BMW's Sleek Electric Sedan Will Challenge Tesla -- in 2021

At this week's International Motor Show in Frankfurt, BMW AG (NASDAQOTH: BAMXF) is showing off a preview of an electric sedan that looks to be aimed directly at Tesla's (NASDAQ: TSLA) new Model 3.

For now, the sleek BMW sedan, called "i Vision Dynamics," is just a show car, a concept. BMW intends to build and sell something very much like it, but not until 2021. Here's what we know.

BMW CEO Harald Krueger with the i Vision Dynamics show car. It's a preview of an upcoming BMW electric sedan. Image source: BMW AG.

An early preview of the upcoming electric BMW i5 sedan

BMW said that the i Vision Dynamics is a battery-electric vehicle with a range of 600 kilometers (373 miles), a top speed of over 120 miles per hour, and the ability to accelerate from 0 to 100 kilometers per hour (62 mph) in four seconds. I suspect that those numbers are engineering goals for the version that will eventually go into production, not the actual capabilities of the show car.

In fact, I'm not sure the show car even runs -- it may be just a styling model. But this concept is still worth a closer look.

From this angle, the i Vision Next has a dramatic and sporty look that works well. Image source: BMW AG.

The idea is that this vehicle will join BMW's "i" range, slotting in between the small i3 and the i8 sports car. Its styling is an evolution of the quirky-futuristic look that BMW developed for the i3, but applied to a car that's more of a traditional BMW -- a sports sedan. 

The production version will come to market by 2021, BMW executives said. BMW hasn't officially announced the production model's name, but it's widely expected to be called the i5. Pricing and details weren't announced, and won't be for quite a while yet. But it seems clear that the target is Tesla's Model 3, though the starting price may be higher -- over $40,000.

How the BMW i5 will fit into BMW's electric-vehicle strategy

The i5, or whatever it ends up being called, seems likely to be a cornerstone of BMW's electric-vehicle strategy, a fun-to-drive premium sports sedan built and priced to sell in fairly high volumes.

It's one part of a larger plan. Like its German rivals, BMW is making a big commitment to electrification, promising 12 new electric vehicles and 13 new hybrids by 2025. More broadly, the company is re-engineering all of the BMW core models so that they can be built with internal-combustion, hybrid, or full-electric drivetrains on shared assembly lines, a strategy that BMW hopes will allow it to respond quickly to shifting market demand. 

BMW's stand at the International Motor Show in Frankfurt displays the i Vision Next with other BMW hybrid and electric vehicles. Image source: BMW AG.

Along with the i5 and electrified versions of its core models, BMW is also known to be planning a higher-end electric-only sedan, a flagship model that it has called the iNext. The iNext will incorporate BMW's most advanced technologies, including the self-driving system that it's developing with partners Intel (NASDAQ: INTC) and Delphi Automotive (NYSE: DLPH).

But BMW says that the iNext and i5 won't go into production until 2021. BMW is starting from behind rivals Mercedes-Benz and Audi AG, both of which have long-range premium electric vehicles set to come to market in the next couple of years. Audi's corporate parent, giant Volkswagen AG (NASDAQOTH: VLKAY), will launch at least two mass-market long-range electric vehicles before 2021. And of course, Tesla already has its Model 3 in production, and is hoping to produce hundreds of thousands next year. 

BMW is spending big to make this happen

In time, electric vehicles will almost certainly cost less to build than current internal-combustion models. Some of those savings will surely be passed on to consumers, but it's likely that most automakers -- particularly premium brands, like BMW -- will retain a bit of extra profit to help enhance their margins.

That will be good for shareholders -- if and when it happens. But in the short term, the process of developing and launching a line of long-range electric vehicles is an expensive one, and BMW's profits are already being squeezed by future-tech investments. Robust drivetrains need to be developed, new supply chains need to be established, and factories need to be converted (and workers trained) to build the new models. At the same time, BMW is investing in other advanced technologies, like self-driving and vehicle-to-vehicle communication.

For most companies planning to mass-produce electric vehicles, the battery supply chain is the hardest part right now. Automakers, or the companies making battery cells for them, will need huge quantities of raw materials like lithium and cobalt to make enough battery cells for mass-produced electric cars. 

This is one area where Tesla may be ahead of some of its larger rivals -- including BM -- having secured supplies of key raw materials early on. There's plenty of both lithium and cobalt and the other required minerals in the earth, waiting to be mined, and there will be plenty available on the open market in a few years. But it will take time for miners to ramp up operations to the point where they can ensure steady supplies in the huge quantities that will be needed.

CEO: Despite spending, BMW still expects good operating margins

BMW rival Daimler AG (NASDAQOTH: DDAIF), maker of Mercedes-Benz vehicles, said this week that it will aim to make $4.8 billion in cost cuts to help fund its electric-vehicle effort. But BMW CEO Harald Krueger thinks his company can accomplish its goals without ambitious savings targets.

Krueger said that BMW will maintain its operating-margin target of between 8% and 10%, despite the increased spending. He said BMW won't announce a cost-cutting target, instead looking to make incremental savings as opportunities arise. 

Krueger said that consistent profit margins are key to financing not just electric vehicles, but other advanced technologies that will be required to stay competitive in coming years. It's an ambitious goal, but not an outrageous one: If BMW can deliver steady profit margins and competitive new electric vehicles over the next several years, that should work out to a nice win for its shareholders.

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John Rosevear has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.

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