BMW Drives Germany

Cloth seats or leather? Sunroof or spoiler? Walk into any auto dealership to buy a new car, and you'll be offered a multitude of options. If it's a BMW you're buying, however, there's a twist: you can walk out of the showroom and change your mind later. Perhaps you'd really prefer the poplar interior trim to the brushed aluminum. Or maybe those retractable headlight washers would be useful after all. Your BMW dealer will be happy to oblige with as many changes as you care to make, until a cutoff point: six days before your particular car goes into production.

Not only is it a handy marketing device--"our cars are tailor-made," BMW's chief executive, Norbert Reithofer, can boast--but it's also profitable. BMW customers, it turns out, often have second thoughts. And when they do, they invariably add ever pricier accouterments. The company says customers change their orders more than 1 million times a year. BMW doesn't break out details of the additional revenue, but given the profit margins on many add-ons, "it's like a big dollop of cream on the cake," says Peter Schmidt, a British-based auto-industry consultant.

This ability to cater to fickle tastes is just one manifestation of an extraordinary flexibility that BMW has injected into a company that sold nearly 1.4 million cars last year, bringing in $65 billion in revenues. It's a flexibility that affects almost everything the firm touches, from the layout of its assembly lines to the working hours of its administrative staff to relationships with its unions and key suppliers. BMW has mastered the manufacturing fine art called mass customization: no two cars rolling through its assembly lines on any given day are identical. Its factories can cope with a model changeover during the course of a weekend without work stoppages. Detroit would take weeks.

The flexibility also extends to the rhythm of work: BMW has struck deals with its heavily unionized workforce that enable it to run its factories more or less as demand dictates. Its newest plant in Leipzig, where the 3-series and new 1-series hatchback cars are built, runs anywhere from 60 to 140 hours per week. Instead of classic two- or three-shift rosters, the company juggles some 300 working-time permutations to determine optimal use of its teams of workers, some of whom are contract "permatemps" more common in the U.S.

The new BMW is in some ways symbolic of the resurgent German economy. For more than a decade, exorbitant labor costs, unbending union rules and an addiction to red tape--not to mention the high price of unification with East Germany--put Germany into an economic straitjacket. BMW went through its own rough patch in the 1990s after the disastrous acquisition of Britain's Rover Group, but its fortunes have changed markedly since it ditched Rover in 2000. Production has increased steadily, and profits are buoyant. Pretax earnings last year rose 25%, to $5.5 billion, despite the soaring cost of raw materials and the strong euro. It has easily outpaced its historic rival, Mercedes (part of DaimlerChrysler), to become the leading premium-car brand. BMW is pushing a worldwide expansion. This spring it opened an assembly plant in India, and the company is building out a plant in Spartanburg, S.C., as part of its strategy to be less vulnerable to foreign-exchange fluctuations.

The German economy is similarly healthy, growing 2.8% last year, and it is once again acting as a powerful motor for the rest of Europe. Surging exports pushed the nation's trade surplus to more than $200 billion. Germany's economy has also undergone significant re-engineering to loosen some of its infamous rigidities. The government has cut corporate taxes and reduced the burden of some nonwage costs on business, such as pensions and health care. It has shaken up its labor market, which has led to a drop in unemployment (although the proportion of jobless, at 8.8%, is still well above the European average). The move to ever shorter working hours that culminated in the 35-hour week in the late 1980s has been reversed; millions of Germans have been working longer in the past two to three years without increased pay. The latest: 50,000 employees at Deutsche Telekom, the former state telephone monopoly, who accepted an extended workweek and a pay cut to protect their jobs.

Neither Germany nor BMW is yet in the clear. The changes brought about by corporate bosses and government policymakers have had an evident impact--BMW alone has whacked $1.2 billion from its cost structure over the past three years--but it'll be hard to sustain that pace. Global competition shows no sign of letting up. Toyota's Lexus is starting to make inroads into BMW's European turf, while at home, rival Audi is turning up the heat, and Mercedes looks like a formidable competitor once again, now that DaimlerChrysler has agreed to sell off Chrysler to a U.S. private-equity firm.

Germany is still far from being a freewheeling economy. It remains suspicious of Anglo-Saxon finance, for example, and has been seeking to curb the power of hedge funds. There's also little sign of substantive change in the historic--some say hide-bound--system of labor relations, under which unions are represented on the supervisory boards of companies. Kenneth Rogoff, a Harvard professor and former International Monetary Fund economist, sees Germany's improved fortunes as being largely the result of the private sector finding ways to bypass continuing structural roadblocks in the economy. The recovery "has legs," he says, because there's still room to catch up with U.S. productivity levels. But he warns that the current economic upswing "won't last forever without more transparent institutional reforms."

CEO Reithofer is more upbeat. Faced with low-cost competition from Asia and Eastern Europe, he says, "many German firms did their homework, and now they are benefiting from it." He thinks Germany could go further, for example, in reducing high nonwage labor costs. But Germany still has competitive advantages, he says, pointing to its traditional engineering prowess combined with a newer ability to cater to the needs of individual clients. The challenge, he tells TIME: "It's all about mastering complexity."

Drop in on BMW's Leipzig plant, and you can see what he means. It's the firm's newest, having opened just two years ago, with a luminous open-plan central building that houses white-collar workers and managers. It was designed by London-based architect Zaha Hadid, and its most striking feature is a conveyor belt that meanders inside the building just below roof level, carrying a steady stream of cars from the body shop to the paint shop. You can see it from almost everywhere in the building, including the cafeteria.