BMW's Profitability Hits Lowest Since 2010 Amid Tech Rivalry

Mar 10, 2017

BMW AG reported its weakest profitability since 2010, capping a negative year for Chief Executive Officer Harald Krueger after the luxury-car marque lost its crown to arch-rival Mercedes-Benz.

Amid higher spending on battery-powered and autonomous-driving technologies, BMW’s automotive profit margin narrowed to 8.9 percent in 2016 from 9.2 percent a year earlier, according to a statement on Thursday. The shares fell as much as 4.2 percent, the most in four months.

“We are fully focused on implementing our strategy,” which involves pivoting to self-driving, electric vehicles, Krueger said in the statement. “From 2019 onwards, we will be firmly embedding all-electric, battery-powered mobility in our core brands.”

BMW, lacking the financial heft of rivals backed by a larger parent, is focusing its resources on innovating for the future instead of chasing short-term sales volume. The Munich-based carmaker plans to launch the self-driving, electric iNext model in 2021 in a bid to regain its edge as an automotive leader. To manage rising development costs, BMW is pushing high-margin traditional models, such as the new X7 sport utility vehicle that’s due in 2018.

 

Bolstered by the revamped BMW 5-Series and Mini Countryman, sales in 2017 will likely be slightly higher, the company said, adding that the overall outlook is clouded by global political and economic volatility.

The world car market is cooling, with demand in the U.S. and Europe set to peak after years of growth, and Chinese purchases forecast to slow after the government raised the sales tax on small-engine vehicles.

BMW shares fell as low as 83.01 euros, before paring the loss to 3.3 percent at 83.76 euros at 2:30 p.m. in Frankfurt.

Electric Future

Carmakers are investing in battery-powered vehicles to comply with tightening emissions regulations, even though customers aren’t rewarding the effort because they’re concerned about cost and driving range. BMW said it plans to sell 100,000 electrified vehicles this year, for the first time.

However, demand isn’t enough to offset the investment costs. Groupwide earnings before interest and taxes dropped 2.2 percent to 9.39 billion euros ($9.91 billion), missing the average analyst estimate of 9.82 billion euros, according to data compiled by Bloomberg.

“Operational performance falls a bit short of expectations,” DZ Bank analyst Michael Punzet wrote in a note to clients, adding that BMW’s “competitive advantage” on electrification is a positive.

The automaker was one of the first to develop an electric car from the ground up with the $42,400 i3 in 2013, and despite reining in rollouts in recent years, it’s planning to add battery packs to existing models in a move that sets it up to act quickly should demand take off.

Luxury Race

BMW faces the additional burden of having to spend money on redesigning a lineup at its main brand that’s been largely static for years, amid a styling lull that gave Mercedes the opening to oust its long-time rival from the top of the sales ranking.

Global deliveries at BMW rose 5.2 percent in 2016 to 2 million cars, growing to a record but at less than half the 11 percent rate which lifted deliveries at Mercedes to 2.08 million. Mercedes had lagged behind its rival since 2005 and temporarily dropped below Audi to third place before a revamped SUV lineup drove a strong comeback in recent years.

Rising sales pushed BMW’s group revenues 2.2 percent higher to 94.2 billion euros. While BMW’s automotive margin stayed within its target range of 8 percent to 10 percent, it’s lower than Mercedes’s 10 percent.

Despite the challenges, BMW said it plans a dividend of 3.50 euros per share for 2016, its highest ever, after paying 3.20 euros a year earlier. That’s too much, according to Kepler Cheuvreux analyst Michael Raab.

“We think BMW is attempting to send positive dividend signals” but the increase isn’t justified because the company faces rising costs to avoid falling behind on electrification, he said. BMW’s results last year were “disappointing.”

The carmaker is scheduled to release more detailed 2016 figures on March 21.

 

Source: Bloomberg Technology