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BMW’s profitability hits lowest since 2010 amid tech rivalry

LiveMint logoLiveMint 09-03-2017 Elisabeth Behrmann

Munich: BMW AG reported its weakest profitability since 2010, capping a negative year for chief executive officer (CEO) Harald Krueger after losing the luxury-car crown to arch-rival Mercedes-Benz.

Amid higher spending on electric-car and autonomous-driving technologies, BMW’s automotive profit margin narrowed to 8.9% in 2016 from 9.2% a year earlier, according to a statement on Thursday. The shares fell as much as 4.2%, the most in four months.

“We are fully focused on implementing our strategy,” which involves pivoting to self-driving, electric vehicles, Krueger said in the statement. “From 2019 onwards, we will be firmly embedding all-electric, battery-powered mobility in our core brands.”

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BMW, lacking the financial heft of rivals backed by a larger parent, is focusing its resources on innovating for the future instead of chasing short-term sales volume. The Munich-based carmaker plans to launch the self-driving, electric iNext model in 2021 in a bid to regain its edge as an automotive leader. To manage rising development costs, BMW is pushing high-margin traditional models, such as the new X7 sport utility vehicle that’s due in 2018.

Bolstered by the revamped BMW 5-Series and Mini Countryman, sales in 2017 will likely be slightly higher, the company said, adding that the overall outlook is clouded by global political and economic volatility.

The world car market is cooling, with demand in the US and Europe set to peak after years of growth, and Chinese purchases forecast to slow after the government raised the sales tax on small-engine vehicles.

BMW shares fell as low as €83.01, before paring the loss to 3.4% at €83.74 at 1:07pm in Frankfurt.

Electric future

Carmakers are investing in battery-powered vehicles to comply with tightening emissions regulations, even though customers aren’t rewarding the effort because they’re concerned about cost and driving range. BMW said it plans to sell 100,000 electrified vehicles this year, for the first time.

However, demand isn’t enough to offset the investment costs, which is burdening profitability even as BMW posted record sales last year. Groupwide earnings before interest and taxes dropped 2.2% to €9.39 billion ($9.91 billion), missing the average analyst estimate of €9.82 billion, according to data compiled by Bloomberg.

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“Operational performance falls a bit short of expectations, but net result and dividend exceed expectations,” DZ Bank analyst Michael Punzet wrote in a note to clients, adding that BMW’s “competitive advantage” on electrification is a positive.

The automaker was one of the first to develop an electric car from the ground up with the $42,400 i3 in 2013, and despite reining in rollouts in recent years, it’s planning to add battery packs to existing models in a move that sets it up to act quickly should demand take off.

Luxury race

BMW faces the additional burden of having to spend money on redesigning a lineup at its main brand that’s been largely static for years, amid a styling lull that gave Mercedes the opening to oust its long-time rival from the top of the sales ranking.

Global deliveries at BMW rose 5.2% in 2016 to 2 million cars, growing to a record but at less than half the 11% rate which lifted deliveries at Mercedes to 2.08 million. Mercedes had lagged behind its rival since 2005 and temporarily dropped below Audi to third place before a revamped SUV lineup drove a strong comeback in recent years.

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BMW, which also owns the Rolls-Royce brand, said growth was driven by gains in China and Europe, which offset a weaker US market.

Rising sales pushed BMW’s group revenues 2.2% higher to €94.2 billion. While BMW’s automotive margin stayed within its target range of 8% to 10%, it’s lower than Mercedes’s 10%.

Despite the challenges, BMW said it plans to pay a dividend of €3.50 per share for 2016, its highest ever, after €3.20 a year earlier. The carmaker is scheduled to release full 2016 earnings details on 21 March. Bloomberg

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