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					January 10, 2005; Page A1

Navigating Curves BMW's Push to Broaden Line Hits Some Bumps in the Road
World-Wide Sales Are Up, But Style, Tech Glitches Turn Off Longtime Fans
A Wurst in Three Sizes

By NEAL E. BOUDETTE
Staff Reporter of THE WALL STREET JOURNAL

Ten years ago, BMW AG looked into the future and concluded its business was in
danger of running out of gas.

Through the 1980s and early 1990s, BMW had been one of the world's most ingenious
marketers of luxury goods. With pinpoint precision, it identified a swelling class of
prestige-minded yuppies and built them the cars they craved: sporty sedans that weren't
flashy but could outrun just about anything else on the road.

The car maker kept it simple: Its trademark 3, 5 and 7 series coupes and sedans all had
the same basic design. BMW's planners called the concept "Eine Wurst, drei Grösse" --
one wurst, three sizes. BMW's white and blue hood emblem became a world-wide
symbol of achievement.

But in the late 1990s, BMW sensed that the attitudes and values of luxury-car buyers
were shifting. Many were placing more emphasis on family and leisure time. These new
upscale consumers included aging baby boomers, yuppies who went on to start
families, and liberal-minded professionals who piled up wealth in the '90s boom. For
them, sporty sedans alone wouldn't cut it, research indicated. They wanted more vehicle
choices and more eye-catching designs to suit their changing lifestyles.

With its future at stake, BMW made an ambitious gamble: It spent billions of dollars to
broaden its single, narrow product line into a whole spectrum of upscale cars. It
acquired Rolls Royce and relaunched the Mini, the British cult car of the '60s. It put the
BMW brand on sport-utility vehicles, convertibles, roadsters and, most recently, a
compact car.

At the same time, BMW has completely remade the 3, 5 and 7 Series. Sensing the one-
wurst look had become boring, it has given each car its own distinctive design of
sculptured curves and creases, and infused them with advanced electronics to make
them luxurious as well as sporty to drive. The new 5 and 7 Series are out now; the
redesigned 3 Series is on the way.

"We had to do something different," says Helmut Panke, BMW's 56-year-old chief
executive. If BMW had continued on its old path, with the same three nearly identical
sedans, "we would be in a dead end as a brand and as a company."

BMW is now about halfway through its massive overhaul. In the past four years, while
most car makers' sales have stagnated, BMW's vehicle sales have soared 34%. But
signs of trouble are cropping up, raising questions about whether the strategy will prove
successful in the long run. The new curvy styling is turning off some longstanding fans.
Some of the new technology has glitches. Meanwhile, competitors like Cadillac and
Nissan Motor Co.'s Infiniti brand borrowed from BMW's old strategy and produced
faster, sportier sedans. They're now pulling in some disaffected BMW fans.

As a result, the new-look 5 and 7 Series are slumping in the U.S., BMW's biggest
market. Another sign something isn't working: BMW in the past year has resorted to
something luxury-car makers loathe -- price-cutting.

This year, BMW will face two critical tests of its strategy. In the spring, the new-look 3
Series will debut. Mr. Panke says BMW "has listened to the feedback" about its recent
designs and promises the new 3 Series is less of a departure from BMW tradition than
the already-launched 5 and 7 Series. A slip-up with the new 3 Series, BMW's top-seller
and the icon of its brand image, might force a re-think of the design direction. "This has
to appeal to the BMW hard-core," Mr. Panke says.

Later in the year BMW will decide if it is going to green-light a new vehicle that risks
further stirring up purists in BMW's following. It seats seven passengers and is a kind of
minivan, although Mr. Panke declines to call it that. Inside BMW, it's known as the
"Raumfunktionales Konzept" -- space-functional concept. If BMW decides to go ahead
with the car, it won't feel anything like a minivan, Mr. Panke says. "It will drive like a
BMW."

