China Puts The Screws To BMW

The market is gigantic: With sales of new vehicles approaching 18 million units in 2011, China is the largest market in the world, far ahead of the US, with its 12 million units. Some fearless industry voices estimate that sales will reach 28 million units in 2017—fearless because the China bubble might blow up before then, which would rejigger the numbers on a massive scale, as it did in the U.S., where sales dropped from over 16 million units before the credit bubble burst to 10 million units during the crisis. However, no major car maker in world would want to miss out on the opportunities in China, and BMW is no exception. And yet, risks are mounting.

Relentless pressure from the National Development and Reform Commission (NDRC) of the Chinese government is pushing foreign car manufacturers to share more of their advanced technologies with Chinese partners, particularly in the hot sector of “New Energy Vehicles” that was defined in China’s most recent five-year plan as strategic industry. The government cites environmental concerns as primary motivation for this shift to electric vehicles. However, the environmental benefits of electric vehicles are not that clear in a country where about 80% of the electricity is generated by burning coal, the filthiest of all fossil fuels. So there have to be other reasons.

“China should attach great importance to research and development of core technologies in green vehicles,” said Wang Fuchang, a deputy director-general with the Ministry of Industry and Information Technology, about a year ago. The goal: Aim for “a global lead in this field by 2020.” Through technology transfer.

It’s not a law, but every car manufacturer that wants to build cars in China has been given to understand in closed-door talks that it must share “New Energy Vehicle” technologies with Chinese partners. The deadline is 2015. Car manufacturers have responded by offering to create China-only brands. VW already has decided on the brand Kaili, Daimler is following suit, and now BMW can no longer drag its heels.

“We will find a solution,” said Friedrich Eichiner, member of BMW’s board of management during a press conference last week concerning talks with the NDRC. And he sketched the outline of a solution: BMW and its Chinese partner, Brilliance, will build a separate brand for New Energy Vehicles. However, these cars will not reflect the latest BMW technologies because it wants to give up as little as possible and protect its critical technologies long enough to where they’re no longer critical. And the new brand will not have any connection to the brand BMW to avoid “watering it down,” Eichiner said.

Fat profit margins: Over 25% of BMW’s worldwide profits come from China, though it sells only 15% of its production there. And it’s just scratching the surface of the 1.3 billion potential customers. The versions sold in China are more profitable because they’re loaded with luxury items and are specifically designed for Chinese tastes. The rear seat is the most important location in the car as BMW owners in China tend to have chauffeurs. Hence, rear seats are more comfortable, afford more legroom, and offer the latest infotainment, not only in the 5 and 7 series but also in the smaller 3 series.

To meet the Chinese demand for its flagship products, BMW is plowing $1.4 billion into the expansion of its plant in Tiexi, Shenyang province. The plant will then have an annual production capacity of 200,000 units. With the 100,000 units from its Da Dong plant, BMW will have a capacity of 300,000 units in China.

A risky change for BMW. These outsized profit margins and rapidly growing sales are what BMW is trying to protect in the near term. And so it has to yield to the demand by the Chinese government to share technologies with Chinese partners. But in the longer term, especially if electric vehicles take off, BMW might create formidable competitors that will try to eat its lunch down the road.

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