Patrick found this on the RF E31 board and posted it on RF E32 board some days ago.
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M70 Engine bay fire and alternator cable shorting

Message: Here are a couple of on-going threads from the E31 community on an M70 engine fire that is preliminary traced back to shorting of the alternator cable to the metal conduit. Fellow members also did some analysis on the conduit and the fact that it is supported on rubber insulations so ideally there shouldn't be a electrical path to ground even if alternator cable is shorted to the conduit. The intake runner the weight of which the conduit is supporting is also isolated by the expensive rubber intake manifold gasket. One possible electrical path is via the M6 mounting bracket of the fuel return hose which go on the M6 stud of cylinder #5. All in all the M70 on E32 shares the same conduit design and people here should take note of fire hazard due to old alternator cable.

I have found several years ago that the cable's insulation had aged and turned brittle especially inside the conduit that ran above the driver side exhaust manifold(even with presence of heat shields). My replacement cable has silicone jacket to take higher temperatures, and I did away with the conduit and routed the cable higher and along the Pentosin reservoir side, and wrapped it with some other heat shielding material.

Original post and photos
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His old post
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Patrick C 88 750 159K

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Similar case happened yesterday on the German forum on an Alpina B12, I warned him to check what Patrick said. Guess what he found here, pics
http://www.7-forum.com/forum/showthread.html?p=897780&posted=1#post897780

He also found a lose cable connection at the alternator.

So check all these connections and wires!

E32 750iL 11/88, E32 750iL Highline 03/90
7 series Tech tips
http://tinyurl.com/3486c

• M70 Engine bay fire and alternator cable shorting (url) - shogun 2008-04-28 14:48:15 (543 views)
  • This is my car and it was quite a sight to see - txgr8white 2008-05-16 21:03:27 (37 views)
  • VERY IMPORTANT !! Please replace your alternator cable :) - 750ilinoz 2008-05-07 00:51:24 (36 views)
  • pic of the removed cable loom (url) - shogun 2008-04-29 18:16:52 (78 views)