The Lowdown: A very British coupé? BMW flies the flag to make its models the envy of Mercedes

As the German car giant goes all out to overtake its rival, chairman Helmut Panke tells John Lawless why the Anglo angle is vital

Thursday is likely to go down as one of the most significant days in BMW's 83-year history, signalling whether it has the capacity to overtake its arch rival, Mercedes-Benz, as world leader in the premium car market.

BMW is launching an astonishing 26 new or updated models between January this year and the end of 2004. But on 18 September the new BMW 5 Series goes on sale in Britain. Rarely, if ever, has so much been riding on the success, or failure, of just one car.

The 5 Series has, for years, accounted for one in four of all BMWs sold. If it fails to hold its 25 per cent share, BMW will stay second to Mercedes. If it does as well, or better, the blue, white and black badge of Munich should cruise pass the star of Stuttgart.

Britain is vital to the success of the launch, explains BMW's chairman, Dr Helmut Panke. He will learn more about BMW's future prospects from how the 5 Series is received in this market, than from anywhere else.

In the US, BMW's biggest market, it has been tantalisingly close to claiming the outright number one spot for months. It has already overtaken Mercedes and is now in a head-to-head battle with Toyota's Lexus. Asia seems destined to become its biggest market, but not for five to 10 years. A factory in China will soon produce 30,000 BMWs a year, in a country which still has only five cars per 1,000 people, against 133 per 1,000 on average in the rest of the world.

Today's battle between BMW and Mercedes is going to be won or lost in Europe. But not, as everyone expects, on home territory. In July, when the new left-hand-drive 5 Series was launched throughout Europe, sales of all BMWs in Germany crashed 15.7 per cent. In Britain that month, where the old 5 Series was still in the showrooms, BMW-badged sales soared 12.7 per cent.

Britain has suddenly become the market where BMW must prove its ability to lead the world. If British car buyers don't give a high five to the new 5, all the whispers at last week's Frankfurt Motor Show about Mercedes surrendering its supremacy will fade faster than you can say "0 to 60".

BMW, which sold 1.06 million cars last year and is targeting 1.4 million by 2008, is investing massively in new models, including the new 6 Series Coupe and the X3 it unveiled in Frankfurt. Last year, it committed itself to spending €3.4bn (£2.4bn) on new and upgraded factories, including €1.3bn on a plant to make the new 3 Series in Leipzig. To cope with a hugely increased workload, it has also outsourced production of the new X3 to Austria's Magna Steyr.

Timing is crucial in the launch of models, and Panke believed BMW had got it right. He knew there would be a sales crash in the middle of this year, as always happens when a popular old model is replaced by a new one. But he reckoned it would be immediately overcome by a resurgence, post-11 September and the Iraq war, in consumer spending.

He told BMW's AGM in May: "In the second half of the year, we will see increasing growth the world over. The positive effects of our product and market offensive will not come to bear until the second half of the year, when our new models enter the market."

Panke now admits he is having to launch his new models into a global market where consumers are still dogged by insecurity. He expected this to be receding by now, but it remains all-pervasive, persistent.

"We have something like a delay in the economic rebound in consumer confidence by about a quarter. We expected it in the second half of this year. Our interpretation for markets worldwide is for a recovery at the beginning of 2004. America and Asia will be faster. Europe will be a little bit slower, with the UK leading. The German market will be flat."

The latest sales figures paint a more pronounced picture, underscoring the pivotal role of the UK market. The global sales of all BMWs were 531,487 in the year to 31 July, 4.9 per cent down on the first seven months of 2002.

In Britain in that month, without being offered the 5 Series, British motorists bought 6,101 BMWs; worldwide, the new 5 sold 6,257.

Whether BMW can oust Mercedes is such a sensitive subject that, in the lift to the 22nd floor of BMW's head office, the company's press officer asks in vain if he can review any of his boss's quotes. But, if the sales retreat in its home market is unnerving others in Munich, Panke doesn't show it. He is bullish and, at times, animated - excited by what he sees as a future filled with more and more different BMWs, aimed at market niches that no one can begin to imagine.

"On 4 September," he says, "Wirtschafts- woche predicted that we are about to grab the number one spot. Under the headline "Traenen in den Augen", or "Tears in the Eyes", the German magazine calculated that in premium cars the difference between Mercedes and BMW is now down to 25,000 sales.

Panke can't hide his delight: "The little BMW of the Sixties and Seventies is now competing, in the minds of the market and media, for the top spot volumewise."

Claiming world leadership doesn't come easily to German corporate chiefs. "The two globally successful premium brands over the last few years are BMW and Mercedes," he says. "Or, to put it politely, Mercedes and BMW." To even mention BMW in the same breath - just three years after its humiliating retreat from Rover - is, for the company, amazing.

"The 1994 [when BMV bought Rover] strategy - which was a move to widen our footprint, going to smaller and off-road vehicles - was absolutely right," says Panke. "But it was done in the wrong way, with the wrong acquisition."

Escaping from its first big, but dismal, attempt at global expansion wasn't as costly as first thought. Panke discloses that it cost €4.1bn instead of €4.9bn.

The irony is that the extra sales surge which BMW needs to get past Mercedes will be generated by two of its three brands that are quintessentially British: the Mini and Rolls-Royce. In the US, where the Mini has just become the first small vehicle to be voted North American Car of the Year, the biggest-selling extra by far is to have a $260 (£165) Union Jack emblazoned across the roof.

