Inside BMW’s Decarbonization Strategy

Welcome to HBR on Strategy. Case studies and conversations with the world's top business and management experts hand selected to help you unlock new ways of doing business. I'm Ramzi Kabaz, an editor here at HBR. This month we're highlighting four of the best HBR podcast episodes on strategy from 2023, curated by me. In 2023, the auto industry went through huge changes in pursuit of lower car emission. Some automakers like Ford, Mercedes and General Motors announced their plans to stop selling vehicles with internal combustion engines, in other words, cars that run on gas. And the reaction from investment analysts was overwhelmingly positive, despite the fact that the production of electric vehicles or EVs actually increases emissions in the supply chain. In contrast, BMW decided to pursue a more flexible decarbonization strategy. Their plans include gasoline and diesel fueled internal combustion engines, plug in hybrid EVs and battery EVs. Their goal is to reduce life cycle emissions across BMW's supply chain, their production and tailpipe emissions in this episode, Harvard Business School Assistant Professor Shirley Liu explains how BMW analyzed its sustainability goals alongside market based risks to formulate their decarbonization strategy. She also discusses how the company's leadership presented their strategy to skeptical stakeholders. If you're making complex decisions about big emerging trends in your industry, this episode is for you. It originally aired on cold call in March 2023. I hope you enjoy it as much as I did.

On April 3, 2020, a woman in Punjab, India posted a photo of the Himalayas on Twitter and taken from her rooftop, and it went viral. The photo itself was unremarkable. It became a sensation because that particular view simply hadn't existed before that day, which came three weeks after the city was effectively shut down by Covid. Three weeks was all it took to wipe away the cloak of air pollution that obscured the iconic mountain range. The same phenomenon was taking place around the world as photos revealing deep blue skies emerged from the likes of Beijing, Rio and Lake. Scientists say that CO2 emissions dropped by as much as 7% in that period, the largest drop in history and the kind of impact we could expect of, say, half of the drivers in the world converted to electric vehicles. But that, of course, is a big if. Today on Cold Call, we've invited Professor Shirley Liu to discuss the case titled Driving Decarbonization at BMW. I'm your host Brian Kenny, and you're listening to Cold Call on the HBR Podcast Network. Shirley Liu conducts research in the area of corporate social responsibility disclosure, with a focus on topics related to climate change and gender diversity. Thank you for joining me today.

Shirley, thank you for having me.

We're going to touch on a couple of those topics today. So this is perfectly timely and I think this case for me was super eye opening in a lot of ways. I mean, I don't have an electric vehicle. I thought about getting one, you know, and there's some complications with electric vehicles that I think we're going to get into and that BMW has certainly considered as they move down this path towards decarbonization. And, and they are sort of a bit of an outlier in terms of their competitors in this space. So I think it's going to be really interesting for people to hear you talk about that. So thanks for writing the case and thanks for being here to talk about it. Why don't we just get started right away here? If you want to begin by telling us what the central issue is in the case and what your question is to start the conversation in the classroom.

Absolutely. I see this case as a decarbonization 101 case for the students where they learn the basics of carbon accounting, carbon management, but also strategies that today a lot of companies are facing this transition to a low carbon economy. So I go in the classroom and start by saying that one of those industries is the automobile industry that is facing tremendous amount of pressure coming from regulators, investors, and they're really focusing on this transition from internal combustion engines, I'll call that ICE, to electrical vehicles, EVs which really focuses on the tailpipe emissions. And so our cold call is why is BMW focusing on emissions across the entire value chain that will start from the supply chain to their own production, then to the use phase tailpipe emissions.

I teased a little bit in the introduction about your areas of research. We always are interested in what motivates faculty to drill into a particular topic. I'm wondering why you decided to write this case.

First of all, I want to highlight this is also a joint work with two other amazing professors here, George Serafim and Mike Toffel, and they were both experts in decarbonization and thus great research there. So I definitely learned a lot from this process and this is my first case. So my hope is both to learn the art of case writing, but also to do research in the climate space. I think the practice is moving very fast. So for example, the best practices, the challenges, in particular, I'm curious about the credibility of environmental disclosure. All of these are better learned in practice as opposed to having a lot of archival data. And so that's why for me it's really important early on in the career to see how companies actually doing these carbon accounting and management.

This is a pretty ambitious one. And Mike and George are great. They've both been on the show and this is as good a time as any for me to plug Mike's podcast, Climate Rising. Mike Toffel is the host of that. Cases like this are the kinds of conversations that he's having with leaders in this field all the time. So that's awesome. Let's talk about BMW. Everybody knows BMW. They make really nice, expensive fast cars. You don't necessarily think about them as a maker of EVs per se. You think about that stick shift on the floor and the sort of racing vibe that you get. Can you talk a little bit about their history as an automotive maker and the culture within the company?

