BMW holds its lead but uncertainty reigns
German premium carmakers Audi and Mercedes battle BMW for the top spot
In keeping with the general air of gloom in the global motor industry, BMW this week said its pre-tax profit would stagnate in 2013 due to continued market instability in Europe and the major investments it needs as it prepares to launch 25 new models over the next two years, such as its electric i3 supermini.
Last month PSA unveiled a record €5 billion net loss for 2012. Losses at Fiat ’s European operations were €700 million last year with the company’s factories in Italy reportedly running at half their capacity. Ford is forecasting losses of $2 billion in its European operations this year. At Opel losses of $4 billion have built up since its parent General Motors emerged from bankruptcy four years ago.
New passenger car sales in Europe fell more than 8 per cent last year and, while initial estimates suggested the market would stabilise this year, figures for the first two months show it’s down a further 9.5 per cent this year.
Against this grim backdrop, BMW seems in rude financial health, reporting annual pre-tax profits of €7.8 billion on a turnover of €76.8 billion. The latest accounts show it makes an equivalent profit of roughly €4,500 on each vehicle it sells. While that figure includes profits on parts and services, it’s in stark contrast to the state of play in many other European car brands.
It’s not just BMW that has remained in the black while rivals are submerged in red ink.
Fellow premium brands Audi and Mercedes have also managed to buck the trend. Earlier this month Audi reported profits of €6 billion for last year. The VW Group-owned brand represented 40 per cent of the group’s annual profits last year, on the back of 12 per cent of total group sales.
So are the premium brands relatively immune to the recession? According to Ian Robertson, BMW’s board member for marketing and sales, it’s down to global reach. “One thing the premium brands – and particularly the German premium brands – have going for us is that we have a global footprint.
“We sell cars all round the world and, 2008-2009 aside, there are always upsides to counter any downsides. The volume players in Europe are primarily focused on Europe, particularly the French and Italians, and that is causing them severe difficulties. When Europe has dropped substantially they are affected substantially.”
It’s true that the mainstream brands reporting losses have been too reliant on southern European sales. Two-thirds of PSA’s sales last year were in Europe, and over 60 per cent of these were in southern Europe. Europe is an important market for premium brands – and it accounted for 47 per cent of BMW’s sales last year – but what has saved them is the appetite for new cars in China. According to management consultancy firm McKinsey, China will surpass the US to become the world’s largest consumer of luxury cars by 2016.
Already it has become the second-largest market for BMW, representing 17.7 per cent of sales, just 1.2 per cent behind the US market. Last year they sold 327,200 vehicles there. “Last year we started out hoping for double-digit growth [in China] of 15 per cent,” Robertson said. “We added 40 per cent. That’s 80,000 cars to our Chinese business last year, which is more than the total sales in any European market outside Germany and the UK. In one year we added to our sales the equivalent of our markets in Italy and Spain put together.”
It’s an appropriate choice of comparison given the slide in sales in both markets.
Against this backdrop is a battle for supremacy among those in the German premium trinity of BMW, Audi and Mercedes. All three have the same objective: to become the world’s largest premium car brand by 2020.
For now BMW retains the crown, particularly when its sub-brands such as Mini and Rolls-Royce are taken into account. Last year it sold 1.85 million vehicles.
Audi, however, is determined to close the gap, with chief executive Rupert Stadler restating its ambition to sell two million cars by 2020. Mercedes, a distant third for now, is undertaking the most ambitious product expansion in its history, all to meet the bold claims of its chief executive, Dieter Zetsche, that it will top the sales table in 2020.
Mercedes probably has the biggest mountain to climb. Earnings goals have been repeatedly scrapped as Mercedes failed to match rivals’ scale and efficiency in smaller cars. Its underlying profit fell 10 per cent last year and is expected to be flat in 2013.
Mercedes opened 22 Chinese dealerships in the four months to January, according to Morgan Stanley, but BMW added 45 to reach 343, increasing its lead to 101 outlets.
Robertson is confident BMW can see off its rivals. “We are, by a good margin, the most successful premium car-maker in the world,” he says. “The difference between us and the nearest competitor is over 400,000 sales. One thing that is equally important to us is that it’s not about the last volume sales. I am not going to chase one of our competitors in China who has a different brand position but has a big volume there. That’s not what we’re about. We are a premium maker and in every market we enter we will remain a premium carmaker. Having said that, we are 400,000 ahead and we have no intention of easing up.”
All three are hoping that rapid expansion of model ranges will drive growth. A significant part of this is the expansion of hybrid and electric models in the range, combined with smaller more affordable cars. Premium supermini is no longer an oxymoron.
Such rapid expansion of the model range – and the development of new technology – comes at a price. Capital expenditure at BMW jumped 42 per cent to €5.2 billion in 2012 with spending this year expected to exceed 7 per cent of sales.
The problem facing executives is that the timeline of new models normally requires them to sign off on new models two to three years before they reach the market. What seems like a smart investment now may be regarded as financial folly by the time the car gets on the road.
BMW’s new i-range of electric cars is a case in point. Norbert Reithofer, BMW’s chief executive would not comment on reports it has told suppliers to reduce parts production for the i3 range in light of reduced sales forecasts and public scepticism about electric vehicles.
Reithofer also refused to discuss sales targets for the new vehicle other than saying that he accepts it will take time to gain popularity. “This is not a technology that will replace the combustion engine in five years; we’re looking at a period of 20 years for this to play out.”
It’s a philosophical response from an executive who will be judged on his ability to maintain profits and the firm’s premium sector lead in the next few years. He underlined the problems facing all premium brands these days: “The global financial environment is both uncertain and volatile. Our business performance is exposed to many risks.”
It seems even the profitable premium brands are unsure about the future of the motor industry these days.