Competitive advantage

BMW's biggest strength is its rivals' weakness

Krüger BMW AP 1800px
CEO Harald Krüger hunkers down for a mildly tough time. Source: AP

In business, a successful image can boil down to a favorable comparison. No one knows this better than Harald Krüger, the energetic boss of BMW, a German luxury carmaker. This week Mr. Krüger announced that earnings at the Bavarian carmaker fell by 6 percent to just over €2 billion ($2.3 billion) in the second quarter, led by a 14 percent slide at its core automotive division.

Outlays continued to rise for research and development, particularly for its new electric models – part of a push to introduce 25 new electric hybrid or purely battery-driven vehicles by 2025. In the second quarter alone, investment in electric drives and technology for autonomous driving boosted development costs by €300 million.

Compared to its direct competitors, however, BMW is in good shape. Its profit margin before interest and taxes (EBIT) in its core automotive division slipped below 10 percent in the latest quarter, but at 8.6 percent, is still higher than both Daimler’s and VW’s. That may well explain why BMW’s share price, while down nearly 6 percent this year (see chart below), has fared better than that of its two archrivals. Stock in Daimler and VW has shed 19 percent and 13 percent of its value, respectively.

The most obvious explanation is BMW’s limited exposure (so far) to the diesel-emissions scandal, in terms of fines, legal fees and vehicle recalls. In early 2018, BMW admitted to Germany’s motor-vehicle authority it had installed emissions-faking devices in a mere 11,000 vehicles, covering its 750xd and M550xd sedans. The number of vehicles affected has now fallen to less than 8,000 – a drop in the bucket compared to VW and Daimler, who were forced to recall hundreds of thousands of diesel vehicles for software fixes.

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“Both Daimler and VW are dealing with certification problems, supply problems, bottlenecks and mass recalls in the diesel scandal,” said Arndt Ellinghorst, an automotive analyst at Evercore ISI. BMW has virtually no problems on these fronts, Mr. Ellinghorst continued.

As things stand, BMW could get off with a fine for Dieselgate, probably one much lighter than the €1 billion slapped on VW by state authorities in June. That’s not to say BMW hasn’t attracted its fair share of scrutiny: To date, several of the carmaker’s German sites have been raided by prosecutors, while a potentially far-reaching class-action suit accusing BMW of manipulating emissions has been launched in the United States. The Munich public prosecutor’s office has got its teeth into the BMW case and will continue its probe into suspected fraud at least until the end of the year.

Mr. Ellinghorst said BMW will continue to outperform Daimler and VW in the second half of the year as well. Due to problems meeting new EU standards for CO2 emissions from September, Mercedes-Benz and Audi, VW’s luxury car unit, will only be able to sell part of their inventories until all vehicles are certified CO2-fit.

BMW has set an ambitious goal of overtaking Mercedes-Benz in sales terms by 2020. The Dieselgate scandal may provide the ideal opportunity to do so, if BMW continues to dodge the bullet.

Franz Hubik covers the German automotive industry for Handelsblatt. Jeremy Gray, an editor for Handelsblatt Global, contributed to this article. To contact the authors: hubik@handelsblatt.com and j.gray@handelsblattgroup.com

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