BMW warns trade tensions could drag on profits

Escalating trade war between US, China puts squeeze on carmaker

BMW has forecast stronger sales momentum during the rest of the year from new models such as the X2 compact SUV. Photograph: iStock

BMW has forecast stronger sales momentum during the rest of the year from new models such as the X2 compact SUV. Photograph: iStock

 

BMW warned that trade tensions could drag on profits in the coming months, squeezed by power politics between China and the United States.

The manufacturer said any higher tariffs could mean it would no longer meet a goal of making a profit at the same level of a year ago. A host of car companies – including top rival Daimler – have cut financial targets as global trade tensions escalate and raw material prices increase.

The luxury carmaker is “very closely” monitoring the trade situation and “if conditions deteriorate any further, we cannot rule out effects on our guidance,” which the company maintained despite a drop in second-quarter earnings, chief financial officer Nicolas Peter said on a call with reporters. “BMW has a strong footprint in the US, China and Europe and is well positioned for these times with a lot of flexibility, especially in production.”

President Donald Trump underscored the danger on Wednesday, when he asked US trade officials to consider increasing tariffs on $200 billion in Chinese goods, adding to trade tensions that have already raise import tariffs for US-made cars to 40 per cent. The increased levy has been in effect since July 6th after – despite lowering import tariffs on cars from other nations – China slapped retaliatory duties on US car imports. BMW last year shipped more than 100,000 sport utility vehicles to China from its Spartanburg plant in South Carolina.

“It’s all about what’s happening at the macro level outside the company’s control,” said Frank Biller, a Stuttgart-based analyst with Landesbank Baden-Wuerttemberg. “BMW is shipping vehicles with strong margins from the US to China, and they’re hostage to the negative effect of the trade tensions.”

Options

BMW, which has raised prices on US-China imports, has a number of options to offset the higher barriers to trade, including an existing assembly plant in Thailand that pieces together X5 SUVs from ready-made kits, chief executive Harald Krueger said on the call. Assembling cars from so-called completely-knocked-down parts is a common option to circumvent duties on vehicle imports.

There are no plans to move certain models to different production locations for now, Mr Krueger said.

Group profit before taxes will be at the same level as last year, BMW said, while reiterating automotive revenue and unit sales would gain slightly. While it had previously said profit would be “at least” level with 2017 – implying it could rise – it still held to the goal, marking a contrast with the decision by Mercedes-Benz maker Daimler to lower its guidance.

Shares of BMW fell 2.1 per cent to €79.79 in Frankfurt – rising later on Thursday to €81.16 – with Daimler and VW also declining. The stock is down 8.2 per cent this year, as the world’s second-biggest luxury carmaker grapples with shifts in global trade barriers – a trend evident in second-quarter results.

Profit from automaking fell after China said it would lower import tariffs from July 1st, prompting consumers to hold back on buying cars and demanding price reductions. Earnings before interest and taxes fell 6.3 per cent in the period, highlighting similar issues already reported by Daimler and Fiat Chrysler Automobiles.

The effect from Chinese consumers delaying purchases is already lifting, BMW’s Peter said. Sales slowed to rise 2.2 per cent during the first half compared with an 18 per cent jump a year ago. For 2018, BMW said it expected demand in China to rise between 5 per cent to 10 per cent.

New models

Trump has also taken aim at European Union car tariffs, adding to headaches for carmakers already navigating the costly shift to electric cars. BMW, with sales growth slowing to 1.8 per cent during the first half, has forecast stronger momentum during the rest of the year from new models such as the X2 compact sport utility vehicle.

In moves that could help offset rising trade tensions, BMW has agreed to raise its stake in its joint venture with Brilliance Automotive Group in China and this year started production of its popular X3 SUV there as well as South Africa. With the X3’s shift to China, more than 80 per cent of BMW’s sales there are now made locally.

The carmaker sidestepped some of the other issues hitting competitors Volkswagen AG and Daimler. Both its German rivals have flagged bottlenecks that’ll drag on deliveries during the third quarter in Europe, where cars need to undergo a new emissions testing regime starting next month. BMW said the conversion to the new procedure was going according to plan. – Bloomberg