Competitiveness of BMW Mini Cooper in the UKs Car Market - Assignment Example

Assessing the Competitiveness of BMW Mini Cooper in UK's Car Market BMW (Bayerische Motoren Werke) is a leading European vehicle manufacturer, engaged in the development, manufacture and sale of premium cars and motorcycles. The company also provides financial services and information technology services. BMW, through the Softlab Group, offers information technology services such as customer relationship management and supply chain management. The BMW is headquartered in Munich, Germany (BMW Website). BMW focuses on the premium segments of the global passenger car and motorcycle market. The company markets its vehicles through company-owned showrooms, independent dealers, subsidiaries and importers. The company manufactures its vehicles at 23 production and assembly plants in seven countries and sells them through 34 subsidiaries. The company operates through three business divisions: automobiles, motorcycles and financial services. The automobiles division develops, manufactures, assembles and sells passenger cars and off-road vehicles under the brands BMW, MINI and Rolls-Royce. It also sells spare parts and accessories. BMW and MINI brand products are sold in Germany through showrooms of BMW and independent dealers. The company sells passenger cars outside Germany through subsidiaries and independent import companies. The BMW is responsible for the manufacture products such as: BMW C1, BMW 1 series, BMW 3 series, BMW 5 series, BMW 6 series, BMW 7 series, BMW X3, BMW X5, BMW Z4, MINI, MINI Cooper, MINI Cabriolet and the Rolls-Royce Phantom. BMW's growth over the years had paid off from a boutique European automaker to a global leader in premium cars. Among their products, BMW's MINI Cooper is holding its own against more established rivals in the new car market. It is also one of the lowest depreciating models in terms of used car sales. It is for this reason that BMW has decided to increase its investment into the Mini. This is a wise move, since sustained demand, even after five years on the market, suggests that the model is a mini goldmine. It is unlikely that anyone predicted the success of the Mini Cooper when it was launched by BMW in 2001 - the revamped model has taken the European market by storm. Originally, BMW intended to produce 100,000 vehicles a year but given the high demand, an increased investment of GBP100 million has been set aside for Mini Cooper in 2005, taking the yearly production total to over 200,000 vehicles a year by 2007. After its 2001 launch, BMW hoped to sell 800,000 units of the current Mini in eight years. The Mini plant in Oxford, England, has been refurbished to boost annual capacity to 260,000 units from 200,000. The plant also will build a new variant, the Traveller station wagon, starting in late 2007, and the second-generation Mini convertible starting in 2008 (Ceferri and McVeigh, 18 Sept 2006). While sceptics argued whether it was the right move for BMW to launch Mini Cooper in 2001, the debate has now shifted towards whether the success of the Mini can continue into the future or whether it is just a fad, a little like Volkswagen's new Beetle, where sales fell dramatically after the initial consumer enthusiasm for the new model. BMW certainly thinks that its investment is well justified. The Mini's price point ranges between GBP11,000 to nearly GBP18,000, which pits the car against the popular Volkswagen Golf and Peugeot 307. Despite this, the demand for the model is generally high across the range with a UK waiting list for several models. Additionally, another key indicator with regards to the success of the model is the demand for it in the used car market, where its rate of depreciation is amongst the lowest of any vehicle in the UK. It is these metrics which must have given BMW the impetus to continue funding the development of the Mini. It is already very valuable to BMW, having surpassed all expectations in terms of popularity, and with its sales cycle having now run for four years with demand still riding high, BMW certainly seems onto a winner. In fact, the profits generated by Mini are likely to eradicate the losses that BMW incurred as a result of its purchase of Rover, Mini's original parent (Datamonitor, 16 Feb 2005). PEST Analysis of the UK Car Market Political - Amendments to the European Union's "block exemption", which came into effect in late 2002, have exerted downward pressure on prices by allowing dealers to sell multiple makes and foreign dealers to advertise their prices in the UK. However, restrictive practices between car manufacturers and dealers may be difficult to eliminate altogether. The block exemption regulation is intended to give dealers greater independence from carmakers, promote inter-brand competition, encourage harmonisation of prices across the European Union and thus ensure consumers get a much better deal. The location clause essentially prevents dealers from expanding outside their territories, but any dealer selling passenger cars and commercial vehicles and who meet the manufacturers standards will be able to set up secondary sales and delivery outlets anywhere within the EU, Norway, Iceland and Liechtenstein. With this new legislation, British dealers sold an average of 444 new cars in 2004 reflecting the fact the market has already consolidated. However, this "block exemption" could be detrimental to small-time car manufacturers. This is because this legislation will benefit only large companies already operating on an international basis have the resources to expand