Remarks by Tom Purves, Chairman & CEO, BMW USA Holding Corporation at the Automotive News World Congress on January 14, 2003

The BMW Group’s view of creating sustainable value in all competitive situations must be a bit different because our company is different.

Our middle name is motor – starting with aircraft engines, then motorcycles and finally automobiles. Competition is our heritage and performance continues as a core element of our current strategy. We have one majority shareholder. We produce just over 1 million vehicles per year, plus about 100,000 motorcycles. We are profitable. As of New Year’s Day, we have three brands. Each has a clear and distinct profile that is consistent and accepted in the premium segment of all markets around the world in which we compete.

Because of who we are, the corporate responsibility we accept, the vehicles we build, and the consumers we attract, creating sustainable value requires the BMW Group to be worldly, focused, innovative and agile.

Building sustainable value must start with corporate responsibility. Companies must take an active role, individually and, as appropriate, collectively, in finding solutions to the economic, social and environmental challenges of today. This is not only required to remain profitable and viable in the future, but because a solid reputation is a prerequisite for day-to-day competitive success in the marketplace.
The sheer size, visibility and regulated nature of our industry require us to address some issues together. As an industry, it is in our utmost interest to demonstrate how individual mobility can be sustained. We must work hard to achieve consensus on practical solutions that are economically and politically sound. It isn’t enough to just say no.

Issues such as fuel efficiency, greenhouse gasses, energy policy, harmonization, and safety, transcend borders and companies. That is why BMW is active in both ACEA in Europe and the Alliance of Automobile Manufacturers here. It also gives us a platform to discuss market-specific issues.

BMW also acts individually to meet its responsibility. Given BMW’s reputation for high performance vehicles, it may surprise some that BMW has reduced the fuel consumption of newly registered vehicles worldwide by almost 22% between 1990 and 2000. This was achieved in a period of historic low fuel prices and market demand for bigger and better performing vehicles.

In the US, BMW has increased the standard equipment, weight, engine displacement, horsepower, 0 – 60 acceleration times and torque of its models. But those looking at CAFE penalty charts might not realize that our model line also offers double-digit gains in fuel economy over a decade ago. BMW models achieve very competitive fuel efficiency in each market segment where we compete. The 745i, 540i, and 325i all meet strict LEV emission control levels. With the 2003 3 Series Model we have introduced the most advanced emission control technology there is, meeting the most stringent California and Northeastern states SULEV emission requirements under the ZEV mandate.

One innovation, Valvetronic, which electronically controls the intake valves on the 4.5-liter V-8 and 6 liter V-12 in the new 7 Series, has allowed BMW to simultaneously increase fuel economy and horsepower by 15%.

While BMW continues to work on high performance, clean and efficient gasoline engines, the company is also committed to a green-house-gas- free hydrogen powered vehicle as a long-term strategy. At this time we have an active development program that will enable us still to bring to market a full size automobile, propelled with hydrogen, before the end of the decade.

BMW has already gained more than 100,000 miles experience, driven on public roads, with the world’s first hydrogen powered car, the 750hL. It used a 204 horsepower V-12 engine to accelerate from zero to 100 kph in 9.5 seconds and to reach a top speed of 226 kph. The CO2 emissions are zero.

In 2001, BMW used the CleanEnergy World Tour to call attention to the technological and potential consumer benefits of hydrogen powered luxury vehicles, and also initiated discussions with government officials and the fuel industry about infrastructure. BMW is working toward the goal of having at least one hydrogen fuel station in each of the major EU cities by 2005, with a larger network phased in by 2010.

In another facet of BMW environmental commitment, BMW factories meet the demanding ISO 14001 environmental standards worldwide. This is not only true, as you would suspect, for the oldest BMW factory in the city of Munich, and at our 10 year old American plant in Spartanburg, South Carolina, but also with new factories in emerging and less regulated markets like Thailand and Russia.

South Africa serves as good example of BMW’s social commitment. During the days of apartheid, and in the face of pressure for multi-nationals to disinvest, BMW took a different approach. It worked to bring change from within by enacting equality in the workface, and investing not only in the business, but also in education, healthcare and recreational facilities for employees.

The factory at Rosslyn, near Pretoria, evolved from a CKD facility to serve the old South Africa, into a sophisticated facility that is now part of BMW’s international production-distribution network. The risk BMW took to stay and invest now provides the new South Africa the ability to export. And in 2002, the South African factory captured the J. D. Power and Associates gold award for initial production quality.

BMW is confident that it is meeting its corporate responsibilities by employing the values I outlined before: worldly, focused, innovative and agile. BMW ranks at the top of the list of carmakers worldwide in the Dow Jones Sustainability Index. BMW has invested in products and capacity to grow from 1 million in 2002 to 1.4 million in six years.

Corporate responsibility and economic strength are required to build a competitive advantage in the marketplace. BMW sees its strength in product, consistent marketing of a powerful brand, and great dealers.

Sony’s visionary founder Akio Morita once said, “Our plan is to lead the public with new products rather than ask them what kind of products they want. The public does not know what is possible, but we do.” Products like the Walkman captured imaginations and provided credibility.

BMW’s credibility as a premium manufacturer is based on decades of innovations – from features like the twin-flat motorcycle engine, V-shaped overhead valves, and hemispherical combustion chambers introduced on the classics of the 1920s and 30s, to modern technology including ABS brakes, Xenon lights, smart airbags, the head protection system, Valvetronic and iDrive.

BMW captured the public’s imagination by inventing the sports sedan – sedan practicality coupled with sports car performance – with the 02 series in the 1960s. The concept has had good legs – the 3 Series, today’s quintessential sports sedan accounted for more than 100,000 sales in the US last year and earned a “10 Best” award from Car and Driver for an unprecedented 12th consecutive year.

