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      05-19-2008, 11:54 AM   #1
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The Wall Street Journal: "BMW, Mercedes Mull a Parts Pact"

Daimler, BMW Discuss Linkup on Components

http://online.wsj.com/article/SB1211...ess_whats_news (Link may only work for WSJ subscribers)

By EDWARD TAYLOR

The Wall Street Journal: Monday, May 19 2008 - Vol. CCLI No. 117

BMW AG and Daimler AG's Mercedes-Benz Cars division are in talks to explore teaming up in developing, producing and purchasing car components, according to people familiar with the matter.

The move marks a recognition by Germany's archrival luxury car makers that they may need bigger economies of scale to bolster profits.

Executives and engineers from the car divisions of BMW and Daimler "from the top, right down to the middle management" are discussing how the companies could jointly buy car parts, including seat frames and air-conditioning modules, said one person familiar with the talks.

The two sides are also exploring possible cooperation, on a project-by-project basis, in developing and producing components, including engines, according to another person familiar with the matter.

People familiar with the talks said the companies aren't under any short-term pressure to reach agreements.

The shift in strategy responds to difficulties the two midsize German auto makers face in maintaining their profit levels, now among the highest in the industry, in the face of a struggling U.S. economy, a strong euro, the rising price of raw materials such as steel, and growing technological demands created by new fuel-efficiency and emissions rules.

Spokesmen for both Daimler and BMW said the two companies are exploring further cooperation on components, but declined to reveal specifics.

Both car companies focus on making luxury sedans and sport-utility vehicles that often compete head to head, a factor that has inhibited collaboration in the past. The current talks seek to identify components and technologies where both companies could cooperate on lowering costs without diluting their brand values or conceding a competitive advantage, said one of the people familiar with the talks.

The shift toward increased cooperation has evolved following a strategic rethink at BMW initiated by Norbert Reithofer, who became chief executive in September 2006. A year after taking the helm, Mr. Reithofer set a goal of "establishing collaborations in the areas of components, drive systems and modules." Daimler Chief Executive Dieter Zetsche has also been repositioning his company after the sale of Chrysler last year.

Mr. Reithofer sees Daimler and BMW as "two midsize manufacturers," and believes there is potential for further cooperation between them, a spokesman for BMW said. Both Mr. Reithofer and Daimler's Mr. Zetsche have been encouraged by progress on an existing cooperation project between Daimler, BMW, General Motors Corp. and Chrysler LLC to develop expensive hybrid technologies.

Both Daimler and BMW in recent months have appointed key executives to head "profitability teams" to explore ways to increase their profits. Daimler appointed Jerome Guillen, a truck unit executive, to head up a "business innovation" team. BMW appointed a finance executive from its motorcycle division, Fritz Geri to perform a similar task at the auto maker.

Other high-end car makers face similar problems. But rivals such as Audi of Volkswagen AG, Ford Motor Co.'s Volvo and Lexus of Toyota Motor Corp. are able to leverage the resources and scale of larger parent companies. Sharing parts and research, plus making bulk purchases of raw materials such as steel allow them to squeeze costs. BMW and Daimler, in contrast, don't have larger parents.

Audi, for example, has been able to use VW's diesel-engine technology and is benefiting from VW's economies of scale in purchasing. VW makes more than six million vehicles a year, including more than 900,000 Audis. Lexus has been able to launch a hybrid luxury sedan thanks to hybrid technology pioneered for Toyota, which makes almost nine million vehicles a year.

Audi's operating margin rose to 8% last year, from 6.5% in 2006, according to analysts at Citigroup. BMW, by contrast, saw its margin on automobiles drop to 6% last year, from 6.3% in 2006, in part because of the cost of investments in green technologies. That's putting at risk BMW's target of 8%-10% operating margins by 2012.

BMW and Mercedes-Benz have been fierce competitors as far back as the 1930s. The rivalry became acute after 1959, when Stuttgart-based Daimler, which makes Mercedes-Benz cars, offered to buy its smaller rival, Munich-based BMW, and was rejected.