Even before the Mini's former owner, Rover, went back into British hands and Land Rover was sold to Ford, BMW designers were secretly working on a new Mini. "We studied the genes of the brand," says Panke, "It offered the most excitement for a small car by putting the four wheels more or less exactly at the corners, with no overhangs. Overall, there was this friendly face, just smiling at you."

These features, the designers were told, had to be retained. "When you look at the Mini today," says Panke, "you know it is exactly the classic Mini."

BMW designers are not allowed to pursue new products at any cost. "Before each model is developed," says Panke, "a business case is developed in which there is a 'hurdle rate' for return on investment. The targets are the same for each model. It is very honest and clear.

"First generations of the new Rolls-Royce and Mini do not reach the target, because they have to carry upfront costs of positioning and having the start-up of two manufacturing operations. But we won't lose money over the first life cycle."

By aiming every car, regardless of size, at the top end of the market, BMW does not suffer, as most volume car makers do, from smaller margins on smaller cars. Euro for euro, each of the 600 Minis produced daily - at a £230m factory in Oxford, now working three shifts a day, seven days a week - earns as much as a Rolls-Royce. "Everyone told us it was absolutely foolish to launch the Mini," says Panke. "But it is the first premium product in the small car market. No other small car, for example, has onboard navigational systems and xenon headlights. And six airbags."

Even with all these quality trimmings, BMW has extracted still more value from its little cult-car by offering an extraordinary 225 optional extras. Its designer clothes collection includes a black jacket badged with "37", the number carried by a winning Mini in the 1964 Monte Carlo rally. Accessories include watches with a Mini speedo-rev counter on the face.

Even BMW planners are amazed at what this approach has achieved. Market research had predicted that the standard Mini would capture 50 to 60 per cent of sales. By the end of the year to 31 August, more than 75 per cent of buyers had opted for the much higher-priced Cooper and Cooper S. Fully loaded, they fetch twice the price.

"The Mini is the only small car that is sold globally, simply because it has the exceptional values of a premium brand," says Panke. And, boy, does it sell: 106,603 in the first seven months of this year, 39.4 per cent up on last year. Brits bought 4,343 in July; in north America, 3,084 were sold. In the same month, while BMW sales slumped in Germany, Mini sales leapt by 5.4 per cent to 2,477.

For a new Rolls-Royce, meanwhile, BMW went back to the vintage values of Stewart Rolls and Henry Royce: "Not begging, being humble, but producing a performance car," says Panke. "And, now - 0 to 60 in 5.9 seconds. Come on, that's quite a performance."

There have been big doubts about whether the new Rolls-Royce Phantom will sell in an uncertain world. Panke, though, is adamant: production at the new £60m factory in Goodwood, Berkshire, will start at between 1,000 and 1,200 a year. "We have several hundred on order - not from distributors but from end customers," he says. "And, no - I say a clear and vehement no - we have not had to massage the price."

Pop star and actress Jennifer Lopez is among the first Phantom drivers, having been given one by her partner, Ben Affleck, for her birthday. For other, less-celebrated customers, a UK dealer confirms, the wait for the £252,000 Roller is six months.

Ultimately, though, the bulk sales will still have to come from BMWs. When asked to differentiate the brand appeal of these cars from Mercs, Panke says: "BMW has, and will always have, much more driver pleasure. More performance. And more dynamism than Mercedes.

"We will never offer a boring BMW."

For shareholders, the financial ride may be about to become a little less exciting. Everything is being done on the back of BMW's 2002 results, its best-ever. But in the first half of 2003, while a fall in turnover (by 8.3 per cent to €20.5bn) was mainly due to currencies, BMW's operating profits were down 12.5 per cent to €1.78bn and net profits were down by 14.5 per cent to €1.08bn.

Panke says he will never have to make another acquisition to increase the company's brand and model range. BMW is paying for all capital expenditure and research and development out of cash flow, and, he stresses, BMW will never have to enter the capital markets to fund its industrial activities.

Panke claims that the number of vehicles delivered under each brand will hit record highs in 2003. But will there be yet another record set of financial results? For the first time, his laugh has a nervous edge: "We strive to match last year's group profits."

The boss who's fit to rule

Helmut Panke ranks high among Europe's top 50 industrial executives. But he is probably the least well known.

The 56-year-old chairman of the supervisory board jogs in the early hours of the morning. He works to a tightly ordered daily schedule and spends most of his holiday time skiing fast down the Swiss Alps, which he can view from his penthouse office.

Since joining the company 23 years ago, in charge of planning and control in research and development, he has headed just about every crucial department: corporate planning, organisation, corporate strategy and co-ordination, and information technology. He left Munich for only three years, to run the US operations, and has since been on the board of BMW's huge finance division.

The big gap is production. Which is why he regularly abandons his office in BMW's famous four-cylinder-shaped headquarters to cross the road and eat lunch at what is its oldest factory.

BMW's shop-floor "associates", as Panke calls them, are among the elite of Germany's workers.

Panke almost didn't join BMW. He applied his university training as a nuclear physicist by going on to do research at the Swiss Institute for Nuclear Research, but returned to the University of Munich to teach the subject.

He then spent four years as a consultant at McKinsey, before joining the Munich car giant.