Taking its toll

BMW warns on profits amid diesel fallout, recalls and trade disputes

bmw profit warning
Put it in park. Source: BMW

BMW issued its first profit warning in 10 years, cautioning investors that earnings would be slightly lower this year instead of unchanged from last year’s €10.7 billion ($12.6 billion) as previously forecast.

Shares of the Munich-based carmaker fell as much as 4 percent in trading. Investors took the BMW warning as a barometer of overall health in the auto market and also sold off shares of Daimler, Continental and Volkswagen.

The BMW warning comes after Daimler, maker of Mercedes vehicles, disclosed in July that second-quarter profit was down 30 percent from the previous year. Daimler issued a profit warning of its own in June.

Distortions in the car market

In its announcement Tuesday, BMW blamed distortions in the car market for putting pressure on its profit margin and dampening sales. The distortions resulted from other carmakers selling models not yet certified under a new emission testing protocol at heavy discounts.

BMW had successfully certified all its models by the Sept. 1 deadline, but VW and Audi had not. These models are being sold as used cars or floor models at hefty discounts and will weigh on prices and margins at least until the end of the year, BMW said.

Sales in the company’s core auto segment are down as a result. BMW had counted on increased sales and higher prices to offset the billion euros the carmaker is investing in the development of electric motors and autonomous driving. Instead, profit margins as measured by EBIT (earnings before interest and taxes) is running at 7 percent rather than the usual 8 to 10 percent.

bmw profit warning

Engines catching fire

Recalls will also hit earnings. The carmaker is recalling more than 100,000 vehicles in South Korea after several instances of engines catching fire. It is also recalling several hundred thousand vehicles in the United States for modifications.

As a third reason for the profit warning, BMW cited trade disputes initiated by President Donald Trump’s administration. The 25 percent retaliatory tariff that China imposed on SUV imports from the US also affects cars produced by BMW in South Carolina for export to China. This puts pressure on profit margins there and exacerbates the slower-than-expected pace of sales in China, which in turn affects production.

Daimler, too, cited the trade dispute in its June warning. That warning also mentioned the effects of the new emissions certification as well as recalls of diesel vehicles for modifications and weak demand for buses in Latin America.

Analysts have worried for months about BMW, not only because of trade barriers but because the market seems increasingly saturated after seven years of booming sales. The carmaker declared a new model offensive as part of its effort to close the gap with its archrival Mercedes. While it did succeed in narrowing the gap, it was only because Daimler experienced a sharp decline in sales in August.

Ambitious as ever

BMW CEO Harald Krüger said Tuesday that despite the lower profit forecast, “The BMW Group stands by its ambition to lead the transformation of the industry.”

But the problems listed Tuesday are just being stacked atop other troubles. Not least is the impending cost of retrofitting diesel vehicles or offering rebates for upgrades to keep pollution in German cities below legal maximums and avoid diesel driving bans. Mr. Krüger joined his counterparts at Daimler and VW this week in a discussion with German Chancellor Angela Merkel on measures needed to avoid bans.

On top of everything else, BMW dealers last week rejected the new service and dealer contracts offered by the carmaker. They complained the terms jeopardize their existence and criticized BMW’s plan to handle more fleet sales directly.

BMW unveiled its Vision iNEXT concept car just a few days ago, an all-electric autonomous driving vehicle aiming to keep rivals Tesla and Google’s Waymo in the rearview mirror. But the burden of proof will be on management to show investors and the Quandt family heirs who control BMW that the company can pull off its ambitious goals.

Markus Fasse is a Handelsblatt correspondent in Munich. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the authors: fasse@handelsblatt.com.

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