For several decades BMW has deliberately set out to transfer the sleek, high performance identity of its products into visual, verbal and inter-personal communications. Everything from architecture to advertising, dealership design and process, shows and exhibits, and events reflect the BMW idea: self confident, innovated, dynamic and fun. Some examples:

• In 1919, three years after BMW began business as a manufacturer of aircraft engines, the spirit of the company was demonstrated in dramatic fashion. Franz Zeno Diemer climbed into a BMW-powered biplane and set a world altitude record of over 32,000 feet. It was a significant technical and competitive accomplishment for the day, but also created the spirit for decades of victories to follow at famous venues like the Isle of Man, Mille Miglia, Le Mans, and Daytona and in Formula 1.

• In 1975, BMW let a Parisian art auctioneer fulfill his dream to drive in the 24 Hours of Le Mans. To get the ride the auctioneer offered to have his friend Alexander Calder paint the exterior of the racecar. That was the start of BMW’s art car collection that now includes works by Stella, Lichtenstein, Warhol, Rauschenburg and Hockney. A collection that has been displayed in the great museums of the world.

• Many manufacturers have associations with driving schools; BMW runs its own. The BMW Performance Center, adjacent to the BMW Manufacturing facility in Spartanburg, attracts owners and prospects from around the country for an ultimate brand experience.

• BMW won its first Formula 1 championship in 1983 using a four cylinder, 1.5-liter production based engine. Of course it was turbocharged and could develop well over 1,000 horsepower, some say over 1,500 for short periods of time. BMW continues to field a Formula 1 team because it provides the ultimate in competition and thus the ultimate in learning for BMW.

• In naming BMW’s head of design, Chris Bangle, its industry Man of the Year, “Automobile” magazine acknowledges that while his work has sparked a lot of discussion in the industry, “BMW cars are still just about the best things to drive available anywhere, and the new forms they embody will, without doubt, have enormous influence on other makes.” That is ratified by Automobile’s selection of the Z4 roadster as the design of the year.

When it comes to winning a competitive advantage in the U.S. luxury market, we see a similarity to a premiere athlete competing for an individual title – golfers at the US Open, a diver at the Olympics, or marathoners in Boston or New York. You have to be aware of what the competition is doing because you respect their abilities. You must also be confident that the margin of victory comes from understanding your own game, and then playing within yourself to maximize your strengths.

Focus and confidence to play your own game are essential to brand management. BMW maintains separate retail organizations for each of its brands. Advertising and promotional approaches that have been wildly successful for MINI would be disastrous for BMW.

Dealers are critical to sustaining value. We have three priorities for our work with dealers. First is insuring that everyone in the retail world “gets” the brand they represent so they can personalize the benefits, competitive advantages, and spirit of our brands to meet the needs of the customer.

We also want to insure that dealerships representing our brands are the best places to work in retail so they can attract and retain the best professionals. BMW actively supports an industry-wide dealer-manufacturer initiative called Automotive Youth Educational Systems, designed to recruit and train young people for automotive technical careers. This is a classic need-opportunity story that is being addressed through education and entrepreneurial know how.

And finally, we want our dealers to continue to earn profitability that ranks at the top of the industry. We are very pleased that the current J. D. Power and Associates Dealer Attitude Study reports that 89% of our BMW dealers rate the dealer-manufacturer relationship as good or excellent, with a full two-thirds reporting “excellent.”

In building a powerful brand, the confidence to say no is as important as the ability to say yes. The BMW brand will never offer a front wheel drive vehicle. The 1 Series coming later in the decade will have the traditional sports sedan front engine-rear wheel drive configuration. The reason the front-wheel drive MINI is not a BMW is quite simple. MINI is a different brand because of different substance, authenticity, values and heritage. MINI product values are different from BMW product values.

MINI won the North American Car of the Year award based on its own brand and product values. The BMW 7 Series was the industry’s most highly rated model in Strategic Vision’s Total Delight Index because of its BMW values.

Brand integrity is why we said “no” to participating in the “People’s Car” competition in China. We waited until we could follow a path that reflected and enhanced our BMW values. BMW will partner to build 3 Series cars in China, the same 3 Series as sold here.

At BMW Group, we aim to fulfill 100% of the expectations of a defined or “smaller” group of people instead of offering partial fulfillment, and thus also dissatisfaction, to a bigger group of people. We are in the business of fulfilling customer dreams: go-kart like fun in a MINI, the Ultimate Driving Machine in BMWs and exclusivity with Rolls-Royce.

Our entire organization is dedicated to providing products for the premium segments of the marketplace. We concentrate on a specific target audience of those who want the best in driving performance and technology and who are willing to pay a premium to get the better solutions, the better materials, and true innovation in technology and design. That is the best way to sustain value and meet competitive challenges.

As we enter 2003, BMW is prepared to collaborate on industry issues, and focus on a successful formula of exciting products, consistent marketing of a powerful brand and working with a great dealer organization.

To close, I would like to offer one more example of BMW’s spirit. BMW successfully combined the reach of the Internet with the talents of top movie producers in 2001 to create The Hire, a series of five short films. John Frankenheimer, Ang Lee and Guy Richie were on the first roster of directors and of course BMWs play a role in each film.

The first installment of the series attracted 20 million views so far – people who actively sought the opportunity to watch. The total continues to increase on the Internet and through downloads and DVD distribution. The three-film second installment of the Hire, released in mid-October as part of the introduction of the new Z4, has already attracted 10 million views.

Thank you for the opportunity to discuss BMW with you. I look forward to your questions.