BMW Courts Middle East Market For Its Hybrid Line-Up

On a long stretch of open road somewhere off Munich in Germany, I finally let go of the apprehension. Brought up to drive on the commonwealth side (read left) of the road, I was fairly hesitant to let loose a hybrid German supercar on one of those no-speed-limit autobahns.

When I finally did stop hesitating and pressed on the pedal after eyeing a lack of traffic ahead, the car, the BMW i8, roared with a growl into what felt like being in a space ship going into warp drive.

Minutes became seconds as the i8 bullied past cars on the bahn at speeds exceeding 200 kmph without the slightest of sway or lack of control, guiding us home in its cosmonaut body with a heads up display that made me feel like a character straight out of the sci-fi flick Minority Report.

As I stepped out and admired the inter- galactic cruiser I had just driven, it dawned on me what BMW had done – it had made driving electric (or at least hybrid) sexy and cool. In one swipe of German engineering and design, BMW had made every soccer mom taunt about cars like the Toyota Prius implode into dust.

In that, BMW also told us what our driving future could look like.

NOT A CONCEPT

Admittedly, BMW is not the first to the gates on this ride. Tesla, the Californian disruptor led by Elon Musk, crashed that party a long time ago. But BMW is certainly one of the first major legacy carmakers to go big on electric and hybrid.

First displayed as a concept in 2009, the BMW i8 was never meant to remain a concept, indicates Dr. Ian Robertson, board member for sales and marketing at the BMW Group.

Speaking to Gulf Business on the sidelines of BMW’s Annual Conference, Robertson says that the response to the i8, and its smaller cousin, the BMW i3 has been better than expected.

While the BMW i8 is a plug-in hybrid sports car, with a 7.1 kWh lithium ion battery and a 1.5 litre combustion engine, the i3 is five-door urban electric car with an average driving range of up to 160 km.

“These cars are not just about testing the technology for the future. BMW is serious about their sales. We are already number three in the world in the segment that the i3 is in.

“For the i8, the sales figures are up there with other high performance sports cars and already selling more than them,” he says, adding that both cars are also an opportunity for BMW to bring a new type of customer to the brand.

Still, the way the market responds to the BMWi series of cars will have a measurable impact on the future range we may see at the Bavarian carmaker.

Klaus Fröhlich, board member for development at the BMW Group, revealed at the conference that technology from the two will crossover to mainstream products starting with the X Drive range of cars, which will be offered in a plugin hybrid option beginning Autumn 2015.

According to Robertson, carbon fibre technology from the BMWi series has crossed over and it is inevitable that its battery technology will eventually find its way to the mainstream cars.

“Battery tech is key to electronic mobility,” says Fröhlich.

“The average density of lithium ion cells has increased and will double again for automotive applications over the next five years. At the same time, cost per kWh will drop, which will convert to an extended range and reduced costs. Electric mobility would eventually be a part of, and more useful for, daily life.”

NOT SO FAST

However, even Robertson acknowledges that there are considerable challenges to overcome before a car like the i3 or any of its successors could be the go-to-car for the urban, daily commuter.

For one, the policy framework in many countries still makes it unfeasible for consumers to go electric. Case in point, Germany, the carmaker’s home market, which has yet to come up with a concrete policy on the issue. We are also in an era of cheap oil, which could at least in theory, delay consumers from going electric or hybrid. Robertson nods in agreement and admits that there will be some short-term affect of low oil prices on the US market.

“Perhaps not in the European market. In Europe, taxation still keeps the price of fuel high. But I think that one thing that is very clear – that the legislation in development and in place across geographies will continue to drive miles per gallon up and Co2 emissions down.”

Over the next 10 years, the adoption of zero emission electric and hybrid technology is set to grow to meet some of the emission targets being set, Robertson argues.

“I don’t see any change from the legislative angle or the environment umbrella to change that,” he says. “Also, we need to look at urbanisation as a factor.”

“The US has two megacities (Los Angeles and New York), Europe has one (London), South America has three (Mexico City, Sao Paulo and Buenos Aries), and the rest are in Asia, of which there is only one old one (Tokyo),” he says.

“And if you look at the environmental challenges they have and will continue to have, zero emissions will have to come.”

ARAB ELECTRIC

Talking of mega cities, our conversation veers to Dubai, Abu Dhabi and Middle East, where I point out that countries offer substantial fuel subsidies, working against the idea of zero emission adoption.

BMW currently only has the i8 on sale in the GCC, of which it has sold more than 50 since its launch in 2014. The i3, the pure electric offering, has however been not launched in the region.

“When we first told our Middle East dealers about the i8, they were not too excited. However, when they saw it and drove it, the excitement levels definitely went up. We sold a lot of them in the region last year,” he says.

One factor holding back the i3 is recharging infrastructure, which is not in place right now in the Middle East, he says.

“But we see some of the bigger cities moving in that direction. As the infrastructure develops, I think we will see the market for the i3 here.”

Some of that infrastructure is beginning to take shape in arguably the Middle East’s only mega-city. In late February, Dubai Electricity and Water Authority (DEWA) announced plans to open 100 electric vehicle-charging stations in the emirate this year.

According to DEWA, the first phase of the recharging project includes installing 16 charging stations for public use, each of which can accommodate two vehicles at the same time.