across borders (Just-auto.com, 16 Aug 2005). Economic - According to Euromonitor International (18 August 2006), the British economy grew by 1.8% in 2005. In 2006, growth should be 2.5% while forecasts for 2007 call for growth of 2.7%. Inflation was 2.1% in 2005 and will be about 1.9% in 2006. Forecasts call for prices to rise by 1.9% in 2007. The economy rebounded strongly in 2006 after a disappointing showing in 2005. The slowdown was primarily due to a poor performance in the manufacturing sector. The pace of growth in private consumption also slowed due to a weaker housing market. However, most economists agree that the economy will turn in a much better result in 2006, probably beating the IMF growth forecast of 2.5%. Consumer spending could also recover, growing at rates close to its long-term average in 2006-2009. In the future, the economy will be more dependent on business investment, which is projected to gather pace on the back of recent and prospective business profits. Indeed, British manufacturing is flourishing. The country exported 1.2 million cars in 2005, which is a new record. BMW even plans to invest around 100 million over the next several years and Japanese carmakers are adding capacity. Social - The preferred cars in the UK car market in recent years have been small cars and sports utility vehicles (SUVs). Hatchbacks dominate the UK market. In the first nine months of 2005, nine of the top ten biggest-selling models in the UK were hatchbacks, with the Ford Focus-the most popular model-selling more than twice as many units as the most popular saloon car, the Ford Mondeo. SUVs still only account for a small share of the UK passenger car market, but sales have grown strongly in recent years, largely at the expense of cars in the upper-medium segment of the market. Another striking trend has been the secular growth of the diesel market. Sales of diesel cars have been rising uninterruptedly for several years, even in 2005 when total sales of passenger cars contracted. Diesel's growing popularity has coincided with the relentless increases in international oil prices in recent years, which have encouraged consumers to buy more fuel-efficient engines. In 2005 ,diesel cars accounted for just over 35% of the total passenger car market (EIU, 12 May 2006). Technological - Because of high prices of cars and oil, car manufacturers are currently designing cars with diesel engines. BMW looks well positioned in the auto market, with the Mini brand capturing a sizable portion of the small car market, while the BMW brand has recently overtaken archrival Mercedes in several markets. By early next year, the Mini will grow even more, but an extra 2.76 inches in length. Its other improvements include a pair of new, aluminum engines produced by a joint venture between BMW and PSA Peugeot Citroen will boost power in the Cooper and Cooper S by 5 and 7 hp, respectively. The Mini Cooper will draw power from a 1.6-liter four-cylinder featuring technology borrowed from the mother ship, namely BMW's Valvetronic system, that allows for fully variable valve timing and lift while eliminating the throttle butterfly. Output tops out at 120 hp at 6000 rpm, with torque peaking at 118 lb-ft at 4250 rpm. The 1.6-liter four in the Cooper S uses a twin-scroll turbocharger and gasoline direct injection to crank out 175 horses at 5500 rpm and a meaty 177 lb-ft of torque from 1600 to 5000 rpm. These technological improvements of the Mini Cooper will make it more attractive for customers who value a more spirited driving (Neff, 7 Aug 2006). Market Segmentation The UK is the fourth-largest automotive manufacturer in the EU, accounting for 11% of EU production and around 3% of world production. In 2004 production of automotive vehicles totalled 1.86m units, of which 88.7% were passenger cars and 11.3% commercial vehicles. With consumer spending slowing sharply and production ceasing at MG Rover, domestic production of motor vehicles fell in 2005. In the first nine months of the year, total production amounted to 1.38munits, a fall of 2% on the year-earlier period. The fall was mainly driven by the passenger-car sector, where output fell by 2.1% year on year (EIU, 12 May 2006). The UK market for passenger cars, ATVs, and RVs and is highly concentrated, with the five major groups controlling over 68% of sales in 2004. The major shake-up in 2004 was the closure of the MG Rover plant, at a loss of around 5,000 jobs. The UK automotive sector has been under pressure for some time. This has caused many of the car manufacturers, such as Ford, Vauxhall, Peugeot, Toyota, Nissan and Honda, have announced that they plan to reduce their capacity in the UK. In order to remain globally competitive and safeguard jobs, UK based vehicle manufacturers and their workforces have worked together to introduce a number of flexible working practices and re-education schemes aimed at improving productivity and quality output. Also, there is an increasing view amongst vehicle and component manufacturers that a stable and competitive exchange rate is unlikely to be achieved until the UK government has established its commitment and a clear timetable for joining the Euro. TABLE 1. CORPORATE OVERVIEW 2004 AV. sales growth Market share Nissan 11.4 19.4 Toyota 0.0 14.9 Honda 5.5 11.7 BMW 0.0 11.5 Peugeot 0.0 10.5 Source: Euromonitor According to Euromonitor International (18 August 2006), superminis was the largest sector, accounting for 33% of sales in 2004, with a volume of 840 thousand new car registrations (See Table 2). The most dynamic sector was MPV's, which achieved 110% growth over the review period. The creation of the MPV with its sleek, modern, yet practical image has won over many consumers who would previously have been uninterested by its less aesthetically pleasing predecessor, the People Carrier. 