BMW AG - a Deep Dive (Part II)
A Moat in Development: Design, Engineering, Software & the Future
Friends of NFTBC, welcome to Part II of deep dive #4 - Bayerische Motoren Werke AG.
In Part I I introduced the lollapalooza of characteristics that set BMW apart from its peers. As a reminder, these are:
Authenticity
Consistency
Adaptability
Independence
Flexibility
Credibility
Long-termism
We also looked at some of the history explaining how this all came to be - the unusual structures that enable BMW to compete as an institution. In this post we’ll take a look at some of the various ways how BMW competes at the product level and gain additional insights into how the characteristics manifest themselves throughout the organisation.
As far as equity research goes, Part II won’t be very numbers-based. But I hope it will help you to understand why BMW is uniquely good at what it does. In fact I think it’s a necessary process to go through when ultimately determining a terminal value for the business - one that should probably be higher than what is typically assumed for an automaker. In fact, I think this is key.
Here’s a hypothetical to demonstrate the point. Recall in Part I, I outlined the various buckets of value within the company. Now imagine BMW were to spin-off Rolls-Royce to shareholders, liquidate the financial services business, sell the MINI brand to the Chinese and then wind-up BMW operations, selling off plant, paying off debts and returning all remaining cash to shareholders. Of course, this will never happen, but shareholders would do well out of it, suggesting there’s essentially zero implied value in the BMW brand itself - the most valuable part of the business.
My intention here is not to provide an exhaustive study of BMW brand development - if you want to go deeper, there are some exceptional books, some of which I referred to in Part I. Instead, we’ll go on a whistle-stop tour, stopping off here and there in order to build a picture of how BMW consistently maintains authenticity in its products over the decades and how it has frequently adapted its approach and processes to do this. No business is impervious to the effects of entropy, but BMW is one that is acutely aware of its history and especially the near-death experience of 1959 - as we shall see, this helps BMW to be unusually capable in the arts of reinvention and forward-looking vision. I believe this to be a core trait of the business that is largely overlooked by investors and it takes a qualitative review to be able to see it. Getting comfortable with this is the first step in understanding why BMW, a legacy car business, has that one thing that investors covet the most - a moat. A moat specifically in brand, engineering and now (as you shall learn) software.
The automotive narrative today has become fixated on narrow specifications, perhaps most notably: fastest acceleration, longest range and lowest price. I’m oversimplifying a little but this is the general framing, beyond which there needs to be some base level of build quality and flashy on-board gadgetry. If this is indeed how car manufacturers benchmark themselves, it’s really no wonder that car models are converging in many aspects, especially design - many now take their cues from each other.
I was fortunate to hear Rory Sutherland speak at an event last year, where he talked about reverse benchmarking - the notion of intentionally avoiding what competitors do badly, rather than trying to copy what they do well. Now, I’ve never heard anyone at BMW talk about reverse benchmarking, but if you follow the company long enough and listen to current and former staff, it becomes clear that something of the ilk is integrated into the fabric of BMW vehicle development.
The biggest thing to guard against is disappointment… Many companies do not appreciate this. You can get 98% of a vehicle right, but the wrong 2% can spoil everything else.
- Helmut Panke
BMWs aren’t driving couches like some cars strive to be. It’s always in the last 10%… That’s what separates companies. Any company with access to the technology could achieve 90% of this system. But figuring out the last 10% took as long to get right as the front 90% of the development
- Burkhard Goeschel
How have BMW’s product sales managed to outperform its closest peers for such a long time? How will it continue to succeed in a world with so many new Chinese automakers? How can it avoid commoditisation? What we’re looking for here is that last 10%.
Part II will be long, although about 25% shorter than Part I. If you prefer, skip ahead to the parts that interest you, although I would suggest reading the section on Neue Klasse at a minimum - in order to understand why the future of BMW is exciting and why the next 5-10 years could be somewhat different to the last 5-10 years in terms of product positioning for unit growth. With Neue Klasse BMW ‘skips a generation’ on styling, jumping towards something that is futuristic but also somehow more classically BMW than models of recent years. But more than that, BMW has finally cracked the code on BEV driving dynamics through its all-new unique software defined approach. Additionally, Neue Klasse delivers major step-changes in battery technology, digital interface and production costs. And the technology is arriving fast and on time, with an aggressive roll-out scheduled over the next couple of years.
With that, let’s get going.
[As always, please do your own research. NFTBC does not give advice.]
Introduction - Mixed Grille
I find it fascinating just how animated, even angry people get about the grilles on new BMW models. Frequently you’ll hear complaints along the lines of BMW having ‘lost its way’ and about how unsightly the cars are. To many, who haven’t taken the time to study the business in detail, BMW’s design evolution might be misinterpreted as capricious or wayward. To me, it comes across as quite the opposite: brand mastery. First of all, there’s the amazingly strong emotional response that the grilles provoke - think about it and ask yourself this question: “how many other large-scale car brands would provoke such strong emotions from tinkering with a single design element?” I can’t name many, if any! And to me that’s extremely interesting because it signals a widespread and powerful emotional connection to the brand. And, not coincidentally, emotion has long been at the very centre of BMW’s brand strategy. Whatever it is, it’s not incompetence - we saw in Part I that BMW has long outperformed the industry and its peers.
Indeed, the critics frequently go on to acquire the latest BMW anyway, having previously declared its looks intolerable. And curiously, their misgivings usually soften over time (“I’ve got used to it” or “it’s growing on me” etc). It’s a funny old thing, human nature. In any case, BMW grilles have taken all sorts of dimensions during the company’s life but it’s easy to lose sight of the bigger picture when you’re used to a particular expression of the icon in your own time.
People have a strong, lasting, if not precise, impression of what a BMW is supposed to be, so it’s natural for them to be a little put out when there’s change.
Human nature is such that, if one is confronted with something very new, the first reaction is rarely positive. Two years ago, when we launched the 4 Series, we had a lot of complaints about its grille... But now that is completely gone. That feedback and the sales of these cars have done really well.
We may have been around for 110 years, but that's no guarantee that people will buy our product. The only guarantee is that if you want to be a part of the future, you have to shape it for yourself.
