fits quite well with the overall BMW strategy and philosophy of high external employment stability and high internal labour and working time flexibility. Even before the decision and recruitment process for the Leipzig plant began, the management and workers representatives in the BMW consortium met with representatives from the regional Leipzig union and employers association at the headquarters in Munich to define the rough outline for what was called a Formula for work. The most important compromise between management and labour was to agree on creating a win-win-situation: management obtains innovative flexible models of working hours and shifts, and at the same time work and employment will be maintained according to the regional level of collective agreements between the IG Metall union and the corresponding employers association. This negotiated and regulated production and labour flexibility is a decisive aspect in the Leipzig plant model, which the competing sites in France (Arras) and Kolin (Czech Republic) could not offer. In the case of the French Arras plant the working time scheme is based on the national state law on the regulation of the weekly working time impeding flexible working time arrangements at the local or plant level between unions and employers. According to expert interviews, in the Czech case the corresponding unions were opposed as a matter of principle to any flexible working time schedule as discussed and negotiated in the BMW consortium since the 1980s. From the very beginning, and as a crucial part of the Leipzig offer, the weekly factory running time was designed with a wide range of working hours (from 60 to 140 hours). The possibility of a working scheme with two and three shifts was agreed upon, and even the two-shift scheme allowed for a wide range of working hours (from a model with 8 shifts of 8 hours, or 64 hours weekly; up to a model with 11 shifts of 9 hours, or 135 to 144 hours weekly). Based on different systems of short, medium, and long working time accounts, this system allows the flexible 10/17

adaptation of the working and factory running rhythms to the market conditions (with up to 30 Saturday shifts per year without additional payments). As far as this production flexibility facilitates a mobile break-even point, the higher labour costs at the Leipzig production site in Germany could compensate, or even undercut, a rigid working and production scheme with nominally lower labour costs but an inflexible and high breakeven point in Kolin. Having outlined the different general aspects of the Leipzig location, obviously location decisions are not based on the objective transformation of explicit and unambiguous criteria into a kind of mathematical algorithm, which is then executed by computers or rational managers without paying attention to subjective perceptions, collective experiences, power interests and company culture. More precisely, decision-making, by nature, is based on bounded rationality (Simon 1957). Organisations and individual managers act and decide based on their accumulated experiences, their basic values, their vested interests and implicit or explicit strategies. Therefore, the location selection of the Leipzig plant could also be analysed as a complex negotiation process, as a power play, or as the outcome of the social production of reality in work and management (Pries 1998). In the following one aspect of this complex negotiation process, namely the role of the works council and institutional company embedding, will be commented on. As mentioned above, part of the BMW business model is a long-term orientation with a focus on stability and accountability in working and employment conditions. This philosophy towards professionalism and labour stability is considered a basic condition for developing a broad scope of high-tech, emotive and passionate products. In this framework, cooperation between capital and labour is important at the plant level, between management and works councils; and at the company level, in the supervisory board and between company management and the corporate works council. Strategic decisions regarding the location of new plants, as well as long-term decisions related to models (which models should be produced in which plants), and the annual decisions on production volume distribution between plants (how many units of each model should be produced and in which plant) are negotiated between management and workers by the works councils and by the advisory board, that means: based on legal definitions and on specific customs and practices. In the case of the new Leipzig plant, the corporate works council and the advising IG Metall union were both in very difficult negotiation positions. As much as BMW was interested in longterm success and employment stability, they were also interested in setting up a competitive and successful new production site, and not in creating a new subsidiary that would not be financially successful. The company and its works council still had in mind the recent Rover venture, which cost the company billions of Euros in losses. On the one hand, this fact could have influenced the works council to promote, or possibly accept, building a production plant in an eastern European or even an Asian country. On the other hand, the works council was not interested in widening the divide between work and employment conditions in the three existing plants in Germany, and the proposed future plant. At a future time of only medium returns, this would have exerted substantial pressure on (reducing) salaries, (raising) working hours and other issues in Germany, where management would have pointed out the aforementioned possible competitive advantages of a new plant in Germany. Therefore, the works council was ready to look for innovative and competitive models that would not endanger the German and the BMW specific labour regulation model. Not only did this lead to complex negotiations between management and labour, but also between the works council and union at the corporate level, and between the corporate works council and the local-regional Leipzig union. Leipzig representatives namely BMW managers, local public administration, local union leaders, and works council members were mainly focused on setting up a new plant, whereas part of the BMW management and the works council majority wanted to preserve the 11/17

