BMW CFO on innovation in a crisis

Bayerische Motoren Werke (BMW), the luxury car and motorcycle producer, is famed for its ability to adapt to changing market conditions.

But the Munich-based giant, like its peers amongst the world’s largest vehicle makers, was put under huge stress by the onset of the coronavirus.

In March, BMW’s share price halved from a pre-pandemic high in February of around €75, prompting a series of responses in which group CFO Dr Nicolas Peter played a key role stabilising the group’s financial position.

“Our main priority was to keep the company financially healthy. Our strong credit rating enabled us to secure our liquidity and maintain good access to capital markets on the one hand, while finding efficiencies, reducing costs, safeguarding earnings and protecting our free cash flow on the other.

“To achieve this, it was crucial to manage our working capital. This meant adhering to a very strict inventory and receivables management plan. What has helped us greatly is that we already began several years ago to implement a long-term Performance Programme.

“It also gives us the leeway to continue systematically investing in the future during these challenging times. In July we intensified and extended the programme in order to focus on short-term cost discipline,” says Dr Peter.

“Overall, the programme has greatly helped us identify efficiencies across the company, understand how we can better utilise data, and transfer knowledge from one area of the company to another. This will help us leverage long term efficiencies, remain agile and flexible, and identify synergies in the company,” he adds.

The group’s leadership team also set to work monitoring activities “inside and outside the company” and a number of Corona crisis teams were set up, “with a variety of priorities, such as employee health, parts supply, supply of markets and reduction of supply stocks. Initially, these teams spoke to each other daily, then weekly,” says Dr Peter.

During lockdown, plans were developed to ensure staff could work alternately in the office and at home with the HR (human resources) team supporting managers with guidelines and producing tutorials.

“Lockdown and the ever-changing dynamics caused by the pandemic have enhanced our use of home working. We set up the infrastructure needed for about 75,000 associates around the world to work digitally, via VPN, Skype or Teams, for example, and with increased bandwidth.

“That way, we were able to protect the health of our associates during the lockdown period. We did all that in the space of just a few days. But we also worked with the sales organisations to digitalise and enhance our sales processes.

“That’s already paying off now and will continue well into the future. Increasingly, we can sell our vehicles even within the social distancing restrictions as well, right through to vehicle handover,” says Dr Peter.

When the group released third quarter results on September the efforts could be seen to have paid off. Pre-tax profit rose 9.6 percent to €2.46bn compared to the same period the previous year- with an 8.6 percent increase in car deliveries to 675, 292. By mid-November BMW’s share price had recovered much of the ground lost as a result of the pandemic, giving it a market cap of around €43bn.

When it comes to the sales function, finance has played a key role in providing insights from data on the changing global patterns as coronavirus impacted markets.

“We first saw the market slump affect China and then hit other markets across Asia, Europe and the Americas. We are now trying to be up to date in monitoring specific developments such as showroom traffic, the number of credit defaults or finance requests from our dealers.

“The finance division plays a key role driving the company towards target values – managing inventories, outlining scenarios, implementing a stop on fixed costs, and serves as the key driver of our Performance Program,” says Dr Peter.

Commercially-oriented

What has certainly helped Dr Peter play a key role in navigating BMW through the challenges of the coronavirus environment has been the fact that he has spent 25 years at the group.

He says in that time a variety of sales and finance roles have imbued in him an innovative mindset that he says has been key to BMW’s continued value creation- be it in cars, motorbikes, commercial vehicles or aircraft engine since it was launched in 1916.

“Employees at all level are expected to have a willingness to be flexible and agile, to challenge themselves and think outside the box, because our industry is constantly changing and evolving,” says Dr Peter.

BMW managers and executives are encouraged to change their roles every three to five years, so they tend to move across various divisions. “Having a broad network and knowing the company from various roles and perspectives definitely enhances a manager’s skillset and approach,” says Dr Peter.

His own BMW experiences, in Germany and overseas, brought him into contact with many facets – internal financial steering, individual market dynamics, customer interfaces and sales volume planning and financing. “It was crucial to work in these various areas of the company and particularly to understand how the dynamic with the markets works,” he says.

A critical aspect of spending many years in roles closely aligned with sales teams was gaininga strong understanding of customer needs. “I worked directly with our dealer network, who are our direct interface with the customers in markets across the globe and are deeply attuned to our customers and their ecosystem,” he says.

A big learning curve was the global financial crisis which Dr Peter says “has been hugely instructional as to how we have managed the corona crisis”. At the time he was head of corporate controlling and in charge of implementing cost control measures, as well as approving investment for e-mobility projects.

