BMW prioritises profit over volume as it embarks on biggest ever new model programme
BMW enjoyed a strong year in 2016, although the problem for the Harald Kruger and the rest of the firm's management team is that its main rival's year was stellar.
IHS Markit Perspective:
- Significance: BMW said it is embarking on the biggest model assault in its history but will prioritise profitability over sales volumes after losing the premium global sales top spot to Mercedes-Benz last year.
- Implications: BMW lost the global premium sales lead in 2016 after a decade at the top, partly because of the ageing nature of its mainstream passenger car line-up. This will be addressed in the next two years, as it launches 40 new models and variants, including the X2 crossover and range-topping X7.
- Outlook: Despite losing the global number one spot to Mercedes-Benz BMW is determined to fight back, and while IHS Markit sees no shift in the current sales status quo between now and the end of the decade, the company will be looking to improve on 2016's financial performance, which included the lowest profitability figure recorded in six years, although this was still well within its long-term margin corridor.
BMW is set to embark on the biggest model launch programme in its history according to CEO Harald Kruger, speaking at yesterday's (21 March) press conference outlining the company's 2016 financial results. Headline numbers were confirmed from those published recently. Kruger was keen to reiterate that despite the company losing out in premium brand global sales for the first time in a decade to Mercedes-Benz, it is not resting on its laurels. He said, "We are launching the biggest model offensive ever. We have started a transformation unlike anything our company has seen before." The latter statement was a reference to the shift towards offering mobility solutions, electric powertrains and autonomous driving; the latter two being exemplified by the BMW iNext which is due in 2021 and which will have fully autonomous driving capability. BMW is also working hard to accelerate this shift in culture by involving all its management team directly in the process. Kruger said, "We have started a transformation unlike anything our company has seen before, with Strategy Camps for senior managers, where they met up with start-ups and technology drivers at global hotspots. And, we created an interactive platform called NEXT EXPERIENCE, in which more than 14,000 employees at all management levels have participated since the beginning of the year. This includes line managers from the plants. They have been learning about all aspects of our strategy and will share these insights with all other employees."
In terms of the new model launch programme, BMW will unveil 40 new and revised models and variants, including the new X2, the third-generation X3 and the all-new range-topping X7. The company has already begun renewing its core passenger car range, one area where Mercedes-Benz has been making inroads as a result of its much younger model offerings in this area. The new 5-Series is being rolled out at the moment, with the Touring variant having been launched at the recent Geneva Motor Show, with the M Performance and new M5 ready to follow. The company has also debuted its refreshed 4-Series model at Geneva which is a popular and strong selling range within BMW's portfolio, just as it faces enhanced competition from the all-new Audi A5 and the Mercedes-Benz C-Class Coupé.
However, BMW will not chase volume over profitability over losing its global number one premium sales spot to Mercedes-Benz. "Profitability is more important for us than the sales volume race," said Chief Financial Officer Nicolas Peter, speaking at the press conference. He added that despite the slightly lower profit margin for 2016 in comparison to previous years, the figure remained well within the company's long-term target corridor of 8-10%. Despite the massive capital investments that BMW will have to make in coming years, relating to future vehicle technology Peter reiterated that this EBIT margin figure would be maintained.
Outlook and implications
This year's financial press conference was something of a mixed bag. The company has maintained its long-term financial targets and posted the highest sales, revenue and net profit figures, but Group EBIT fell 2.2% y/y to EUR9.386 billion, with Group pre-tax return on sales rising to 10.3% from 10.0%. Automotive EBIT fell marginally by 1.8% y/y to EUR7.70 billion, which translated to a slightly lower EBIT margin of 8.9% in comparison to the figure of 9.2% that was recorded. This was still within the EBIT corridor of between 8 and 10% for the automotive division, which remains one of BMW's key financial metrics. BMW also fell behind Mercedes-Benz for the first time in a decade in sales volume, with BMW brand deliveries rising by 5.2% y/y to 2 million units, while Mercedes-Benz brand sales rose by 11% to 2.08 million units. However, this is partly down to model cycle issues as we have previously highlighted and BMW will close the gap but will not overhaul Mercedes before the end of the decade according to the latest IHS Markit forecast. By 2020 Mercedes-Benz passenger car sales will be at the level of 2.25 million units in comparison to the 2.13 million units of BMW. BMW is right not to chase volume at the expense of profit, as a pricing and a discounting war would be a race to the bottom for both companies. However, BMW may look to create more strategic partnerships in the coming years to help mitigate some of the financial burden of developing the advanced technologies that it will fit to its production cars in the coming decade, especially at a time when Daimler's synergies with Renault-Nissan appear to be successfully accelerating.
About this article
The above article is from IHS Automotive Same-Day Analysis of automotive news, events and trends, and is a deliverable of the World Markets Automotive Service. The service averages thirty stories per day and also provides competitor and country intelligence. Get a free trial.
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