BMW was founded in 1916 in Munich, Germany. Initially they actually produced aircraft engines and gradually moving to automobile engines and then cars. And I think they're best known for being the ultimate driving machine by having really strong engines, great marketing right there.

The ultimate driving machine.

And hence that transition to EV will be interesting. Two things I want to highlight about their culture when we visited the company. The first one that really comes off a lot when we talk to the employees, there is this belief of under promise and over deliver. Whenever they make a promise, they'll make sure they deliver it. And if not, they rather not make the promise. For example, when you look at ev, they talk about their driving range. So when BMW releases a driving range and then someone independent go in and test it and it's probably longer than the one they listed, whereas the other companies, it may be the opposite.

That's pretty smart actually on their part, I think.

And then the second part about their culture is they're very metric, target driven, very quantitative, so they set clear targets. What's interesting is everyone in the company owns a bit of that target. Everyone knows the overarching target. So down to every engineer, when they designed one component for the car, they have a part of that target. So when I meant target, I mean the decarbonization target. They focus on sustainability. Starting way back in 1970s, that's when they first hired an environmental officer for the purpose of complying with environmental regulations. And then in 2000 is when they defined sustainability as part of their overarching strategy. And starting in 2007, that's when they started developing the first battery electrical vehicle inside of the company. And that's a time when there's no mass produced Bev on the market. Before the times of Tesla. And then in 2013 is when they released that EV, which is i3 model. What's fascinating is they try to have a EV that has the lowest emissions across the entire value chain, that even the door. They say if you compost the door, you put it underground, it will be composted.

I've seen the i3 and the i4 and you know, some of them are like a complete departure from what you would expect to see from BMW. So I'm wondering, when they introduced these models, how were they viewed? How were they received by people?

It is quite divided. There are some that find it very revolutionary. It's very different from their traditional cars. That's very beautiful. To me, it looks a little cute even.

Right.

But on the other hand, you also have some critics saying that the market is simply not ready. And they say it's because they came up with an i3 so early in the game. That's why, like right now, they're a leggard in the EV game.

Okay, and who else are they competing with in this space? Who else is introducing models like this?

There are two types of players. First of all, you have the newer startups type company like Tesla and Xiaopeng or Nio in China that are all producing only electrical vehicles. But at the same time, a lot of the traditional automobile companies like Mercedes, Ford, gm, they are also facing this transition and pushing out their version of battery electrical vehicles.

Yeah. So several of their competitors have already put a stake in the ground about when they're planning to go completely cut away from ICE vehicles and go completely electric. Is that right?

Yes. For example, Mercedes say they will be ready to go all electric at the end of the decades where market conditions allow. And also at COP26, a lot of companies, including Ford, Mercedes, General Motors, they sign a declaration to essentially ban ice by 2040, no later than 2035 in the leading markets.

Yeah, but BMW has not put that stake in the ground.

Exactly. BMW is not making that statement and instead they are focusing on having a flexible powertrain strategy. So by that it means if you're a customer and you want a particular type of car, you should be able to choose having an electrical battery inside or an internal combustion engine inside. So you should leave that option to customers. Part of that reason is customers have different driving habits. So some may be using a car for professional reasons, some may be using for leisure, for commute, some may be in rural, some maybe in urban areas. And there's this concern from the customer that the battery power cannot last for Such a high range, they call that range anxiety.

As one potential I have range anxiety. That's one of the reasons why I haven't made the move to the electric vehicle.

Exactly. And also the lack of charging infrastructure. When you go into oil station, you can just charge quite instantly. For an ev you have to charge for half an hour. At the moment, the current technology, so it's adding that pressure. But what's interesting here is in reality the average driving distance is not that long. For a trip. In the U.S. for example, the average daily driving is less than 30 miles. But an EV's range can go up to 300 miles.

Right, right. So you're saying that my anxiety is unwarranted, as most people's anxiety is probably unwarranted.

Again, it depends on the use case.

Yeah, yeah. And I would imagine that this strategy that they have pursued, I mean, it makes sense to the extent that they're able to meet the needs of the customer, regardless of whether they're looking for an electric vehicle or a combustion vehicle. But it's got to be taxing on them as an organization because now they have two manufacturing processes, they have two sets of suppliers. It's got to be complicated. I can imagine Mercedes and the other firms that have put this stake in the ground are saying we're converting everything because it's just going to be a more fluid process for us.

Part of the reason for staying flexible I think also relates to their experience with two other major trends in automobile industry. You may have heard the three major trends are automation, ride sharing and electrification. With the first two, BMW invested in technology that relates to ride sharing and automation driving. The technology of the market is not quite there yet. And end of, they have to write off these investments. And so when it comes to the electrification, they're also being very careful with the timing that they'll keep it flexible. And again, relating back to the culture of not trying to over promise. So that's why I think partly they're not going to give a date by which we're going to ban internal combustion engine before they're certain they can do that.

