BMW has long called itself the ultimate driving machine, but lately it does not seem to be the ultimate destination for customers in the market for German luxury and performance. In 2016, BMW lost its crown as the top selling luxury brand around the world to fellow German rival Mercedes Benz. In 2012, the BMW brand led Mercedes Benz in global annual sales, but the three-pointed star gained the top spot in 2016 and has held it since. Mercedes has also surpassed BMW in their home continent of Europe, a major market for both. To be fair, in 2018, the total sales for the entire BMW group slightly outsold Mercedes Benz cars. BMW Group sold 2,490,664 units that year, compared with 2,438,987 for Mercedes Benz cars. But still, investors and industry observers have noticed the edge. Mercedes has gained on BMW. Sales growth at BMW has slowed over the last five years, and investors

worry the brand has become a bit stagnant. BMW really has become a bit stale and boring, too much consensus driven, doing more of the same. And I think they need to go back to really innovate a bit more aggressively. And the design has become, you know, it's just more of the same. So I think BMW is a bit of an identity crisis. And ultimately, that's, you know, really, if you sit back, the reason why they're replacing a CEO, because everything has become a bit lame. BMW appointed a new CEO in August 2019 and has assured investors it is on its way to reinvigorating itself. To understand how a name as storied as BMW now elicits such opinions from the investment community, it is important to look at its history and what turned it into such a powerful automaker in the first place. BMW was founded in 1916 as an airplane engine manufacturer, also out of

the First World War came a
remarkable German effort, the BMW. Now, this engine is the first engine that
I know of in all of history that attempted to overcome the effects
of altitude on power. The famous blue and white emblem,
which has changed little since the company's founding, incorporates the blue and
white colors of the Bavarian state flag in a form that is
meant to resemble a rotating airplane propeller. In the years following the
First World War, a state prohibition on the manufacturer of airplane engines
led the company to make railway breaks and inboard engines. BMW announced it would make its
first complete vehicle, a motorcycle, in 1923. The basic engine design of that
first BMW motor model has remained largely the same ever since
the company acquired an automotive manufacturer in 1928 and produced its first
cars under the BMW name in 1929. The earliest BMW cars were
designs licensed from the Austin Motor Company. But BMW started producing
its own designs in 1932.

When World War 2 broke out, BMW made weapons and other wartime materials, often relying on forced labor from convicts, prisoners of war, and concentration camp prisoners. The company said it is painfully aware of the suffering it caused at this time and regrets the fate of these forced workers in the wake of the war. The machines used for armament manufacturing were destroyed, and the company made household appliances. The occupying U.S. military government ordered BMW plants to be dismantled, and a considerable portion of machines were shipped to other countries as reparations for the war. BMW eventually restarted motorcycle manufacturer after World War 2, beginning with an improved version of the original R23 model the company had first designed in the early 1920s. The motorcycle exceeded sales expectations, selling 9,144 units in its first year. BMW began making cars again in the early 1950s. Its first postwar car was the 501, which was not a sales success.

The company's first real hit car came
in 1961 with the compact 1500 sedan. The group established its racing subsidiary,
BMW Motorsport, in 1972, which would provide direction and inspiration
for BMW's performance-oriented cars. The 1500 was something of
a turning point for the brand. BMW soon came out with similar
models: a 1600, 1800, and 2000. But it was the 2002 that really made
waves, and it is often credited with being the first model that distinguished BMW
as a purveyor of a new type of vehicle. The German sports sedan BMW
replaced the 02 series with the 3-series in 1975, and since that time,
the small sporty car has been the sports sedan to beat. BMW also eventually began selling cars bearing
the M badge from BMW Motor Sport Division. Cars such as the M3
and M5 were and still are higher performance versions of BMW sedans
that offer ordinary customers the

performance needed for the track BMW,
whose sales grew as the company solidified its reputation for combining
luxury performance with a European pedigree. But over time, buyer tastes begin
to shift, starting with a boom in sport utility vehicles
in the late 1990s. BMW and German rival Mercedes were
both keen to meet the need. BMW introduced its first sport utility
vehicle, the X5, in 1999. Purists cried foul, as they would
with other brands embracing the SUV trend. Perhaps sensitive to this, BMW notably referred to its SUVs
as sport activity vehicles, avoiding the association of its
products with utility. Despite the backlash, selling sport
activity vehicles has boosted the company's top line. They accounted for 37.3 percent of total BMW sales in
2018, an increase over the 33.8 percent in 2017. However, some investors worry that BMW has
strayed a bit too far from its

identity as a German performance brand. I mean, I think that what they're trying to do is create a driver's car, even if it is a large SUV or a midsize SUV, and still make it fun to drive for that segment. Obviously, a next seven will not drive like an. That is just not possible in physics. But in terms of cannot drive and be more fun than some of its competitors. Maybe that's their strategy. But I do think that certainly waters it down. And I think when people think of performance, they're not necessarily thinking an SUV. In recent years, BMW sales have not kept pace as well as Mercedes with growth in the global luxury market. Mercedes has kept up share along with some of the peers that have stolen share from BMW. And a big reason for that is Mercedes just simply sells more model variants than BMW does. And if a consumer is moving more towards premium or luxury versus just

