BMW’s supply chain in the face of isolationism

BMW manages the risk caused by increasing isolationism through a combination of its global production network and active currency hedging.

“I would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35 percent tax, then you can forget that. […] For every car that comes to the USA, you will pay 35 percent tax” – President Trump, January 2017[1]

The threat of a protective tariff from the US is only the latest of many issues that BMW, the German manufacturer of premium cars, has been trying to solve in minimizing the risks in its global supply chain. BMW has relied on the benefits of globalization to drive down costs using low-cost suppliers and to expand its sales footprint into growth markets, specifically China and the United States.[2] [3]

More recently, however, currency risks and political movements towards more trade isolationism increased pressure on both top and bottom line and led BMW to reevaluate its supply chain strategy that relies heavily on sales in concentrated areas of the world and single-sourcing parts from critical suppliers.

Managing these risks in the supply chain is a particularly important aspect for BMW as its smaller scale (2.4 mn vehicles in 2016 compared to 10+ mn for Toyota/Volkswagen[4]) leaves the leaves the company with fewer cost levers to pull than its competitors

BMW’s current supply chain strategies

Global production and supplier network

BMW distributes its production across the world to minimize its total cost of serving customers, taking advantage of differences in local sourcing costs, labor rates, capital expenditures and distribution/transportation costs. It employs an optimization model to plan out the allocation of production across all facilities over a 12-year horizon with a focus on demand and production flexibility.[5]

The model takes into account tax rates, import tariffs and more sophisticated variables.[6]  As a result, the company’s production network includes over 20 factories, sourcing from 13,000 suppliers across 70 countries and producing 2.3 million vehicles annually.[7] [8] Production facilities for specific vehicle types are strategically located in regions that generate the most sales for these programs – e.g., the US plant in Spartanburg manufactures most major SUV programs (X3, X4, X5), and the Chinese plants produce vehicle types that are in demand locally(small SUVs and sedans).[9] In fact, the Spartanburg plant is BMW’s biggest plants worldwide (410,000 vehicles produced in 2016)[10], while capacity at the Chinese plants is expected to increase to 450,000 vehicles annually.[11]

Employing a “local for local” production strategy not only optimizes supply chain costs but also minimizes the risks of protectionist tariffs that might increase transportation/distribution costs – something BMW has realized through localizing production in its major markets abroad – US and China (16% and 22% of global sales volume, respectively).[12]

Currency hedging

Another risk that arises from isolationism is an increase in currency risk. BMW employs two major levers to minimize its exposure to currency risk: It employs natural hedging, spending money using the revenue generated in the same country, and it has set up regional treasury centers that report and mitigate currency risks for the major currencies BMW operates in.[13] This currency risk hedging is especially critical as BMW has plants in the United Kingdom, whose currency is exposed to major volatility due to the recent political developments (Brexit).

Further proposed actions

Decrease dependency on single suppliers

To leverage economies of scale and realize significant cost savings, BMW has historically depended on just-in-time single sourcing for critical parts. This strategy had the flipside of an increased production breakdown risk due to issues at just one single supplier. Just recently, breakdowns in the supply chain for both BMW and Volkswagen halted production at their main plants for several days, leading to millions of dollars in costs due to missed production. [14] [15] BMW should proactively diversify its supplier base, especially for critical components.

Use more local sourcing

As more production volume shifts from Europe to the US and China, BMW needs to decrease its reliance on European suppliers – 55% of purchasing volume is still coming from Europe.[16]

Open questions

  • Given the trend to automated driving, how can BMW keep its position as the main value generator in the supply chain? Will it be an equal partner in the recently established partnership with Intel/MobilEye or will it eventually become a simple contract manufacturer that integrates sophisticated software from upstream value creators?
  • How will BMW handle the upcoming changes in its supply chain as it moves away from producing internal combustion engines to integrating electric engines?
  • How will BMW retain or reposition its value proposition – sporty, innovative, fast cars – as the trend in the automotive industries moves to autonomous, economic and shared driving?

Word count: 759

 

References

[1] Taylor, E., & Rinke, A. (2017, January 16). Trump threatens German carmakers with 35 percent U.S. import tariff. Retrieved from Reuters: https://www.reuters.com/article/us-usa-trump-germany-autos/trump-threatens-german-carmakers-with-35-percent-u-s-import-tariff-idUSKBN1500VJ

[2] Robertson, J. (2017, February 8). Why carmakers have the most to fear from protectionism. Retrieved from BBC: http://www.bbc.com/news/business-38570387

[3] Taylor, E. (2017, May 19). BMW to boost China production capacity. Retrieved from Automotive News Europe: http://europe.autonews.com/article/20170519/ANE/170519763/bmw-to-boost-china-production-capacity

[4] BMW Group. (2016). Annual Report 2016. Munich: BMW Group.

[5] Fleischmann, B., Ferber, S., & Henrich, P. (2006). Strategic Planning of BMW’s Global Production Network. Interfaces, 36(3), 194-208.

[6] Fleischmann, B., Ferber, S., & Henrich, P. (2006). Strategic Planning of BMW’s Global Production Network. Interfaces, 36(3), 194-208.

[7] BMW Group. (2017, November 14). Supply Chain Management: Supplier Management. Retrieved from BMW Group: https://www.bmwgroup.com/en/responsibility/supply-chain-management.html

[8] BMW Group. (2017, May). Sustainable Supply Chain Management. Due Diligence in the Supply Chain. Retrieved from BMW Group: https://www.bmwgroup.com/content/dam/bmw-group-websites/bmwgroup_com/responsibility/downloads/en/2017/BMW-Group-due-diligence-in-the-supply-chain.pdf

[9] BMW Group. (2017, November 14). Production: Flexible. Efficient. Innovative. Retrieved from BMW Group: https://www.bmwgroup.com/en/company/production.html

[10] BMW Group. (2016). Annual Report 2016. Munich: BMW Group.