Although it has one of the strongest brand names in any industry, BMW is only the
world's 14th-largest car maker as of 2003. Unlike most of its competitors, BMW doesn't
strive to compete in every segment of the auto industry. Instead, the Munich-based
company shuns the high-volume market of middle-of-the-road vehicles and focuses
strictly on premium-priced cars. The Mini, for example, is smaller than a Honda Civic,
but is priced at about $3,000 more.

This strategy has made BMW, despite its relatively small size, one of the world's most
profitable car makers. In 2003, its automotive operations generated $3.5 billion in
operating profit, more than those of General Motors Corp., Ford Motor Co., Volkswagen
AG and Renault SA -- combined.

The remaking of BMW sprung from an exhaustive study jointly funded in the 1990s by
European car makers including Mercedes, Volvo, Audi and BMW. It was carried out by
Sigma, a German research firm that had pioneered a method of predicting shifts in
consumer tastes.
Sigma's technique looks beyond demographics such as age and income.
It often interviews consumers for hours and even photographs their homes and offices
to build a picture of the mindset of different consumers. Its work for the car makers
found the yuppies of the '80s and '90s -- a group it called "social climbers" -- were
motivated almost exclusively by professional success. They put work first and gladly
flaunted their wealth. For them, driving a Bimmer was the perfect way of saying "I've
made it."

But Sigma found this greed-is-good, look-at-me attitude was becoming passé by the
late '90s. For BMW, there would be little growth in its future if it stuck with serving just its
hard-core customers.

Sigma predicted -- correctly, it turned out -- the luxury-car market was headed for a
significant expansion. As the yuppie lifestyle goes out of fashion, Sigma said, other
groups with different upscale mindsets would increase in number.

One group, dubbed "upper liberals," includes socially conscious, open-minded
professionals who hit it big in the '90s. Some are former yuppies who have gone on to
have kids. They are still professionally ambitious, but now take time out for family and
demanding hobbies like skiing, triathlons and mountain biking.
Sedans don't have the room or flexibility for their active lifestyles. In the past they often
leaned toward Volvos, Saabs and sport-utility vehicles.

"Post-moderns" are high-earning innovators like architects, entrepreneurs and artists.
They are highly individualistic and gravitate toward head-turners like convertibles and
roadsters.

Another group called "upper conservatives" is made up of wealthy, traditional thinkers.
They've never been that interested in driving sporty cars like BMWs, and prize luxury
and comfort over driving performance. In their minds, the Mercedes S-Class and
Jaguars set the standard for elegance and sophistication.

A final group in the Sigma study consists of upper-middle-class consumers at the top of
a milieu known as the "modern mainstream." Like upper liberals, they are family-
oriented and active. Typically they leaned toward near-premium brands Honda or
Volkswagen; BMWs were too expensive for them. But increasing numbers of them are
looking to move up above the middle class and are open to luxury-brand cars.

With this thinking as its roadmap, BMW began spending billions of dollars to remake its
product line. For upper liberals, it added the X5 in 1999, an SUV that the company
prefers to call a "sports activity vehicle," in a bid to appeal to this group's active lifestyle.

In 2001, it launched the new Mini, aimed at upper-middle-class buyers who aren't quite
affluent enough to buy a BMW branded car. This group is also the target market for the
new BMW compact, the 1 Series, which just arrived in Europe. It's due in the U.S. in
2006 or 2007.
A BMW-developed Rolls Royce -- the $325,000 Phantom arrived world-wide in 2003 --
is intended for the very wealthiest upper conservatives.

The most jarring change came in the redesign of the 3, 5 and 7 Series, the company's
core vehicles. BMW's American-born chief designer, Christopher E. Bangle, gave them
a futuristic design. Mr. Bangle, who joined BMW in 1992 after stints at Fiat and GM's
European Opel operations, says BMW's goal is to create art on wheels.