driving experience, we think more
customization, and more model variety kind of plays into Mercedes' hand. Investors also worry BMW is falling behind
in the race to make profitable electric vehicles, a key frontier
in the auto industry. The company had an early lead over
many other car companies with its fully electric i3 city car and
its hybrid i8 sports car. BMW said it will end production of
the i8 after releasing a limited ultimate sophisticated addition. The i3 has not been
a resounding sales success either. Its design was unique but polarizing,
with many reviewers remarking on its odd shape and its lack of
consistency with BMW's overall aesthetic. The car also cannot drive as far
on a single charge as other electrics, even less expensive ones. Of course, there are elements of
the i3 that are remarkably innovative, such as the carbon fiber chassis BMW uses to reduce weight and extract more
range from the car on a charge.

And despite the fact that
the car is so small, BMW has said it has the same
amount of interior space as the brand's famous three series sedan. Now, many automakers are pushing their
own fully electric vehicles out into the market, and BMW has at times
appeared to waver in its commitment to electric vehicles. Critics accused former CEO
Harald Krueger of being a bit too cautious in
investing in electrification. The brand's electrification strategy has also changed
tax while the i3 is a fully electric vehicle. BMW now is pushing more aggressively into
plug-in hybrids, cars that run on both gasoline and a
rechargeable electric battery and motor. This might be less costly than investing
in fully electric vehicles in the short term, but industry analysts wonder
what will happen when the larger industry switches over to
fully electric cars. The concern we have longer term for
them is that they are approaching electrification with a very
aggressive plug-in hybrid strategy.

And the concern there is what
happens if consumers want full battery-electric cars quicker than expected. One of BMW's key competitors is Audi,
which is owned by the massive German automaker Volkswagen. VW has thrown its full weight
behind battery electrics, betting that it can manage the costs of going all
in on the technology and selling electric cars at high volumes. VW is capable of the reason for that. They just have more scale right there,
doing the Jaguar with Naut Volt. When you have scale, you can cut out
most of the costs when making it better. A large chunk of it,
30 percent, is just manufacturing scale. So they're definitely
in an advantage. And you're right. BMW is going to
face more margin dilution in the short term than VW. At the Frankfurt Auto Show in
2019, VW reportedly said it has already brought down the costs of batteries
to 100 dollars per kilowatt hour.

And there are doubts BMW can achieve battery costs anywhere near that. That said, premium automakers such as BMW are likely to have an easier time managing the costs of the tech needed to comply with increasingly stringent emissions regulations, since they can simply charge higher prices for their vehicles and secure better margins than many mass market automakers. The real reason for this is electrified car, especially fully electrified cars cost more to me than their ICE counterparts. And the real reason for this is the costs of the batteries so much today. Now, over time, the battery costs could come down. But as we've seen from the likes of Tesla, for example, the premium consumer is less price sensitive and can pay more. We know that the EVs will cost more than the AC ICE counterparts. So having the premium offering should help with meeting CO2 requirements and and getting the consumer demand and consumer willingness to effectively pay more for these products.

BMW's current story does have some bright spots. The brand has a slew of new cars coming out over the next few years, including a new addition to its electric I sub-brand and new M division models. BMW also has strong brand recognition, but I don't think the products are necessarily the problem. It is competition in the market itself. The fact that, you know, people have come along like Elon Musk and have just wowed people and got them apart to be a part of something that is completely different than when BMW is doing. I mean, BMW, Tesla. It's just not possible. So in terms of refreshing their image, perhaps it is. It is a marketing, advertising, and image exercise rather than a product exercise because I don't think that there's a problem there. Things like the way the vehicles, they like the way that they drive. It's not that necessarily. It's just it's it's a tough market out there, though.

It has arguably gone from sports sedan purveyor to a high-end family wagon maker. Its cars are still highly desired among buyers around the world. That includes the largest and perhaps most important market in the world today, China. The Chinese auto market has been slowing over the last few quarters, but much of the softness has been in the mainstream segments. The premium segment where BMW plays has remained strong. And BMW is still seeing solid growth there. It is by far BMW's largest market, accounting for 30 percent of its global sales in 2018. BMW Group's China sales rose nearly 8 percent to 640,800 three units. That's up from 595,020 units in 2017. In 2018, BMW said it would be increasing its stake in its Chinese joint venture in 2022. Typically, foreign automakers doing business in China have to enter into 50/50 partnerships with local firms.

By increasing its stake, BMW is increasing
the profits it can pull from its venture. This is also important
because in the coming decade, emerging markets will account for 100
percent of incremental auto sales. 70 percent of that will be in China. Furthermore, BMW China margins are higher
than its non-China margins. BMW told CNBC it considers
itself the ultimate driving machine. No matter the model or drive train,
the legendary German brand will likely need to plow those profits back into
its business if it hopes to regain its title of the world's
best-selling premium brand.

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