BMW's Muted Forecast in Step With Daimler Amid E-Car Stretch

Updated on
  • Automaker flags possible first pause in profit gain since 2008
  • New models, electric cars propel $8.6 billion in investments

BMW AG’s profit growth is at risk of stagnating for the first time in a decade this year as the luxury carmaker ramps up already high investments in new models and electric vehicles.

Pretax profit will be “at least in line” with 2017, the Munich-based carmaker said Wednesday. That follows last year’s 10 percent jump and would mark the first time in a decade that the figure hasn’t gained. The world’s second-biggest luxury carmaker, in the midst of a record rollout of new, high-end models, said it’s still targeting an all-time high in earnings, and stuck to a long-held target range for its return on sales.

Losing Power

BMW's investment in electric cars is sapping pretax profit growth

Source: Company; Bloomberg data

*Company forecasts at least flat with 2017

“Will this be a walk in the park in the coming year? No, it won’t be,” Chief Financial Officer Nicolas Peter said at a Munich press conference. “At the same time, I’m absolutely optimistic profitability will stay within that range.”

BMW has pledged to recapture the luxury-sales lead from Daimler AG’s Mercedes-Benz by 2020. Losing its decade-long dominance in the premium segment has put pressure on Chief Executive Officer Harald Krueger, who has promised the company’s most aggressive expansion of new models to date to regain its edge.

Deliveries and automotive revenues are expected to rise “slightly” this year, BMW said Wednesday, as the manufacturer adds momentum from new models like the X2 compact sport utility vehicle.

Spending Surges

So far, BMW has managed to keep a grip automotive profits even as spending on electric cars balloons. Outlays on research and development will total about 7 billion euros ($8.6 billion) this year, an increase of some 15 percent on top of an 18 percent jump in 2017. Free cash flow fell 23 percent last year to 4.5 billion euros and is forecast to slide further in 2018 to 3 billion euros.

This year will mark the pinnacle of spending demands, though the costs will remain above a targeted proportion of sales for awhile, Peter said.

BMW shares rose 0.8 percent to 86.71 euros as of 11:48 a.m. in Frankfurt. That pared the stock’s decline this year to 0.2 percent, valuing the carmaker at 56.3 billion euros.

The industry’s shift to electric models, with BMW an early adopter with the slow-selling i3 city car, is generating record spending as regulations prompt carmakers to develop plug-in hybrids and battery vehicles while consumers remain on the fence. BMW will ratchet up its electric line-up next year with a new Mini, and it plans an offering of 12 battery-only cars, plus another dozen powered by both electric and combustion engines, by 2025.

Low Proportion

While sales of electrified vehicles jumped by two-thirds last year, according to BMW, they still accounted for less than 5 percent of the carmaker’s deliveries. Development costs are among the reasons that Daimler is forecasting no growth in earnings before interest and taxes this year.

To finance the push into electrics, BMW is reducing customer options such as the range of steering wheels to scale back costs. Somewhat ironically, it’s also prioritizing gas-guzzlers like the seven-seat X7 SUV among its new models. The company showed off the high-performance M8 Gran Coupe at the Geneva car show earlier this month. The vehicle, once in production, will fetch upwards of $100,000 to fill BMW’s coffers.

“We are bringing out completely new models and introducing a new design language for the whole product range,” Krueger told journalists. “This is our recipe to ensure the BMW brand regains pole position in the premium segment by 2020.”

(Updates with CFO’s comments starting in third paragraph, shares in eighth.)
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