The first of the series to be redesigned was the 7 Series, which was aimed at upper
conservatives. In a bid to appeal to their appreciation for luxury, comfort and no-hassle
driving, the new 7 Series was loaded with electronics: computerized suspension to
smooth out bumps in the road, push-button ignition to eliminate the chore of twisting a
key, and more than 100 microprocessor-controlled motors to adjust the windows, seats,
airflow and lights.

To control so many features, drivers use a knob on the console, called iDrive. Like a
computer's mouse, it can point-and-click through menus on an in-dash display.

A new 5 Series with a similar look arrived in 2003. Last year, BMW added two more
vehicles: the 6 Series, a flashier coupe derivative of the 7 Series intended for post-
moderns, and the X3, a less-expensive SUV targeted at the modern mainstream.

Although all the new models have lifted world-wide sales, BMW has hit some bumps
along the way. Some fans complained the 7 Series' bulbous trunk lid looks like it was
glued on as an afterthought. On the Internet a "Stop Chris Bangle" petition drew
thousands of postings.

The aggressive styling has "caused some customers to not want to move forward," says
Frank Ursomarso, who's been selling BMWs for 28 years at Union Park BMW in
Wilmington, Del. "Sometimes you can be too far ahead."

That was the case last summer when Shannon Yauchzee considered the new 5 Series.
A die-hard BMW fan, the 39-year-old civil engineer has owned seven BMWs in the past
11 years. He belongs to the BMW Car Club of America and teaches performance-
driving classes for its members on weekends.

But he sat in the 5 Series for only a few minutes and then walked away. "I didn't bother
to drive it," he explains. "I just couldn't get past the styling." In August, he got a new ride
-- a $48,000 Audi S4 with a V8 engine, an option he couldn't get in the BMW's
comparable model, the 3 Series.

The new electronics have caused problems. Frustrations with the iDrive control system
lead some owners to call it "why-Drive" or "iDunno." Glitches in other components sent
customers back to dealers again and again in search of fixes, denting BMW's reputation
for quality. In a recent issue of Consumer Reports, not a single BMW was judged
reliable enough to make the magazine's 2005 recommended list.

"We are not at the reliability level that we have to be at for our customers," Mr. Panke
admits.

Competitors' sportier new sedans like the Cadillac CTS and Acura RL are also starting
to give BMW trouble. Retooled with bigger engines and more advanced steering and
suspension systems, these cars have narrowed or even erased BMW's lead in handling
and performance.

Last summer Godfrey Chua, a market researcher in Boston, was looking to replace his
1994 BMW 530i. He had his eye on a new 3 Series, but after test-driving and comparing
it to alternatives, he drove off in an Infiniti G35 coupe.

His new car is slightly less agile than its BMW counterpart, the 3 Series, he says, but is
a bit quicker since its engine is more powerful -- 280 horsepower compared with 225 for
the 2004 3 Series. And his G35 cost $33,600, $7,000 less than a comparably equipped
3 Series. "You don't have to pay BMW money to get BMW performance," he says.

BMW finished 2004 with mixed results in the U.S. market. U.S. sales of BMW-branded
vehicles rose 8%, but thanks only to the new X3 SUV. Without that vehicle, sales would
have fallen 6%. The brand-new 5 Series suffered a 3% drop. That's a jarring reception
for a car that rivals routinely admit to using as a benchmark when designing their own
luxury models. Sales of the Bangle-designed 7 Series and Z4 roadster fell 21%, and
33%, respectively.

Facing less-than-robust demand, BMW has had to prime sales with profit-eating
incentives. It subsidized leasing deals on the X3 for most of the year. In December it
held a year-end clearance sale in the U.S., the first time it's ever done so. Recently a
$5,000 rebate was offered on the Z4 roadster through a promotion run by American
Express Co.

Mr. Bangle, BMW's head designer, shrugs off suggestions that his designs have scared
off buyers. "We're not trying to be everybody's darling," he says in an interview.
"Sometimes you leave people behind. But then you also pick up some new people."

				
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