Yeah. What does the regulatory environment look like around EVs?

There is a lot of regulations coming out and I think they're the catalyst for this transition from internal combustion engine to EVs. The EU Parliament approved the ban of selling new ice, new internal combustion engine by 2035. California also announced similar rules and other states like Massachusetts and New York are considering following. So the regulatory environment I think is another big push that's why a lot of companies are also using those dates. 2035. That's when we're going to also ban ice.

Okay, so that puts a lot of pressure on BMW to put a date out there. Are they suffering any consequences from not actually taking that step?

Yes and no. So on the yes side, there are media articles that are calling them the EV laggard, and there's even a social impact investor that comes out and say they are the BlackBerry of the automobile industry. But on the other hand, potentially no, because the more sophisticated analysts or investors may be able to see that BMW is still investing a lot in the EV technology. And even if you look at their actual sales of ev, it is higher than some of their traditional competitors.

And for those who remember blackberries, by the way, they were really good and they're making a comeback. I think people are really. Yeah, they're pining for those again, those and flip phones. Who knew? Let's talk about what exactly they're measuring and reporting on within the EV cars themselves. And I think that begins with the ghg, the Greenhouse Gas Protocol. Can you just describe as succinctly as possible, because I know it's a very complicated measure. What exactly are they looking at with ghg?

Yes, and that's what we hope the students can learn from that. The current way they measure carbon is through the Greenhouse Gas protocol. They divide greenhouse gases into three buckets. And first of all, there's more than one greenhouse gas. They will aggregate everything in terms of a carbon equivalent in terms of the global warming potentials. So let's call that carbon, for now, carbon equivalent. So they separate those into three buckets, Scope one, two and three. Scope one is the company's direct emissions. For example, BMW burns certain fossil fuel for their paint shop. And so that would be scope one, direct emissions. Scope two is the electricity they purchase, and that has some emissions associated with that. Scope three is everything else. So for BMW, scope one and two is in total, only 1% of their total emissions. Scope three, everything else can be separated into the supply chain. And the use phase. Supply chain is around 15%, whereas the use phase is 80% of emissions.

Okay, and is that the use of the actual customer in the vehicle itself?

Exactly. That will be when the customers drive the car. And then the tailpipe emissions. That's also being considered on BMW's books.

Where are they focusing their decarbonization efforts? What are they looking at?

That is back to our cold call question. They look at the full value chain. So they set a science Based target which are targets that can align with a scenario to limit the global temperature rise to 1.5 degree. For them the target is by 2030 per car the scope 1 and 2 emissions, they want to reduce it by 80%. So that is quite ambitious. And part of the reason is this is their own emissions. They need to own it and really show they're making a sincere effort. Scope 3 supply chain is 22% reduction, but in reality to achieve that it's much harder. The reason is by converting to electrical vehicle, you're having the battery. The battery increases your supply chain emissions by around 50%. So in total for them like a true reduction of 22% really feels like a 70% reduction. Finally, scope 3 use phase which is the driving and that depends on the car they sell, that one they hope to reduce by 50%.

Yeah. So they are putting targets against all of these. And as you said, they're ambitious targets which flies a little bit in the face of their under promise and over deliver strategy. But what are some of the issues that they've run into as they try to make these goals?

I think initially when they first set the targets, they are quite reasonable and there will be surprises they learn afterwards that made it harder to achieve potentially. It's not unique to BMW. A lot of companies are all like they set a target, but how to achieve it, It's a learning process. In the case of BMW, let me share three surprises they had or challenges. The first one is realizing a lot of the decarbonization opportunities are not readily available everywhere. When they think about changing to solar and wind power. But not all the plants have the same amount of sunlight or wind. And so when they plant at a high level and then realizing at the local level it is not fully available. The second is some of the processes turn out to be more expensive. And for example, electrification is a major step towards decarbonization because if you electrify all of your process, you don't need to burn fossil fuel anymore. So that lowers emission and then you can then move into using renewable energy to really transition closer to almost zero emissions. But for them they realized that to electrify their, for example the paint shop, that will mean they have to stop the operation and really rebuild the the facility. And that is more costly than they initially thought. Whereas if they build a new facility with the new technology and become electrified to begin with, that is actually cheaper and that's what they are going for as well.

Okay, so scopes one and two are somewhat within their control. But Difficult. Nonetheless, Scope three is really hard because now they start to dive into the supply chain. How deep are they going into the supply chain?

