BMW triumphs over X5 total recall

It was hardly the way that BMW's Middle East operations would have liked to start off the new year. As a brand renowned for its emphasis on 'engineering perfection,' BMW definitely lost face when it was forced to announce in February that 164,000 units of its immensely popular X5 sport utility vehicle (SUV) were being recalled worldwide because of a possible faulty brake hose.

But soon enough the German penchant for restoring order took over, and BMW's regional office, along with their many dealerships, worked overtime in tracking down the affected vehicles and rectifying the fault. In the Middle East, about 4,000 X5 units were affected by the recall decision.

The company will certainly overcome the incident, but its timing could come to haunt the carmaker for a long time to come. BMW is set to face one of the toughest years since it entered the Middle East market in the mid-1990s. Key regional markets such as Saudi Arabia and Kuwait are recording fairly sharp declines in automobile sales across the board, according to market sources, and the future looks uncertain at best.

In a year-to-year comparison, first quarter sales in these two markets, which together account for half of the overall Gulf automobile sales of 500,000-600,000 units annually, are down by at least five percent. Purchase figures in the UAE market, which accounts for 85,000 new car sales a year, are not that different either.

Even within the ranks of the ultra-luxury car segment, which makes up between 10,000-15,000 units annually, demand is mostly flat. This is the first time since opening its Dubai office in 1994 that BMW is facing a contracting market.

So far, it had seen a spell of unbroken year-on-year growth in these markets, capped by its breaking the 10,000-unit mark for the first time in 2002. This includes 2,940 units of the pricey 7 Series, which is the highest BMW has recorded to date in the Middle East. The company has also invested in some of the most
eye-catching showrooms, advanced service facilities and glossy ad campaigns in the region.

With the current year promising to be an exacting one, the company clearly needs new thinking. 'For 2003, we would consider a repeat of our 2002 numbers as being an extremely good achievement, given the environment we are operating in,' says Robert Bailey-McEwan, regional managing director for the BMW Group, at the announcement of the 2002 results. 'We could have done a lot better in 2002 if there were more models of the X5 and the Mini coming in to satisfy demand.'

The contracting market comes at a bad time for BMW. The company is set to introduce a number of new models around the world and a slack market is hardly the ideal platform for them. BMW recently spectacularly launched its new 7 Series in Miami and Dubai simultaneously. The company is also preparing for the arrival of that most coveted of status symbols: Rolls-Royce.

The first Rolls-Royce units after its ownership passed on to the BMW Group from January 1, 2003, will be reaching their Middle East owners by April. Deliveries will be made only on firm orders placed in advance, and carry a price tag of $300,000.
But the mark will still face major challenges in the super-luxury market - Britain's Bentley, with which Rolls-Royce shared parentage until recently, is launching a major offensive in the region by bringing in new models.

Then there is, of course, the Maybach from the DaimlerChrysler stable. Priced from 310,000 euros, it will reach regional showrooms some time during the second quarter, and company officials are looking at annual sales of 100 units.

BMW cannot reasonably expect Rolls to deliver numbers beyond 100 units or so in the Middle East. Rolls sales will be more about fat margins and the prestige it brings to the BMW table. On volumes, it will have to look elsewhere.

For that, there is the rollout of the new version of the 5 Series, plus the introduction of the X3, which would belong to the BMW SUV line-up. Then comes the 2 Series, which would represent BMW's first step to expand within its own line-up. 'With such a wide range, BMW should be looking to sales of 20,000 units plus and not be content with 10,000,' says a senior manager at archrival DaimlerChrysler.

'While market conditions will have their impact, it is my belief that they may be running out of steam and may not have much more room to grow.'

BMW is betting a great deal on the continued success of its SUVs. But that is not going to be easy. Apart from traditional rivals such as DaimlerChrysler and Audi, BMW will have to contend with new model launches from another German rival, Porsche, a fighting fit Lexus and a much-revived Cadillac. Porsche is still basking in the stunning response to its Cayenne model, which has proved to be a very big hit in the United States.

The company hopes to repeat the performance in other markets as well, and the initial response to the Cayenne has been extremely encouraging in the Middle East, with pre-launch orders going well over 500 units from the region alone. The Cayenne, which has a higher price tag, will definitely prove no mean challenger to the X5.

But the Cayenne is not the only threat for BMW. A renewed Lexus, the luxury mark of Japanese powerhouse Toyota, is also a strong player in the market. The fall in the Japanese yen last year helped Lexus to entice buyers with very competitive prices. Toyota has also boosted the line-up, with several new models to pick from in the Lexus range.

There is another factor that all contenders in the luxury car market will need to contend with - the re-emergence of Cadillac as a force to reckon with. From the General Motors (GM) stable, Cadillac had a very good track record in the Middle East, but had lost its edge in the last decade. GM has in the last few years pumped in billions of dollars to redesign the entire Cadillac line-up, and the initial signs are quite positive.

'This year and the next will see us go quite far in turning around Cadillac's fortunes in this region,' says a regional GM official. 'There will be a full line-up of launches of new models, which we are sure will develop a committed following and give the other contenders a run for their money.'

Then there is DaimlerChrysler, which holds on to the mantle of the biggest luxury car maker in the Middle East by some distance. Smarting from a drop in sales of its Mercedes-Benz cars during 2002, primarily because of insufficient deliveries, the company expects to regain the lost glory in the region during 2003.

A solution has also been reached on ensuring supplies meet market requirements, especially on the E-Class.
But there is a dark cloud that all European makers will have to look to: the rise in the value of the euro during the last four months has been described as 'alarming' by many as it will make imports costlier, and thus put off buyers. The euro has already gained nearly 18 percent against the dollar, making European products extremely expensive.

'In an uncertain market, a euro that is firming up to the dollar is the last thing any European manufacturer wants. We are watching the movements very closely, and will shortly decide on revising pricing strategies for the near term,' said an official with a German make. So far, most European manufacturers, and their dealers, have mostly resisted passing on the higher euro charges. But if they don't increase the prices, the manufacturers will see profits plunge.

It will be slight consolation for BMW that both DaimlerChrsyler and Porsche are in the same boat, and that a rising euro will hurt all three. This could, of course, leave the path open to other players from Asia and the United States - notably Lexus and General Motors - for whom a rising euro is not a problem.