BMWs working and employment conditions. For the works council and IG Metall, it was a necessary condition that labour regulation would not fall below the regionally valid collective agreements even if this meant a worsening of working and employment conditions in comparison with the BMW company standards in Munich, Dingolfing and Regensburg. The standards in these cities were, and continue to be, higher than in the corresponding regional collective agreements in Leipzig. Even throughout the negotiation process surrounding the decision regarding the Leipzig site, the coalition had to offer competitive costs compared to the Kolin site in the Czech Republic, in addition to controlling the gap between the new Leipzig plant and the other German plants in Munich, Regensburg and Dingolfing. From a general standpoint, the localisation decision as a negotiation process seems to have led to a substantial win-win outcome for all major interest groups (but only inside Germany). The company works council ensured that the new factory was not opened under a completely different legal regime (for instance, as a limited liability company (GmbH), as was the case for Volkswagen Auto 5000 GmbH; see Pries 2002 and Schumann et al. 2004). Regional collective bargaining agreements were not undercut; the total factory running time was high, but not higher in comparison to Regensburg plus the press shop and the Munich plant. Most of the existing BMW labour conventions were also applied in Leipzig (success-based bonus payments, Christmas bonus, holiday bonus, company pension fund, reduced car prices, etc.). Some innovative elements of the Leipzig labour regulation regime are related to the payment system. New output-oriented salary schemes were introduced in certain areas, with a basic salary and bonus payments of up to 21% of the basic salary if production targets are reached. There are also individual bonuses according to performance and goal attainment (with 3% of the basic salary as a general target step, and 6% and 9% as additional steps). The annual bonus payment is oriented around plant seniority from 25% (less than a year working at BMW) up to 100% (three or more years of BMW service), with the start of production in 2005 as the starting date. The working time regime at the beginning of production in 2005 was a two eight-hour shift system, with five working days per week and 245 working days per year. The factory began running in September 2004. Production began in March 2005, with the product line two (series 1 and 3) and a total of 2.000 workers and employees in the body shop, paint department and assembly. Average daily production is aimed at 650 units, with a possible expansion of up to a maximum of 960 units per day and a planned workforce of 5.000 (with an optional additional press shop). At the beginning of 2007, there was employed a very high number (of about 1.000) of temporary workers earning only about half of the formally employed BMW workers. In summary, the Leipzig site won out due to its meeting a complex set of criteria defined by BMW. Last but not least, language and culture were also considered important factors, which could have raised risks and costs had the new plant been built in Kolin. According to Leipzig CEO Claussen, BMWs business model is oriented to the long term; therefore, the location decision for a new plant is not only important for the lifespan of one car model, but for half a century. Keeping this long-term orientation in mind, it is probable that the direct labour cost differences between Kolin and Leipzig will be reduced more quickly than would be the cultural and language differences between the different locations. Space, logistics and the soft factors of the labour market and labour regulation are also important. The global, or at least trans-local, management of knowledge, the complex value chains and fragile supply chains strengthen aspects of liability, which include the level of general economic development, infrastructure security, the scope of product and production flexibility, efficiency and speed of public administration. Summarizing, the Leipzig plant location process reveals a strong long term strategy and commitment of the BMW group in Germany although the company turned a real global player during the last ten years. It also shows the strong impact of institutional factors such like the labour regulation and especially 12/17

the works council system economic globalisation did not lead to fleeing the general German business model with strong workers participation but to a certain downgrading and flexibilisation of working and employment conditions in the newly opened Leipzig plant. PRESENT SITUATION AND FUTURE PROSPECTS OF THE BMW BUSINESS MODEL BMW today is a globally thinking and operating full-sortiment premium manufacturer. Although smaller than Volkswagen and Daimler-Benz, BMW was the first German automobile manufacturer able to offer the whole range of products from compacts up to high end luxury cars. This broad scope of products ranges from the Mini and 1-series over the 3-, 5- and 7-series up to the 8-series, the sportive cars of the Z-series and the SUVs of the X-series. The BMW trajectory since the 1990s has to be interpreted as a result of three entangled processes of change. First, concerning the reorganisation of the production system some important means were developing the cooperation with the suppliers and the interdisciplinary R&D groups as well as improving the general flow of knowledge and experiences via the research and innovation centre FIZ. By this, BMW focused much more than other carmakers at the initial steps in the product development curve: optimisation potential was not mainly situated in the direct execution of body shop, painting and assembly tasks. But the most important rationalisation promise was located in the beginning of the life cycle of a product: in the knowledge and R&D management within the company and with (system) suppliers. Second, after having settled a well proved and tested product range of the 3-, 5- and 7-series, the company invested a lot of attention and money in the substantial differentiation of its products. Combining well established volume series with highly specialised niche models while, at the same time, maintaining high technological and quality standards helped to expand the number of customers and the production volume. The third important step was shifting from a regional Bavarian producer to a really global player not only in sales, but also in production and procurement. The establishment of an all new green field plant in Spartanburg/USA and a large number of new CKD plant, mainly in Asia, as well as the strengthening of a world wide procurement and logistics network reveal this strategy. These three lines of strategic action since the 1990s were strongly intertwined: Without having restructured the knowledge and R&D activities and developed cooperation with suppliers it would not have been possible to light such a firework of new products; without broadening substantially the scope of products and entering or even creating new market niches it would not have been possible to almost triple the volume of the overall production in about one and a half decade (see Table 2). In the same period, the overall direct employment only increased nearly half, which reflects the success of the efforts to reorganise the production system. Without this direct increase in production efficiency the company would not have had the money needed for substantially expanded R&D activities and developing new products. Ultimately, the internationalisation of production activities allowed BMW to participate in the most rapidly growing markets during that period, namely the SUV segment in the USA and the premium car segment in Asia.

