BMW Sees i3 Spending Weighing on Automotive Profitability

BMW i3
A logo sits on the exterior of a new BMW i3 battery-powered automobile, manufactured by Bayerische Motoren Werke AG, at the company's factory in Leipzig, Germany. Photographer: Krisztian Bocsi/Bloomberg

Bayerische Motoren Werke AG, the world’s biggest maker of luxury vehicles, forecast weaker auto profitability in the fourth quarter after investments to roll out new models like the i3 electric car weighed on results.

Spending will exceed targets this year and continue at a high rate in 2014 as BMW broadens its lineup and builds new factories, the Munich-based company said today. The outlays led to third-quarter earnings before interest and taxes falling 3.7 percent to 1.93 billion euros ($2.6 billion).

“Our target is to assure the long-term competitiveness of the BMW group,” Chief Financial Officer Friedrich Eichiner said today on a conference call. “That is more important than short-term profit.”

The maker of BMW, Mini and Rolls-Royce vehicles failed to keep pace with earnings gains at Volkswagen AG and Daimler AG. BMW is developing the battery-powered i3 city car and the plug-in hybrid i8 sports car to introduce its eco-friendly “i” subbrand. The expansion is part of the company’s effort to maintain an edge over Audi and Mercedes-Benz, which have both vowed to surpass BMW in sales by the end of the decade.

BMW fell as much as 4.8 percent to 79.56 euros, the steepest drop since June 20, and was down 3.2 percent at 2:01 p.m. in Frankfurt trading. The stock has gained 11 percent this year, valuing the company at 52 billion euros.

Spending Burden

In the first nine months of 2013, BMW spent 4.3 billion euros on expanding its production network and rolling out new models and profit will take an additional 500 million-euro hit in the fourth quarter, Eichiner said today. BMW will exceed its target of spending 7 percent of revenue on capital expenditures for the full year, he said.

While the investments are “money well spent in the long run,” the earnings show why Mercedes’s momentum makes Daimler more appealing for investors, said Daniel Schwarz, a Frankfurt-based analyst at Commerzbank AG.

Third-quarter Ebit at the manufacturer’s auto division fell 6 percent to 1.55 billion euros. That resulted in the profit margin narrowing to 9 percent from 9.6 percent a year ago. Fourth-quarter automotive profitability will be at the lower end of a target range of 8 percent to 10 percent, BMW said today.

BMW maintained a forecast of 2013 pretax profit “on a similar level” to last year’s 7.82 billion euros as investment offsets record deliveries. Nine-month pretax profit slipped 0.3 percent to 6.02 billion euros, as research and development spending jumped 14 percent to 3.2 billion euros to meet tighter emissions standards.

Long-Term Focus

“We are making these investments from a position of strength and we are making them early,” Chief Executive Officer Norbert Reithofer said on the conference call. “This is consistent with the long-term focus of the BMW group.”

BMW is under increasing pressure to keep ahead of German competitors. Daimler’s Mercedes-Benz Cars division, which also includes the Smart city-car brand, reported a 23 percent surge in third-quarter Ebit. Operating profit at Volkswagen jumped 20 percent as earnings from the Porsche sports-car brand partly offset investment to expand Audi.

Mercedes gained ground against BMW and Audi in September as the introduction of the CLA coupe helped demand almost double for the company’s compact models. Nine-month sales by Mercedes rose 10 percent to 1.06 million cars and SUVs, compared to a 9 percent gain at the BMW brand to 1.21 million deliveries and 7.6 percent growth at Audi to 1.18 million.

Deliveries Rise

BMW sales, including Mini and Rolls-Royce, rose 11 percent to 481,657 vehicles in the third quarter, boosted by demand for the 3-Series line, which has been expanded to include a GT version. The new 4-Series coupe shares underpinnings with BMW’s best-selling model.

To defend its lead, BMW is introducing 25 models in 2013 and 2014, with 10 of them, such as the Rolls-Royce Wraith, having no predecessor. Mercedes plans 13 all-new models by the end of the decade, while Audi is widening its SUV lineup.

The i3 city car, which will cost 34,950 euros in Germany and $41,350 in the U.S., goes on sale in Europe on Nov. 16, followed by the U.S. and China in the first half of next year. Customers had already reserved more than 8,000 i3s, and the company is considering boosting production capacity for the car.

“Once BMW i start-up costs start diminishing, focus will return to growth,” Arndt Ellinghorst, a London-based analyst with International Strategy and Investment Group, said today.

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