4x4 dual purpose vehicles registered the second highest growth over the review period, at around 81%. This type of vehicle has benefited from intensive marketing efforts by manufacturers. Much of this marketing activity focuses on 4x4 vehicles crashing through swamps and forests - providing a sense of escapism for today's urban drivers. In 2006, the largest manufacturer of motor vehicles in the UK by far is Nissan, whose plant in Sunderland is also consistently the most productive in Europe. In 2004 Nissan produced an estimated 338,000 units, up by almost 13% on 2003. Despite the closure of one of its plants in 2002, Ford-which, aside from its own brand, owns a number of British brands such as Aston Martin, Jaguar and Land Rover-produced around 275,000 units in 2004. The next-largest producers in the UK are Toyota and PSA (with around 210,000 units each). However, the fastest-growing producer in recent years has been BMW, whose plant at Cowley, near Oxford, produces some 200,000 Minis per year. Nissan, Toyota and BMW, which all export a large share of their output to other markets in the EU, have periodically pressed the UK to join the EU's single currency, intimating that they might cease producing cars in the UK if the country remains outside the euro. These calls have become more muted since sterling's depreciation against the euro in 2002-03. Indeed, all three companies have ramped up production since 2003, and Nissan and Toyota have declared their intention to build new models in the UK. TABLE 2 MARKET SECTORS 2000 AND 2004 Units Sectors 2000 2004 Mini 52,203.0 36,171.0 Supermini 688,686.0 839,604.0 Lower medium 661,502.0 729,116.0 Upper medium 476,860.0 459,635.0 Executive 104,583.0 109,667.0 Luxury Saloon 11,406.0 13,620.0 Specialist sports 67,208.0 73,940.0 4x4 dual purpose 99,212.0 179,439.0 MPV 59,987.0 126,077.0 Source: Euromonitor Recommendation BMW is still to launch a hybrid electric vehicle of its own. Japanese companies such as Toyota and Honda have already established a strong presence in the hybrid electric vehicle market. The company has a prototype, BMW Active Hybrid drive concept, in the pipeline and has formed a global alliance with General Motors (GM) and DaimlerChrysler to develop a hybrid electric vehicle. BMW's lack of presence in the hybrid electric vehicle segment dents the image of the company as a manufacturer of high-performance luxury cars. The worldwide demand for light hybrid electric vehicles (HEV) is estimated to reach 4.5 million units in 2013. Rising energy costs and increased emissions regulations are likely to increase demand for HEVs. Thus, BMW should work very hard to produce an HEV Mini Cooper in order to maintain its lead in luxury light vehicle segment. Although BMW had $59.2 billion in sales last year, is much smaller than its American rivals, the U.S. auto giants could still learn a thing or two from BMW. Detroit's rigid and bloated bureaucracies are slow to respond to competitive threats and market trends, while BMW's management structure is flat, flexible, entrepreneurial -- and fast. That explains why, at the very moment GM and Ford appear to be in free fall, BMW is more robust than ever. The company has become the industry benchmark for high-performance premium cars, customized production, and savvy brand management, making it the envy of Mercedes-Benz, Audi, and Lexus and the subject of Harvard Business School case studies. Even mighty Toyota Motor Corp. regularly dispatches engineers to BMW's factories to see how the company produces 1.3 million customized cars a year (Edmonson, 16 Oct 2006). The future of the BMW Minis in the UK still looks bright seeing its competitive position as positive in the recent years. According to BMW, European sales of Minis this year have topped 111,000, 3,000 of which were convertibles. The company hopes to see even stronger figures in the second half of the year with the launch of its new range now in production. The range will include the Mini One and Mini Cooper and convertible versions of both. Such has been the popularity of the Mini convertible models that BMW predicts that by 2005 one in five Minis will be "soft tops". In knowing their strengths and working on their weaknesses, it is more likely that the production of Mini Cooper will still remain a profitable enterprise for BMW. References BMW Corporate Website. http://www.bmw.com. Ciferri, L.and McVeigh, P.(2006, Sept. 18). Mini gets new engines (BMW Mini Cooper).Automotive News Europe11(19):31. Datamonitor International. (2005, Feb 16). BMW / Mini: a Happy Adventure. New york: Marketline Business Information Center. Economist Intelligence Unit (EIU). (2006, May 12). UK: Country Profile. Retrieved 20 Oct. 2006 at http://www.viewswire.com. Edmondson, G. (2006, Oct. 16).BMW's Dream Factory; Sharing the wealth, listening to even the lowest-ranking workers, and rewarding risk have paid off big time. (Company Overview). Business Week4005:70. Euromonitor International. (2006, Aug. 18). United Kingdom: Automotive Profile. UK: Global Market Information Database. Just-auto.com(August 16, 2005).UK/France: Abolition of location clause under Block Exemption draws near but it will be 'business as usual' - PwC.Retrieved 20 Oct. 2006 at http://www.just-auto.com/article.aspxid=74769&lk=s Neff, N. (2006, Aug. 7). More to Love; Mini gets bigger and better for 2007. AutoWeek56(32):4. Read More