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Table 2: Basic indicators of the BMW Group trajectory

BMW Group World - Basic Indicators
160000 140000 120000 100000 80000 60000 40000 20000 0
03 04 90 91 92 93 94 95 96 97 98 99 00 01 02 05 20 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 06

Production (units/10)

Employment

Sales (Mio.)

Net Profit (Mio.*100) Source: Annual Reports

The fundamental shift from a regional carmaker to a global premium player could be observed also comparing the overall structure of sales and of car production of the BMW group in 1990 and in 2006. At the beginning of the 1990s, production abroad represented almost three percent, and the sales outside Germany counted for about one third. According to the Annual Report for 2006 of the BMW Group (p. 36 and p. 54), sales abroad represented 73% of total sales, and the production in plants outside Germany represented 36% of total unit production of the group. These figures best reflect the fundamental shift in the overall company strategy and structure. But this crucial move since the 1990s did not coincide with a rupture in the overall business model of the BMW group. As mentioned in the introduction and described in the sections of this chapter, the expansion of the product line was possible due to a firm basis of engineering capacities and of the prevalence of engineers in management and of skilled and highly motivated workers in the lines. All decisive CEO-positions were filled by internal recruitment, and most of the leading managers were and are engineers by profession. The professional and engineering approach is reflected also in the strategic role of the research and innovation centre (FIZ) in Munich; this R&D and innovation centre not only is responsible for development of mew models, but also designs and samples production start of new models. By this, problems and errors of model design that reveal in starting running new products, are replayed at once to the product developing areas and could be improved for all group wide plants at once. Besides of the function of the FIZ the case of the new plant location and opening in Leipzig also reveals this approach towards professional and qualified work, being this one decisive aspect of the site selection decision. Besides the professionalism argument, the Leipzig case also is illustrative for the family oriented system of social and labour relations. Because the works council of the BMW group influenced strategically in the location decision by developing and proposing a work schedule for 14/17

the new plant that permits a range of production flexibility that was not possible at the competing sites. The family and network driven institutional embeddedness of the company also is reflected in the long term cooperation structures with suppliers; the supplier satisfaction index with their customers (the carmakers) always gives BMW (and Porsche) the best satisfaction degrees of their suppliers (#). The Human Resource Management strategies and the corresponding value and mission statements also echo the family, qualified work and long term orientation of the companies business model. Last but not least, this is also states by the strong influence of the Quandt family as shareholders. In 2002, the Quandt family represented 46,6% of the direct voting rights of the shareholders (Annual Report for 2006, p. 52). Besides of 8,8% of other investors the 44,6% of institutional investors are distributed quite equally in Germany, the rest of Continental Europe, Great Britain, the USA, and the rest of the World. This gives management a certain independence from short term driven shareholder thinking. Asked if he has a problem with short term thinking in trimesters of shareholders, the BMW CEO Reithofer answered: A reasonable time to value a company for me a twelve month period. More reasonable is a three to four years period. (Sddeutsche Zeitung, 30.12.2006) From a general viewpoint, the BMW group trajectory of the last fifteen years reflects the strength of what elsewhere (Pries 2004) was coined the German automobile business model and that consists of five main elements: (1) a mixed system of corporate structure and profit strategies, whereby shareholder value and stakeholder value interests are balanced through a system of executive boards and supervisory boards and of conflictive cooperation between management and labour; it includes the tangible influence of family networks, important banks and/or the state in the corporate governance of companies as well as public and collective interests of labour, represented through a mix of party and union representatives in the different committees; (2) hand in hand with this goes a shareholder-stakeholder-configuration, with a long-term perspective and building identities as car companies that are genuinely dedicated to advancing engineering, as is reflected in the ongoing dominance of car guys as executive leaders; (3) without the former aspect, it would not have been possible to successfully put in practice a firework of new products based on an historically-proven, strong orientation towards research and development, engineering and knowledge development, in general; (4) the aforementioned enlargement of the products scope was not only technology-based but also oriented towards innovative, emotionally appealing, highquality, sustainable products; these shifts in the product structure and market strategies reflect the recursive integration of social and political sensibility into the products, which was made possible in part by workers participation; (5) this workers participation was not simply a short-term management strategy designed to exploit knowledge: it was part of a decades-long labour and personnel policy of promoting stable, long-term employment, low external and high internal labour flexibility, and workers qualification as an important investment; Meanwhile these elements of a specific automobile business model could explain great part of the BMW success of the 1990s and beginning of the new century, there are at least two challenges for this business model and for the BMW group in the future. The first point refers to the possible bifurcation of labour between a core crew and a marginalized manpower working in precarious conditions in outsourced services and supplier companies. The second challenge refers to the possible market insensibility of the engineer driven and professional car builders thinking that puts the technical solution and the technologically high sophisticated products at the top and not the customers preferences. This could be observed since the beginning of 2007, when in the context of bicarbonate emissions debates in Europe, the USA and later on all over the world the German premium carmakers were hit by a certain kind of mental shock. For the future, to build sustainable cars is much more important than producing only power cars for the car guys and their engineers of BMW, but also of Daimler-Benz, Porsche and Audi, this marks a strong test for their own sustainability. 15/17