Both BMW and Daimler in recent years extricated themselves from disastrous mergers with mass-market brands that were made in earlier attempts to gain volume. BMW took a 3.15 billion charge at the time to sell off United Kingdom firm Rover in 2000, while Daimler effectively gave away an 80% stake in Chrysler in May 2007, after paying $36 billion in 1998.
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      05-19-2008, 12:03 PM   #2
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Quote:
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The shift in strategy responds to difficulties the two midsize German auto makers face in maintaining their profit levels, now among the highest in the industry, in the face of a struggling U.S. economy, a strong euro, the rising price of raw materials such as steel, and growing technological demands created by new fuel-efficiency and emissions rules.
It sounds like BMW and Mercedes are facing hard times due to the looming US standards of 35 mpg (across all cars in a fleet) for 2015.

i.e. if you have one car that gets 70 mpg, you can have one that gets 1 mpg and meet the standards.

http://www.usatoday.com/money/autos/...my-rules_N.htm

Basically, because of the markets that BMW and Mercedes cater to, they will have a harder time with meeting these regulations. In order to do so they are going to have to spend a LOT of money, for which the return might not be so great due to their size.
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      05-19-2008, 12:34 PM   #3
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oh no! bad move. i wish it was Porsche that BMW picked
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      05-19-2008, 01:02 PM   #4
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Hmmm very interesting. I guess we'll have to wait to see how it will unfold.
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      05-19-2008, 06:21 PM   #5
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They both already outsource a lot of parts to the same people. My former E46 and my dad's W203 have same EXACT jack, jack mounts, tools and stuff all made by Heyco I think. Headlights are outsourced to hella or bosch (can't remember), and even the wiring is done similarly.
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      05-19-2008, 06:27 PM   #6
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how much worse can reliability get? yay, let's all share each other's crappy parts. Next year, a 2010 c class owner will be bitching about his fuel pump!
LMFAO HAHAHAHAHAHAH
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      05-19-2008, 07:10 PM   #7
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Quote:
Originally Posted by jdink View Post
It sounds like BMW and Mercedes are facing hard times due to the looming US standards of 35 mpg (across all cars in a fleet) for 2015.

i.e. if you have one car that gets 70 mpg, you can have one that gets 1 mpg and meet the standards.

http://www.usatoday.com/money/autos/...my-rules_N.htm

Basically, because of the markets that BMW and Mercedes cater to, they will have a harder time with meeting these regulations. In order to do so they are going to have to spend a LOT of money, for which the return might not be so great due to their size.

The ones that will really get screwed are GM, Ford and Chrysler. All three of them sell large trucks and SUV's the most.
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      05-20-2008, 11:21 AM   #8
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The ones that will really get screwed are GM, Ford and Chrysler. All three of them sell large trucks and SUV's the most.
Not exactly.... they have large economies of scale so they can do this, where BMW and Mercedes don't.

Its not that if Ford sells 10x 10mpg SUV's that it has to sell 10x 70mpg hybrids. They could sell 1000000 10 mpg suv's and 10x70 mpg hybrids and meet the US fleet standards. Would it be very profitable for them to develop a car that sells 10 units? not really... (thats where BMW gets screwed)
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      05-20-2008, 12:13 PM   #9
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interesting..
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      05-20-2008, 03:06 PM   #10
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Well, we will see how it goes!!!
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      05-20-2008, 05:14 PM   #11
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Quote:
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i.e. if you have one car that gets 70 mpg, you can have one that gets 1 mpg and meet the standards.
Ummmm...not so sure it is that simple. There is a volume/mix factor in that equation.
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      05-20-2008, 05:31 PM   #12
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wow, we'll see what happens
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      05-21-2008, 07:33 AM   #13
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economies of scale...
the fact that they might collaborate their efforts in the development of engines is what's killing me the most.
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