Very deep. Ideally, it's all of the supply chain. But then as you imagine some of them four or five tiers down their supply chain, how are they going to get the measurements? And that speaks to one issue in the carbon accounting for scope 3 supply chain, which is this issue of primary versus secondary data. Ideally, you get primary data, which is the real number that contributes to the tire, to the steel that you acquired. But then because they don't have such detailed information right now, they will use industry averages. So, for example, steel produced in this region under this method has an average emissions of this number. And that's what they'll use on their books. And you can imagine the problem with this is, well, then you are not compensating for firms that are greener.

Yeah, the case goes into the Catena X approach. How does that help them in this focus on phase three?

This is an industry effort that they are one of the pioneers in it. The idea is to build something like a blockchain for emissions data where within the automobile industry, all of the suppliers will put their information on that chain. And Catena stands for chain in Greek. It's the idea that if they all put in their data, then they can have this primary data. But you can imagine the challenge is also, how do you coordinate with everyone in the industry?

Yeah, there's also a big emphasis on recycling within the automotive space. And the case goes into some of the complications of using recycled batteries and just recycled materials in general. Can you talk a little bit about that?

And that's actually the third surprise that I wanted to mention earlier with recycling. The surprises with recycling is that it's difficult to have a closed loop. Some of the materials, like aluminum, you need higher purity. Whereas for Coca Cola, can you also need aluminum, but that's of a lower quality. And the issue is some of the cars being recycled, the aluminum were used to produce Coa Cola cans. So you actually lose that same purity of aluminum which are not going back into the automobile industry. So these are some of the issues. How can you get back the material? So the same with battery. The battery is even more important to have recycling because of the rare minerals that is of limited supply. And so who can really keep the battery to their own production, can't really dominate the market. And one thing they mentioned that's interesting is in China, the requirement is that whoever produces the battery, the company. So if BMW sells a car With a battery. BMW has to recycle that battery, whereas in the rest of the world there's no such regulation. The question becomes, who gets those recycled batteries?

Yeah, I was really surprised to read in the case that there are ICE vehicles in the BMW line that have lower emissions than some of their EVs, which made me say, well, why are they doing this at all? Because that throws up a big red flag. But maybe you can talk a little bit about why an ICE vehicle would have lower emissions than a smaller size ev.

That really depends on a few factors.

Okay.

That is actually one of the major exercises we have the students do in class. We share an Excel file with them with all the emissions numbers and ask them to tweak certain assumptions. And in particular, we ask them to tweak where the battery is being produced, what is the local grid emissions, and how long do you drive the car for? Let me highlight two key things here. So the first one is the transition from ICE to EV is a trade off where you lower your tailpipe emissions, but you increase the emissions from the battery. So with ice, you are creating emissions as you drive. With the electrical vehicles, you don't see the emissions, but you charge them using the local electricity. So the emissions of your local electricity will determine how much emissions that process creates.

Very interesting.

And that really varies by region. So the emissions of the local grid in China, for example, is three times that of EU and twice as much as in the US and so in certain combination where you don't drive long distances, you are in local grid with very high emissions and battery produced in regions with high emissions. There is that potential that the EV is actually dirtier than an internal combustion engine. And the other question we also ask students is, what about outside of the model? Are there something we're not capturing just by looking at one car scenario? And one factor is imagine if all the cars convert to ev. Right now, there's not enough renewable energy or clean energy such that you may need to actually end up firing more coal plants. And that is higher emissions.

Yeah. This is part of the whole tension around sustainability. And we talk about this in other cases that we discuss on the show as well. This has been a really interesting conversation. Shirley. If there's one thing you want listeners to remember about the BMW case, what would it be?

The measurement you need to measure emissions. Because you can't manage what you don't measure. And with the better measurements, it helps you make better decisions. One thing we want to highlight is emissions is across the entire value chain, sometimes by focusing on one type of emission, you end up increasing another emissions. So it's important to see the full picture. What I really am grateful for is BMW for sharing with us all of their experience. And our hope, or my hope, is that some of the students who learn this will one day go into their own company and this case can show them once you have the measures, you can start making better decisions.

Yeah, Shirley Lou, thank you so much for joining me on Cold Call.

Thank you for having me.

That was Harvard Business School Assistant Professor Shirley Liu in conversation with Brian Kenny on Cold Call. We'll be back next Wednesday with another hand picked conversation about strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify or wherever you get your podcasts. And while you're there, be sure to leave us a review. We're a production of Harvard Business Review. If you want more articles, case studies, books and videos like this, find it all@hbr.org this episode was produced by Ann Sanney and Hannah Bates. Ian Fox is our editor and I'm your guest host, Ramsey Kabaz. And special thanks to Adi Ignatius, Maureen Hoch, Karen Player, Nicole Smith, Ann Bartholomew and you, our listener. See you next week.