“Look, we have already tested the i3 in the Middle East extensively…to check its performance in the weather conditions… and also to bring it to the market and test the waters.

“The consumer will not shy away from these technologies, but governments must be motivated to bring this change.”

Robertson points to Norway, often called the ‘Middle East of Europe’, given its oil-driven economy, which has incentivised the adoption of zero emission electric and hybrid cars with favourable taxation – there is no VAT on cars.

“Now 13 per cent of the car market in Norway is electric.”

But what about the consumer’s motivation? BMW’s own numbers show that of all its sales in the Middle East, the 5 and 7 Series, and the X5 and X6 account for around 65 per cent. The X product range, which covers the crossover and SUV segment, now accounts for around 50 per cent of overall Middle East sales – not exactly sign of a consumer that is worried about the environment or fuel economy.

Robertson disagrees, suggesting that while the Middle East favours 4x4s and SUVs, the picture will change.

“What we see in the Middle East is that people are motivated about new products. And if you look at the regulations going forward, customers will eventually head in that direction too. We have seen that time and again, and Norway is a good example of that.”

THE BIGGER PICTURE

BMW group had what one could call a fantastic year in 2014.

Global car sales grew by 7.9 per cent to 2.11 million vehicles. Revenues also reached an all-time high exceeding 80 billion euros and growing 5.7 per cent annually. In the Middle East specifically, the group saw its sales grow by over 23 per cent, selling more than 30,000 cars.

Of these, Abu Dhabi and Dubai were its strongest markets, both growing by 68 per cent and 15 per cent respectively. The group also saw particularly strong growth from smaller volume markets: Oman (38 per cent), Bahrain (37 per cent), and Jordan (15 per cent). In the first two months of 2015, sales grew by over 12 per cent in the least year, with 5,106 cars sold.

However, that momentum may be difficult to keep up given the sharp fall in crude oil prices, which has squeezed government fiscal budgets and in turn impacted consumer spending – given the quantum of public sector employees in the region.

Two other examples stand out.

In China, where the firm had an unprecedented run of posting annual sales growth of over 30 per cent, 2014 brought a lower figure of 17 per cent.

Going forward, Robertson does not expect growth to be in double digits. In January this year, the firm agreed to pay $820 million to auto dealers in China who had asked for compensation after buying vehicles on expectations of rapid growth.

Earlier, in Russia, BMW was one of the many carmakers to suspend sales after economic sanctions, post the Ukraine crisis, brought about a rapid fall in the value of the Ruble.

According to the Association of European Business Automobile Manufacturers Committee, sales of new cars and light commercial vehicles in Russia fell 38 per cent from a year ago to 128,298 units in February following a 24 per cent drop in January.

Robertson is unperturbed by this. “Volatility is the new normal. We are all used to that now. It has been difficult to acknowledge stability after 2008 to 09. If we look at the oil price fall or the fall in the Euro, no one could have predicted that.”

“At the same time, as a company, we have a good balance between all our geographies. It is very unlikely that the entire world moves in one direction,” he states, pointing to how the recovery too has been varied – the US crossed pre- crisis levels last year, while Europe is still behind the curve.

“But we balance our portfolio to fight challenges like currency volatility. So while we have very strong manufacturing in Europe, we now have an increasing presence in Asia with capacity in China growing from 300,000 to 400,000. Our new plant in the US will have a capacity of 450,000, while we have smaller factories for Russia, Brazil India, and Thailand.”

WHAT NEXT?

I ask Robertson of the future of BMW as a carmaker. Is it aware and alert to the threat from disruptors such as Tesla and now possibly, Apple? Robertson asserts that at the end of the day, all car companies are moving forward.

“We have taken really bold steps in the past. No one ten years ago would have thought that we would launch the 1 Series or the X models. When we did launch the X series (SUVs), most people said that BMW does not make SUVs and they are not going to work. Last year, we sold more than a half a million X cars.

Then there are the i3 and i8, and more technologies are in the works, like the hydrogen fuel cell, which might be unfeasible for now, but can be part of the automotive future, he adds.

On the threat of Tesla, Robertson admits that it has pushed carmakers like BMW to change the way they market and sell their cars. “We are moving forward with our own outreach program on the digital space. But we have a more flexible approach.”

He points out that Tesla sells digitally and has its own stores, which is not easy to do in markets like the US and China. “We are a mature company with a robust and entrepreneurial dealer network. At the end, we want to continue having them as the backbone of our relationship with customers,” he says.

“At the same time, the experience in the dealership has to be friendlier to our customer. The sales process has not changed in 100 years. And the feedback is that it’s not very good.”

To improve on this, BMW recently introduced Product Geniuses – individuals whose responsibility is to provide the customer with experience and information of the car and not to sell him one. Today, there are 2,000 of these across the world.

“Our dealers did not like this in the beginning, but we told them it is the future. Two years ago, they put one Genius in for four salesmen. Now, they have four Geniuses for one sales guy,” he says.

So can a Genius convince a young Middle East consumer to drop his muscle car and put his money on an electric
or hybrid BMW? Robertson thinks it’s inevitable that one day, he will not need convinving.

“You know that the cost of generation for electric engines and batteries is coming down. At the same time, the cost for the combustion engine is increasing, especially with the emissions overlay,” he says.

“At some point, the internal combustion engine and the electric engine will cross over. There will be no stopping electric cars then.”