Future-proofing bites into BMW profits

BMW continues to struggle with high costs, which dampened profit at its automotive division in the third quarter. While hefty investment in new technologies is geared at providing a sustainable business in the future, for now it is eating into margins.

EBIT at the OEM’s automotive business in the July-September period this year contracted 6% to €1,594m (US$2.15bn), a drop that BMW specifically attributes to increased costs for new technologies, bumped up production and market launch costs. Slow vehicle sales in parts of Europe also played a role in the decline. EBIT margin for the quarter was 9.0%. Third-quarter revenues were flat (+0.1%) at € 17,196m, and profit before tax contracted 4.1% to €1,631m.

For the first nine months this year, EBIT for the automotive segment is down a notable 11.9% at €4,887m, with an EBIT margin of 9.5%. Automotive revenues grew 1.2% to €51,304m, while profit before tax for the January-September period fell 9% to €4,795m.

Unit Sales of BMW, Mini and Rolls-Royce brand cars rose 10.7% in the third quarter to set a new record at 481,657 units. Nine-month sales also set a new high at 1,436,178 units, up 7.5% from the same period last year.

Under threat

While BMW claims it remains in pole position in the global premium segment so far this year with sales of 405,350 units, analysts have started to caution that the OEM is under threat. In a research note, Berenberg Equity Research analyst Adam Hull points out that while BMW’s SUVs offer very strong margins, the segment share is expected to weaken. “Range Rover is gaining share, the new large Audi SUV range is due in early 2015 and the launch of the Porsche Macan in spring 2014 will likely hit sales/margins of top X3 version,” writes Hull.

BMW 7 Series

The large car segment is also seeing more competition, with Hull noting that unit sales of BMW’s 7 Series models may revert to 2009 levels as the Mercedes S-Class and Porsche Panamera, along with the Tesla Model S in Europe, steal away buyers. The Maserati Ghibli is also a threat to BMW’s large-engined, large cars, warns Hull. Overall, the high-margin X5/X6 and 7 Series are expected to drop to 9-10% of unit sales in 2014-16, compared to 14% in 2010-11. “New models from Maserati, Bentley and Jaguar, and increased pressure from Range Rover, Mercedes and Audi will restrict BMW’s ability to raise prices in an upswing. Higher investments and lower gross margins on new electric cars and hybrid technologies will also restrict margins,” comments Hull.

Looking ahead

Despite the likelihood of increased competition, BMW remains confident of another record sales year in 2013. “After a good third quarter, we are well on course to achieve our targets for the full year. We continue to target sales volume growth in the current year in the single-digit percentage range and hence a new sales volume record, ” commented Norbert Reithofer, Chairman of the Board of Management of BMW. However, with continued high levels of expenditure for new technologies, models and production, Group profit before tax should remain on par with last year. For the Automotive segment, the forecast for EBIT margin remains unchanged at between 8% and 10% for the current year.

Hull remains cautious, referring again to the likely effects of stiff competition: “We believe that there is an upward step change in the level of competition with many model launches in the large SUV and large-car segment which we believe will structurally decrease BMW margins in these areas. Even factoring in a stronger European market, we assume BMW Autos margin in 2014 will be 9.1%, down from 9.5% in 2013. Also, importantly, we do not expect 2015 to see a recovery in BMW’s margins as we assume 7 Series sales at the 2009 level (ahead of its replacement in late 2015/early 2016.”

Megan Lampinen