Why BMW is Waiting to Mass-Produce Electric Vehicles

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BMW AG (NASDAQOTH: BAMXF) launched its first battery-electric vehicle way back in 2013, and it has been working to advance the technology ever since. But its CEO said on Thursday that it won't begin mass-producing electric vehicles until 2020.

Why not? Because the technology still isn't profitable, and BMW isn't willing to sell those cars at a loss.

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Why BMW is waiting to mass-produce electrics

BMW has made great strides in electric-vehicle technology since 2013. The latest electric BMW, the i8 Roadster sports car, uses what the company calls its "fourth-generation" technology: Better batteries give the new model about 40% more range than its predecessor.

But CEO Harald Krueger told investors on Thursday that the leap that BMW made from its third-generation technology to the latest fourth-generation version wasn't enough to make it viable for mass production. It needs one more leap:

The cost advantage will be a "two-digit" percentage improvement, Krueger said. "It's not 5%. It's something which we believe is a major step forward."

Krueger feels that BMW needs to wait in order to have competitive costs. While larger rivals like Volkswagen AG (NASDAQOTH: VLKAY) and General Motors (NYSE: GM) can afford to build electric vehicles at a loss in order to advance the technology and build a presence in the market, BMW is a smaller company. It needs to wait until it has a cost advantage to be competitive, he said:

BMW is spending big money to win those cost advantages

BMW is planning to roll out a battery-electric version of its huge-selling X3 compact crossover SUV in 2020, and to have a total of 12 battery-electric models by 2025.

The company is spending a lot of money to get there. BMW spent 6.11 billion euros (about $7.5 billion) on research and development last year, an increase of 18% from 2016. That was 6.2% of its total 2017 revenue. It expects to spend more in 2018, between 6.5% and 7% of its total revenue.

A year ago, Krueger said that BMW would fund that increased spending by rolling out more high-profit SUVs. That has begun: An all-new (internal-combustion) X3 was launched last year, new versions of the X2 and X4 crossovers are coming in 2018, and an all-new high-end X7 SUV is expected to arrive near the end of the year.

But CFO Nicolas Peter said that BMW still might need to charge a premium for that first battery-electric X3 in 2020:

The upshot: As usual, BMW is proceeding carefully

Since taking over as CEO, Krueger has been careful to balance BMW's need for advanced technology to stay competitive with a realistic view of the company's size and budget. Unlike its rivals Audi AG, which is owned by giant Volkswagen, and Mercedes-Benz, which can leverage parent Daimler's (NASDAQOTH: DDAIF) truck and bus businesses for added scale, BMW is on its own.

That means it needs to proceed carefully into the electrified, self-driving world. And that's why Krueger feels the need to wait until 2020 (or a bit later) to begin ramping up production of battery-electric vehicles.

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John Rosevear owns shares of General Motors. The Motley Fool recommends BMW. The Motley Fool has a disclosure policy.