BMW Leads the Auto Pack in European Investment

   
What’s the big news in the European automotive industry? BMW, the Munich-based automaker, plans to produce 650 BMW 3-series autos each day beginning in 2005 at its newly announced US$860 million, 2,500-employee plant in Leipzig. BMW Chairman Joachim Milberg says that choosing the location “wasn’t an easy decision.”


     
The year-long search required BMW to look at 250 European sites before choosing Leipzig. Other short list finalists included Arra, France; Rolin, Czech Republic; and two other German cities, Augsburg and Schwerin. Altogether, 125 German cities bid for the BMW plant.

     
Many observers considered the Czech site the frontrunner because of lower wages. Others thought the German federal government favored the Schwerin site. Yet, Leipzig prevailed. But why?

     
It was a combination of factors, according to Milberg. The automaker gave praise to the city’s available skilled work force, as well as its infrastructure and transportation facilities. He added that BMW liked the 495-acre (200-hectare) site it found in Leipzig.

     
Of course, money talks, and European Union incentives played a key role. The automaker will receive some $244 million for locating in Leipzig. Leipzig qualifies for EU incentives because it’s status as an economically disadvantaged region.

     
The Leipzig announcement took place, however, before the Sept. 11 terrorist attacks on the World Trade Center (WTC), which have sparked fear of an accelerated decline in the European automotive industry. But this hasn’t slowed BMW. In October, the company invested another $462 million to produce a new V-8 engine at its Munich facility. The German automaker will also utilize the facility to make a smaller V-6, which will not go into any BMW models — it will be manufactured for other automakers.

     
Flexibility was key to this Investment, The Munich machine shop can already produce V-6, V-8 and V-12 engines simultaneously. The investment will allow BMW to produce some 160,000 engines per year, and capacity can be increased by approximately 50 percent if demand requires.

     
“The degree of flexibility this provides in terms of production volumes is very important for meeting fluctuating market demand,” Lutz Kuhne, director of BMW’s powertrain division explains. The ability to survive in today’s automotive market will require such flexibility — not only are customers more demanding, but as the economy slows and demand falters, being able produce various engine sizes will allow the company to meet whatever demands may come.

     
“We are positive on the profit side, and we have no reason to change our outlook (for 2001),” BMW CFO Helmut Panke told Reuters at the Tokyo Motor Show in October 2001. “And we are going into 2002 with reasonable optimism.”

     
The company forecasted higher sales and profits in 2001 compared with the previous year, and it reported a pre-tax profit of $1.48 billion. BMW expected to sell more than 900,000 cars by year-end 2001 — an optimistic view considering the increasingly sluggish economy. Nonetheless, Panke suggested that BMW would move forward with its extra work shifts.

Austria Auto Suppliers Take to the Web       In October, the Austria Automotive Association announced the development of a new supplier Internet marketplace. Modeled after Covisint. The new exchange is expected to lower costs and help small and medium-sized suppliers cooperate for contracts with large automakers.       Austria serves as a perfect location for such a marketplace. Auto parts manufacturing and contract vehicle assembly brought some US$6.6 billion to Austrian companies in 2000. Another $1.3 billion came to Austrian companies from the commercial truck and bus industries.       Austria has between 700 and 800 Tier 1, 2 and 3 auto suppliers that form three clusters in the country’s main industrial areas. The cluster centered on Vienna crosses the border to Slovakia and Hungary, where GM/Opel and VW run fast-growing companies. Styria is home to the oldest and best-organized supplier cluster, while the third cluster centers on Linz and Steyr. Local governments in Vienna and lower Austria are forming a fourth cluster that will comprise the Fiat-General Motors engine and transmission plant in Vienna, Vienna Technical University and Magna-Steyr. The clusters support newly established firms and already have formed small Internet markets on interlocked Web sites that will be the basis for the Austria exchange.

     
BMW does not exactly fit the mold, however, when it comes to future plans of European automakers. Pre-Sept. 11, many automakers were expected to make cuts to production levels, according to analysis by J.D. Power-LMC in London, due to overcapacity. “Production during the first three quarters [of 2001] has been greater than could be justified on the basis of domestic sales,” Arthur Maher, a J.D. Power-LMC analyst, told Automotive News Europe. As of the end of October 2001, automakers produced 350,000 more vehicles than Western Europe demand required.

     
Even more telling are the orders received by parts and logistics suppliers. Some of these groups saw orders fall by as much as 20 percent in mid-September (two weeks after a Hacks). These companies may provide the most accurate indicator of how far the industry has fallen. As a result, many suppliers are cutting jobs. Delphi, which had already reduced its global work force by 11,500 jobs as of October 2001, expected to cut another 1,000 to 1,500 positions by year’s end.

     
Still, the show must go on, and others like BMW continue to expand operations throughout Europe (see chart). In another highly anticipated announcement, Nissan Motors finally decided it could cope with the strong British pound … opting to manufacture a new Micra model at its existing Sunderland, England, operations. Nissan CEO Carlos Ghosn caused media rumbles late in 2000 when he threatened to move the Micra production to the continent because the cost of operating in the UK was too high.

     
One particular site seemed extremely appealing on the continent — Flins, France, just outside of Paris. Flins is home to a Renault factory — Renault had purchased controlling interest in Nissan in the spring of 1999, creating the world’s fourth-largest automaker.

     
Though Britain’s $58.5 million grant provided good incentive for Nissan to stay in the UK, the decision boiled down to Sunderland’s productivity. “As you know, Sunderland is the leading European car plant in terms of productivity, and has been in that position for many years,” Ghosn noted at the facility announcement.

     
Valeo, a French automotive equipment supplier, has been a big investor in the past year. In September 2001, it announced a new electronics engineering technical center in Bietigheim, Germany, which will house approximately 400 electronics and mechanical engineers, as well as management staff. Earlier in the year, Valeo was granted investment incentives by CzechInvest in order to build a new production capacity for the manufacture of heat exchangers in Zebrak. The company was awarded investment incentives in the form of five-year tax relief on corporate tax accruals and will be exempt from import customs duty on machinery and equipment.

     
“We intend to invest ($19.5 million) during the next five years in order to ensure the production of heat exchangers, mainly evaporators and heater cores, parts of air conditioning units,” says Jean-Marie Pelletier, industrial vice president of Worldwide Heat Exchangers Product Line, Valeo Climate Control Branch. “This investment will create 397 new jobs. We estimate our market share to be approximately 25 percent and expect that, following the completion of this project, this will increase to 30 percent.”