BMW's Margin Squeeze

Posted by: Gail Edmondson on November 6, 2007

Mini 2008

BMW third-quarter results, released Nov. 6, provoked fury among analysts and investors. Its battered shares were down nearly 5% by the end of the day.

No one can understand why BMW’s soaring sales don’t translate into higher profits. Instead, as BMW’s car sales and revenues grow, profit margins shrink. In the third quarter, sales were up 13% by volume and revenues rose a stunning 19% to 13.8 billion euros ($20 billion), powered by the new Mini and the X5. Sales at the Rolls Royce unit were up 52 percent over Q3 2006, as the swish Phantom convertible hit the market.

On the profit side of the equation, net profit rose by 78% to 803 million euros ($1.16 billion). But the group operating margin fell from 7.6% percent to 7.1%, zapped by 135 million ($195 milion) in undefined reconciliations. “BMW’s third-quarter profit should have been far, far better,” says Morgan Stanley analyst Adam Jonas, comparing BMW’s anemic result to Audi, which saw its profit up 76% on a 4% growth in volume and Mercedes up 55% with 10% growth. “Cost control and competition appear to be the culprits,” says Jonas.

Can BMW rev its bottom line back up to where it should be. My guess is that CEO Norbert Reithofer is still tuning up Bimmer Inc. He’s only one year on the job, and just presented his strategic review in October, which targets an operating margin of between 8-10 percent by 2012. I put my chips on very solid results starting in Q4 and going into 2008.

Yes — it’s hard to explain that target date of 2012 for a decent, BMW-like return on sales. Especially since Audi and Mercedes are already showing margins of 8% or better. So either Reithofer aims to surprise on the upside, or the German premium car industry is headed for some kind of major ecology-driven disjunction that throws all bets off. Reithofer in fact argues that investments in green technologies have cut seriously into earnings. R&D expenses were up 20% year on year.

BMW is a cautious company with conservative accounting practices. Its owners sit on the supervisory board and don’t like downside surprises. My guess is that Reithofer is taking a bit of a hit upfront, investing ahead of the curve to make sure he isn’t caught off balance as the industry prepares for a very different future.

After all, BMW isn’t a company that shocks the market from quarter to quarter with $1 billion black holes or quality catastrophies. (It’s amazing to me how quickly the Street forgives and forgets those blunders at other companies like ex-DaimlerChrysler.) BMW is also known for leading the industry on the technology front, not lagging. I’m betting BMW makes the profit curve sooner rather than later. In 90 days, we’ll know more.

Reader Comments

RAM

November 6, 2007 8:05 PM

A bit of advice to BMW: Say your car is an A product, and you sell to the A market. Then I advise you NOT to sell your A product into the B market, like Mercedes has done. Furthermore, if you start making small BMW's that everybody can afford, you will lose your market image of being THE brand in the world, and you will no longer be perceived as making the most prestigeous cars. The same thing will happen to you that happened to Mercedes. Nobody regards Mercedes to be the best brand, and to be a car only the rich were driving. Thus the really rich did not want the car anymore, because everybody has it, and they are no longer in a unique class of rich people driving Mercedes, etc., etc.
You cannot gain the whole market, and you cannot be like Toyota, unless you want to of course.... However, there should still be enough rich people to buy your car at a premium price! So do not lower your pricing, as the article says, your market share will increase of course, but your profits will decrease. This is simple sales!

noz

November 7, 2007 7:51 PM

RAM makes some excellent points. Few can master the art of 'being all things to all people', and a bunch fail in their efforts. And for what? An ego massage? Germans with their built-in arrogance have fallen pray to this, and to be honest, I love to see it. Watching the so-called leaders stumble and fall over their own shoes is a source of entertainment. Perverse? No, not really. And it beats the living heck out of TV and 'Professional Sports'. And yes, there is more joy in the super-low ratings of Congress, but that is another subject.

Seems to me that endless growth is the enemy, NOT a means of 'survival among the fittest' largely because those 'fittest' are not so in the long run, and these days, the short run as well. Might I mention GM, Ford, Chrysler, Mercedes, VW, Audi, etc.

And as to profits, one might look into so-called 'executive compensation' as an unwarranted expense.

Tommy G

November 26, 2007 2:16 PM

When companies sell an increase in the numbers lot small lower margin cars, then the operating margin will fall. Net profit rose by 78%. I would say that a good number. The company must look at expenditures to increase profit margin. Another area to conceder is perception. I drive a Mercedes because I perceive Mercedes to be a better cost value than BMW. If BMW wants my business, then the company must change my stated perception.

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