BMW Loses Ground to Mercedes as Auto Profitability NarrowsBy
Outlook for car revenue reduced to ‘slight’ gain from ‘solid’
BMW making ‘significant’ investment in next-generation cars
BMW AG lost ground to global luxury-car leader Mercedes-Benz as profits from carmaking fell while the euro’s gains prompted the manufacturer to reduce its forecast for automotive revenue.
Amid increased spending to refresh and expand its car lineup, BMW is now predicting a “slight” gain in 2017 auto revenue, compared with its previous forecast for a “solid” increase, the Munich-based company said Tuesday in a statement. Alongside the outlook for a lackluster end to the year, third-quarter the automotive profit margin slipped to 8.3 percent of revenue, below the 9.2 percent at Mercedes, where charges for air-bag recalls and diesel-model fixes held back profitability.
Once the biggest maker of luxury cars, BMW is struggling to regain momentum in its tussle with Mercedes. Its styling has become conservative, while it straddles the dual demands of refreshing its conventional lineup to make money and develop new technology for the looming shift to self-driving, electric cars.
“BMW is like a bloke settling into middle age,” Max Warburton, a London-based analyst at Sanford C. Bernstein Ltd., said in a note. “Getting older, slower and duller is not a pleasant experience.”
In addition to developing upscale models like the 8-Series coupe and full-size X7 sport utility vehicle, BMW is investing to accelerate a rollout of at least 12 battery-powered vehicles by 2025 in a race with Mercedes’s 10 billion-euro ($11.6 billion) electric-car push. BMW’s spending on research and development rose 22 percent to 4.06 billion euros in the first nine months of 2017, and the pace is set to continue for at least the next three years amid the biggest product offensive in the company’s history, Chief Financial Officer Nicolas Peter said on a conference call.
“Significant upfront investment on research and development is necessary, both now and in the coming years,” Peter said in a statement. “Due to currency-translation effects, especially the strong euro, we now expect a slight, rather than solid increase in automotive -segment revenues.”
‘Solid’ Profit Increase
Despite the spending pressure, BMW raised its full-year forecast for group earnings and now expects to post a “solid” increase in pretax profit, compared with its earlier prediction of a “slight” gain. Third-quarter earnings before interest and taxes fell 3.2 percent from a year earlier to lag behind analyst estimates.
“BMW’s quarterly performance was weakish, and the boost to the overall guidance largely feeds from a strong first-half of the year,” said Juergen Pieper, an analyst at Bankhaus Metzler in Frankfurt. “Compared to its key competitors, the result was less strong.”
German automakers are battling with the disruptive shift sweeping the auto industry alongside dealing with the ongoing fallout from Volkswagen AG’s cheating on diesel emissions. Since the scandal erupted more than two years ago, diesel technology, which makes up about half of car sales in Europe, has come under scrutiny about excessive pollution in real-life conditions, raising the threat of driving bans and depressing demand for the lucrative models.
BMW is responding with an enlarged suite of high-end cars and SUVs to shore up profitability while the threat of new competitors such as Tesla Inc. looms. Next year, the manufacturer will add the new X2 compact SUV and start production of the three-row X7.
“Our priority is the long-term perspective,” Chief Executive Officer Harald Krueger said in the statement. “For this reason, we are investing substantially in all relevant future areas of mobility.”