Literature
Birkmann, Karla, 2005: Der Weg nach Leipzig aus Sicht des Betriebsrats, Vortrag gehalten auf dem 2. Automobilkongress der Ruhr-Universitt Bochum, unter http://www.ruhr-unibochum.de/autokongress2/download/beitraege/Praesentation_Birkmann.pdf BMW AG, 1991: Stationen einer Entwicklung. Die ersten 75 Jahre BMW. Mnchen: BMW BMW AG, 2005a: Rede von Dr. Helmut Panke, Vorsitzender des Vorstands der BMW AG, 85. ordentliche Hauptversammlung der BMW AG, gehalten am 12. Mai 2005 in Mnchen. Mnchen: BMW BMW AG, 2005b: Sustainable Value Report 2005/2006. Mnchen: BMW BMW AG, 2001: Flexible Arbeitszeiten bei der BMW Group. Mnchen: BMW BMW AG, 2003: Das Konzept des neuen BMW Werkes in Leipzig. Entwicklung nachhaltiger Strukturen, Vortrag, Januar 2003, BMW Werk Leipzig. Mnchen/Leipzig: BMW Eckardt, Andrea/Khler, Holm-Detlev/Pries, Ludger, 2000: Auf dem Weg zu global operierenden Konzernen? Fallstudien zu den Internationalisierungsverlufen deutscher Automobilkonzerne in den 90er Jahren (Forschungsbericht). Erlangen: IPRAS Harbauer, Jrgen, 2003: Standortwahl Leipzig, Vortrag gehalten auf der Veranstaltung Inlndische und auslndische Standorte richtig bewerten, Fachtagung am 7.05.03. Stuttgart: Fraunhofer Institut ISI/BMBF Kinkel, Steffen/Lay, Gunter, 2005: Automobilzulieferer in der Klemme. In: Pries, Ludger/Hertwig, Markus, 2005 (Hrsg.): Deutsche Autoproduktion im globalen Wandel. Altindustrie im Rckwrtsgang oder Hightech-Branche mit Zukunft? Berlin: edition sigma, S. 59-74 Lewandowski, J. 1998: BMW. Typen und Geschichte. Augsburg: Delius Clasing Pries, Ludger, 2005: Renaissance oder Agonie der deutschen und europischen Automobilindustrie? In: Pries, Ludger/Hertwig, Markus, 2005 (Hrsg.): Deutsche Autoproduktion im globalen Wandel. Altindustrie im Rckwrtsgang oder Hightech-Branche mit Zukunft? Berlin: edition sigma, S. 15-37 Pries, Ludger, 2004: Renaissance of the German Carmakers during the 1990s: Successful Japaniza-tion or the Development of a Genuine Business Model? In: Faust, Michael/Voskamp, Ul-rich7Wittke, Volker (eds.), European Industrtial Restruc-turing in a Global Economy: Fragmenta-tion and Relocation of the Value Chains. Gttingen: SOFI, pp. 131-155 Pries, Ludger, 2004: New Production Systems and Workers Participation a contradiction? Some Lessons from German Automobile Companies. In: Charron, Elsie/Stewart, Paul (Eds.), Work and employment relations in the automobile industry. New York: Palgrave Macmillan, pp. 76-102 Rosellen, Hanns-Peter, 1983: Das wei-blaue Wunder. BMW - Geschichte und Typen. Stuttgart: Seewald

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Annex Worldwide Production of the BMW Group 2006 (units)

Shareholder Structure of the BMW Group 2006

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