Balance Sheet Check

BMW's Lead Narrows

BMW CEO Harald Krueger annual results March 16 2016 Munich Source Bloomberg 56538713
Chief executive Harald Krüger needs to keep an eye on the competition.
  • Why it matters

    Why it matters

    Germany’s BMW is the world’s most profitable automaker but faces growing problems.

  • Facts

    Facts

    • Despite record earnings, BMW’s profitability declined in 2015.
    • Currency factors such as the weak euro accounted for about half of the €10 billion rise in sales last year and significantly boosted profits.
    • BMW is increasingly reliant on sales of SUVs while U.S. electric-car rival Tesla is targeting BMW’s core clientele.
  • Audio

    Audio

  • Pdf

Harald Krüger’s first year as chief executive of BMW came during a turbulent time in the auto industry. First the Chinese sales boom petered out, then the diesel emissions scandal at Volkswagen tarnished the entire sector.

But despite these factors, Munich-based luxury automaker BMW chalked up its sixth successive record year in 2015. The dividend payout will exceed €2 billion ($2.28 billion), an unprecedented sum, of which half will go to the Quandt family, which owns a 46.6 percent stake.

BMW, it seems, has found the secret of sustained success. Since 2005, the group has almost doubled its unit sales and quadrupled its dividend. Then as now, 90 percent of revenue comes from its car division, dominated by the core BMW brand, alongside British brands Rolls-Royce and Mini. The remainder comes from financial services and from its motorcycle division which accounts for just 2 percent of sales. All divisions achieved growth in sales and earnings in 2015.

A closer look at auto sales also reveals weak points. The low oil price is shifting BMW’s business model further toward sports utility vehicles. By contrast, sales of all BMW’s luxury ranges fell last year.

The impressive performance isn’t entirely homemade, though. BMW is profiting from a number of positive factors including a favorable exchange rate, the low price of oil and historically low interest rates.

The weak euro had a particularly beneficial impact on sales and the bottom line. Currency factors accounted for about half of the €10 billion rise in sales last year, and BMW’s auto division posted a €456 million net gain from currencies and raw materials prices, lifting earnings before interest and tax (EBIT) to €7.8 billion.

Excluding these factors, the picture is less rosy. Even though BMW sold 6 percent more cars, its profitability fell. The EBIT margin in its auto division fell to 9.2 percent from 9.6 percent last year. And that’s not a sector-wide problem: Arch-rival Daimler, maker of the Mercedes brand, last year increased unit sales by 16 percent and increased the operating margin in its car business to 9.5 percent from 8.0 percent. If Daimler keeps up that pace, it will overtake BMW this year in terms of unit sales and profitability.

It’s a similar story for the overall BMW group, where operating profit hasn’t kept pace with sales. The group’s EBIT margin fell by almost 1 percentage point to 10.4 percent. BMW is clearly finding it harder to grow profitably. To be sure, it’s still the world’s most profitable automaker. But its lead has narrowed. Toyota has almost caught up with an EBIT margin of 10.3 percent. The big U.S. automakers also achieved strong earnings improvements in 2015.

A closer look at auto sales also reveals weak points. The low oil price is shifting BMW’s business model further toward sports utility vehicles. By contrast, sales of all BMW’s luxury ranges fell last year. Sales of the 3 and 5 Series each dropped 7 percent, and the outgoing 7 Series slumped 25 percent. But the newly launched 2 Series compact car sold 157,000 in its second year.

That means BMW’s success hinges on sales of SUVs more than ever. One in four BMW cars sold is from its X range of SUVs. They’re more lucrative than limousines, but the downside is they consume more fuel than conventional cars. BMW needs to reduce the average CO2 emissions of its new car fleet to 95 grams per kilometer by 2021 to meet European emission standards or face heavy penalties.

 

11 p22 Sales per region-01 BMW

 

Also, BMW’s sales of electric cars aren’t living up to the automaker’s ambition to become the market leader in sustainable mobility. Sales of its “i” brand totaled 29,513 units in 2015, just 1.5 percent of total unit sales.

BMW was an early mover in electric cars, investing more than €3 billion in its prestige project i3, which it presented in 2013. But with sales of just 50,000 electric cars since then, the investment is unlikely to have paid off.

Chief executive Mr. Krüger has emphasized that e-cars will continue to play a key role for BMW. The i3 will be fitted with a new battery, and the hybrid sports car i8 will soon be available as a convertible. But BMW won’t roll out a completely new electric car until 2020. Called “Inext,” it will be fully networked and will offer strong self-driving features.

That’s a remarkably long time given that BMW’s rivals are rushing out electric models, not just to meet E.U. emissions limits but also to keep pace with U.S. rival Tesla, whose Model S is outselling the top models of BMW and Mercedes in key markets such as Switzerland and California.

Tesla is becoming more aggressive, announcing its Model 3 in a grab for BMW’s core clientele. The Model 3 is similar to the BMW 3 Series in design and price. If BMW doesn’t change its electric strategy, it will lose its early-mover status on battery cars. In the coming years, its focus in that area will be on plug-in hybrids. That’s less risky because the dual power system is easier to integrate in its existing model ranges. But it remains to be seen if the strategy will pay off.

Despite growing challenges in its core business, BMW has a strong financial cushion. Its auto division has net liquidity of almost €17 billion, providing ample room to cope with cyclical downturns and new challenges in research and its model policy.

 

Markus Fasse covers the aviation and automobile industry for Handelsblatt. Siegfried Hofmann is the chemical and pharmaceutical industries correspondent. To contact the authors: fasse@handelsblatt.com and hofmann@handelsblatt.com

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