Why BMW is Waiting to Mass-Produce Electric Vehicles
BMW AG (NASDAQOTH: BAMXF) launched its first battery-electric vehicle way back in 2013, and it has been working to advance the technology ever since. But its CEO said on Thursday that it won't begin mass-producing electric vehicles until 2020.
Why not? Because the technology still isn't profitable, and BMW isn't willing to sell those cars at a loss.
Why BMW is waiting to mass-produce electrics
BMW has made great strides in electric-vehicle technology since 2013. The latest electric BMW, the i8 Roadster sports car, uses what the company calls its "fourth-generation" technology: Better batteries give the new model about 40% more range than its predecessor.
BMW CEO Harald Krueger with a show car that previews the upcoming all-electric i4 sedan. Image source: BMW AG.
But CEO Harald Krueger told investors on Thursday that the leap that BMW made from its third-generation technology to the latest fourth-generation version wasn't enough to make it viable for mass production. It needs one more leap:
We wanted to wait for the fifth generation to be much more cost-competitive, the jump from the fourth to the fifth generation. And the fifth generation [will be] available first in 2020.
The cost advantage will be a "two-digit" percentage improvement, Krueger said. "It's not 5%. It's something which we believe is a major step forward."
Krueger feels that BMW needs to wait in order to have competitive costs. While larger rivals like Volkswagen AG (NASDAQOTH: VLKAY) and General Motors (NYSE: GM) can afford to build electric vehicles at a loss in order to advance the technology and build a presence in the market, BMW is a smaller company. It needs to wait until it has a cost advantage to be competitive, he said:
If you would like to win the race and electrification is the future, you must be the most cost-competitive in that segment. Otherwise, you can't scale up the volume. And that's why we are doing so much intensive research on these things. There is a lot of material, cash, set of production in all these things, because you need to understand that in detail to take all the costs.
BMW is spending big money to win those cost advantages
BMW is planning to roll out a battery-electric version of its huge-selling X3 compact crossover SUV in 2020, and to have a total of 12 battery-electric models by 2025.
The company is spending a lot of money to get there. BMW spent 6.11 billion euros (about $7.5 billion) on research and development last year, an increase of 18% from 2016. That was 6.2% of its total 2017 revenue. It expects to spend more in 2018, between 6.5% and 7% of its total revenue.
An all-new version of BMW's big-selling X3 arrived last year. BMW will roll out a battery-electric version in 2020. Image source: BMW AG.
A year ago, Krueger said that BMW would fund that increased spending by rolling out more high-profit SUVs. That has begun: An all-new (internal-combustion) X3 was launched last year, new versions of the X2 and X4 crossovers are coming in 2018, and an all-new high-end X7 SUV is expected to arrive near the end of the year.
But CFO Nicolas Peter said that BMW still might need to charge a premium for that first battery-electric X3 in 2020:
We will have to coach, we will have to explain to our customers that this technology is not for free. This technology has an add-on cost against today's combustion engine.
The upshot: As usual, BMW is proceeding carefully
Since taking over as CEO, Krueger has been careful to balance BMW's need for advanced technology to stay competitive with a realistic view of the company's size and budget. Unlike its rivals Audi AG, which is owned by giant Volkswagen, and Mercedes-Benz, which can leverage parent Daimler's (NASDAQOTH: DDAIF) truck and bus businesses for added scale, BMW is on its own.
That means it needs to proceed carefully into the electrified, self-driving world. And that's why Krueger feels the need to wait until 2020 (or a bit later) to begin ramping up production of battery-electric vehicles.
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John Rosevear owns shares of General Motors. The Motley Fool recommends BMW. The Motley Fool has a disclosure policy.