[11] BMW Group. (2017). BMW Brilliance Automotive further expands production capacity in China. Munich: BMW Group.

[12] BMW Group. (2016). Annual Report 2016. Munich: BMW Group.

[13] Bin, X., & Ying, L. (2012, October 29). The case study: How BMW dealt with exchange rate risk. Retrieved from Financial Times: https://www.ft.com/content/f21b3a92-f907-11e1-8d92-00144feabdc0

[14] Churchill, F. (2017, May 30). Supplier delays stall BMW production. Retrieved from CIPS: https://www.cips.org/supply-management/news/2017/may/supplier-delays-stall-bmw-production/

[15] Sheer, J. (2017, June 28). The BMW Supply Chain Breakdown: What Happened? Retrieved from ThomasNET.com: https://blog.thomasnet.com/bmw-supply-chain-breakdown

[16] BMW Group. (2017, May). Sustainable Supply Chain Management. Due Diligence in the Supply Chain. Retrieved from BMW Group: https://www.bmwgroup.com/content/dam/bmw-group-websites/bmwgroup_com/responsibility/downloads/en/2017/BMW-Group-due-diligence-in-the-supply-chain.pdf

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5 thoughts on “BMW’s supply chain in the face of isolationism

  1. I found this paper very interesting. There is one section of your paper that I would like to push back on; there is a still a significant portion of the parts supply for the South Caroline made BMW’s that are imported through the port of Charleston and move through the inland port in Greer, SC. While this traffic would not be affected by the NAFTA changes it is still subject to supply chain disruptions due to weather and port closures.

    However, this risk could be corrected with the solution you propose; co-locating more parts near the final assembly location.

  2. The challenges to be addressed by the Auto industry do not stop to pile up! Isolationism, electric engines, and self-driving capabilities just to name a few. On the isolationism front, I see the auto industry being able to adapt itself to new taxes incentives and the fact that BWM already owns plants in the US is a good starting point. On the other hand, I do not see the big auto manufacturers being able to catch up on the self-driving capabilities fast enough to be competitive with companies that were born with a tech DNA (like Tesla, Google and Uber). In that context, I see as extremely positive BMW’s initiative of joining forces with companies like Intel/MobilEye to keep its competitiveness and speed up its progress towards the future.

    Of the three concerns raised in the article, I believe that the most crucial challenge to BMW would be to need to shift its value proposition from sporty and innovative to economic and eco-friendly cars. Those values are so inherently associated to the brand that any change on that could offend its current customers and do not seem credible enough to new ones. I do not believe, though, that such movement will happen anytime soon and the fact that Tesla cars are on the premium segment is a prove of that.

  3. Very interesting. I’d like to dig into the point regarding autonomous vehicles. It seems like BMW will need much more coordination with US markets, particularly SF and Pittsburg. Given the complexity in the additional hardware components (chips to run the AI) in addition to the software, I wonder if BMW will be able to reduce manufacturing costs by setting up more production facilities in the US.
    https://techcrunch.com/2016/09/15/the-end-of-the-automotive-supply-chain/

  4. The nationalist sentiment that has engulfed several major global markets seems to largely target foreign companies that export goods to these markets now subject to nationalist policies. I am curious to get your thoughts on how these policies will affect the people they are intended to protect. My experience tells me that nationalist policies are often intended to protect the jobs of domestic workers, but often ignore the impact these policies have on prices passed on to domestic consumers. Can companies like BMW get around the tariffs proposed by global leaders like President Trump by building more plants in target markets (similar to BMW’s Spartanburg plant)? If so, will import tariffs apply to the components assembled in these plants? Does the U.S. economy have the ability to supply these plants with domestically-produced components? Would you recommend that BMW continue to target increasingly isolated economy like the U.S., or should the firm focus its sales efforts on my globalization-friendly markets?

  5. Thanks Thomas, I am certainly hoping they overcome the myriad of challenges given I’d like to own one of their cars here in the U.S. someday…As you mention, there are several strategies BMW can leverage to combat the isolationist rhetoric in the U.S., which, to be fair, is all it has been thus far: rhetoric. You mention local procurement and manufacturing, but I was curious what technical or operational changes could be made in addition to these more strategic shifts? This past summer, BMW and GE invested in a startup called Xometry based in Maryland that essentially functions as a marketplace for small, custom manufacturers and large scale manufacturers like GE and BMW [1]. This is an interesting strategy because it pairs large scale industrial giants with the long tail of American manufacturers. The National Association of Manufacturers in 2014 estimated there were nearly 252,000 manufacturing outfits across the country. More than 248,000 employed fewer than 500 workers, and nearly 190,000 had fewer than 20 employees [1]. This platform would seemingly give BMW access to this supplier and parts network in a much more efficient manner, and eliminate the need for their own production plant or imports. If BMW scales this investment or acquires it outright, it would perhaps signal a shift to a more asset-light, platform marketplace model for operating in the U.S. However, this does also contribute to the risk you identified of BMW losing its role as the main value generator in the chain.

    [1] Soergel, Andrew, “BMW, GE Commit Millions to Digital Manufacturing Marketplace”, U.S. News & World Report, posted June 28, 2017. , Accessed November 2017.

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