Autos

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Electric motors aren't as complicated as combustion engines. As battery vehicles become common, carmakers probably won't need as many production staff. So when BMW AG's chief labor representative starts criticizing management for being "too slow" to invest in electric cars, you know something's up.

Manfred Schoch, who's also the German auto giant's deputy chairman, told Bloomberg News last week that to stay competitive, it must build more electric cars, including versions of the 3, 5 and 7-series saloon. BMW's a conservative place, not given to airing differences in public. The models Schoch's talking about are its holiest-of-holies. So his intervention matters.

And he has a point. BMW's image has suffered of late. Volkswagen AG has more ambitious electric plans while Mercedes is thriving because of more exciting designs.

BMW shares trade on a pretty dismal 8 times estimated earnings, about the same as Mercedes-owning Daimler AG (even though it's coping with a struggling truck unit).

Missing Premium
BMW used to trade on a higher earnings multiple compared to rival Daimler. Not anymore
Source: Bloomberg

BMW could be bolder in both design and technology. It has the financial muscle to be a leader here. So far new CEO Harald Krueger's most eye-catching promise has been a fully-autonomous, electric car called the iNext, due in 2021.

He has reasons for caution. Autonomous driving isn't mature yet (as Tesla's autopilot accidents have shown) and in five years electric cars will be able to drive a lot further before recharging. But BMW's electric line-up looks thin: an all-electric Mini planned for 2019 and electric X3 SUV for 2020.

These don't really set the pulse racing, a problem in an industry where buzz is everything. Tesla already sells almost three times more Model S saloons in the U.S. than BMW's top-of-the-range 7-series. The forthcoming $35,000 Model-3 threatens to grab market share from the 3-series. Tesla's taken almost 400,000 pre-orders, approaching the yearly total of the 3-series.

Still, BMW has strengths Tesla would kill for, including strong cash flows, a resilient balance sheet and huge China sales. At the end of September, BMW's automotive division had 16.7 billion euros ($18 billion) in net financial assets

Deep Pockets
BMW can afford to spend more than Tesla on R&D
Source: Bloomberg

And BMW can do technology. It launched the i3 electric compact back in 2013, following up with the impressive i8 hybrid sports car. If you're going to find fault, then it's mistake was to be too innovative, too soon. Customer demand and electric batteries weren't mature enough when it launched the i3. Since then, BMW's difficulty has been whether to risk profits on new electric cars before it knows customers want to buy them.

BMW has sold about 70,000 i3s and i8s since their launch, a fraction of its 2.2 million annual sales. Plus its conservatism has worked well till now: the automotive operating margin has been above 8 percent in every quarter for six years.

Electric Firepower
BMW remains consisently profitable so it can afford to invest in electric cars
Source: Company reports
Nb.Audi's return on sales was affected by special items related to the diesel scandal. The reported margin is adjusted to exclude its motorcycle unit.

With Donald Trump as U.S. president, it would be tempting to stick to the tried and trusted. He might relax emissions rules, and the U.S. accounts for about one fifth of BMW revenue, including sales of many gas-guzzling SUVs and saloons.

To not change would be a mistake, though. Even Volkswagen, long an electric skeptic, is talking about selling as many as three million electric cars a year by 2025. And you can see why. China's cities are congested and polluted so it's determined to promote electric cars. European emissions rules will get tougher. Plus consumers seem to like electric cars (ask Tesla).

So BMW can afford to be braver. If more haste requires more spending, then so be it. Investors haven't given it much credit for high earnings anyhow. Time to put the electric pedal to the metal.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Cash, marketable securities and intragroup net financial assets

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net