“This involved challenging each other to handle this crisis situation. But we were able to steer successfully the company through an extremely challenging period and difficult global business environment.

“While there are certainly different dimensions to the current pandemic situation, I myself and the company in general learned a lot during that phase, about flexibility and implementing lessons learned in the current crisis.

“It helped us to find and leverage efficiencies across the company, and how we wanted to steer the company during such challenging times, finding the best ways to move forward.

“I understood very well the enormous difficulty the external conditions in such a crisis can impose on short-term planning and the ability to offer a business outlook,” he says.

Driving seat

When he was appointed CFO of BMW at the start of 2017 Dr Peter set out about developing a finance function able to address complexity across R&D, purchasing, steering and coordinating production, created by the move to digitalisation.

It has meant continuously implementing new digital tools in response. “For example, we have been able for some time now to have a real-time monitoring and immediate data presentation of our financial reporting.

“We are also automatizing our data analysis, which will greatly improve our efficiency. One example from our marketing and sales department is taht wee are analysing the so-called take-rate of options in our vehicles,” says Dr Peter.

Close ties to the sales function has also influenced how finance under Dr Peter interacts with the rest of the group. “My experience working in the finance and sales divisions means I have a broad network of colleagues internally – as well as in the markets across the globe.

“As the head of corporate controlling I also had contact with nearly every division and department throughout the company and gained critical knowledge as to how those areas function, as well as meeting the people and managers running these areas.

This all taps into what Dr Peter describes as the “next phase of learning” for BMW. He says: “As our products are becoming more technologically advanced, we need to also think in a whole new dimension. An example is that one in three employees has been trained in e-mobility so far. “That adds up to more than 46,000,” he says.

“There is certainly always more work to be done, but we can move forward from a solid starting point. All of this will also be a huge asset to us and help us come out of the current crisis situation stronger than before,” says Dr Peter.

The transformation to an ever more technologically driven company also requires overcoming cultural patterns that might slow down the change process, says Dr Peter.

He cites transparency and communication as two key aspects of this process that needed to be developed as staff worked remotely. “It is critical to inform staff across divisions about what is going on at the company, especially during a crisis,” he adds.

Road ahead

Economic disruption caused by the coronavirus pandemic continues to significantly impair forecasting and leads to considerable uncertainty in providing an accurate outlook for the short and long-term, says Dr Peter.

“For years, due to the unpredictable business environment, we had been thinking and planning in scenarios from best case through to worst case. He says this requires a very focused management approach, “particularly as volatility increases across the globe drastically”.

He says: “We need to be sure we are prepared to control what we can control and to be prepared for all scenarios. At times, we need to prepare for the worst and hope for the best.

“While the current business and economic environment may be difficult, the overall strategic trajectory of the company is still clear for us. I can say this because we always think in long-term cycles, anticipating today what is relevant in the early 2030s.

“The financial crisis taught us the value in maintaining a long-term focus on strategic initiatives for 7-14 years down the road, while managing a crisis through short-term measures in the present,” he adds.

Looking ahead, Dr Peter says BMW will continue to be managed based on both long-range and short-range planning.

“In the short-term, we need to protect the financial stability. This includes ensuring our liquidity at all times, and bolstering our free cash flow for the full financial year. Meticulous management of our working capital is crucial here.

“We also want our shareholders to participate in our success. For this reason we have a clear dividend policy, which results in a pay-out ratio of 30-40 percent,” says Dr Peter.

Looking long-term, he says there is a clear road map to make BMW sustainable – including the electrification of the group’s fleet. “As part of this process, we are setting ourselves clear targets for CO2 reduction up to 2030.

“For the first time, these extend throughout the entire lifecycle: from the supply chain through production to the end of the use phase. The aim is to significantly reduce CO2 emissions per vehicle by at least one third across the entire spectrum. We have anchored our commitments to sustainability at the core of our strategic direction.

Dr Peter says transformation has its price. “For the transformation of the company towards more digitalization and decarbonization, we are particularly dependent on the fact that our business is profitable.

We considered this at an early stage. So in 2016, when we presented our new strategy, we also began to focus on the growing and highly profitable luxury segment: This helps us gain the financial security we need to continue investing in future-oriented projects, such as the broader electrification of all brands and model series. In just two years, we have already increased our growth in these segments by 70 percent.

“We are constantly looking at trends both in our industry but also beyond our industry. We want to understand the needs and desires of our current customers, but also those of future customers,” he adds.

 

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