BMW’s strong third quarter results must have pleased shareholders. The business pages may have constituted rather gloomy reading generally of late, but the good ship BMW appears to plough on regardless.
The numbers are undoubtedly impressive and come despite some headwinds (mainly from raw materials cost rises, impacting everyone): best third quarter in group history; revenue up 3.8% to EUR16.5bn; EBIT up 44% to EUR1,716m; pre-tax up 21% to EUR1,644m; Group net up 23.8% to EUR1,082m. Take that, doom merchants.
BMW is benefiting from continued growth of sales across its major markets – but especially China, where margins are strong – combined with the successful execution of a cost reduction plan, maintaining an aggressive schedule for new model introductions and getting into new market niches. Analysts point to a number of accelerating positive internal and external interdependent factors that are boosting BMW results. Besides the contribution this year from key new models such as the 5-Series and X3, BMW now has a better country mix aligned to lower costs on new models.
BMW Board member Ian Robertson told just-auto earlier this year that many of the decisions BMW took in the period 2008-2009 are now bearing fruit. He maintained that it was vital, even in the hard times, to maintain future investment strategies and keep the new product coming.
“During the difficult years we did a lot of things. We challenged the way we design cars, the way we build cars, the way we sell cars. And one thing that we didn’t do was stop any of our future investment strategies,” he said. And looking at cost and efficiency gains was key. “The way in which the cost base was challenged in that period is now showing very positive results in our performance.”
One important example of cost saving at BMW is in the engineering of new product. BMW is now seeing a lower cost structure from the its modular manufacturing strategy (Baukasten/building block system) that raises component system commonality across different models. It is helping to raise BMW margins. “The long-term goal to reduce the cost base structurally in order to achieve an 8-10% margin range on a sustainable basis remains intact,” says Sabine Blümel of Creative Global Investments.
The communality of parts horizontally across different models to up to 65% is having a growing impact as more models in the range incorporate the new efficiencies. Indeed, it is expected that the economic benefits from the modular strategy will continue to grow and give new models a considerable cost advantage versus their predecessors. “The launch of the new 1-Series and 3-Series will have a growing impact on BMW’s cost structure and thus underlying profitability,” Blümel says.
On the sales side, both new models and favourable market geography have been key.
“New model introductions have been a key factor behind the earnings growth and margin improvement, as new models drive volume, improve pricing and reduce costs, the key models so far being the 5-Series [introduced in March 2010], and more recently from the X3 which was launched in the fourth quarter of last year.”
She says that better pricing is only partly attributable to a general price recovery in the premium segment of most car markets globally. BMW-specific factors supporting pricing include a growing share of new models in total sales.
But market geography and getting presence where the growth is are also important. Booming sales in emerging markets, spearheaded by China, have been a main driver of improved mix and pricing at BMW because they provide above-average unit revenue and profit margin for premium manufacturers. Buyers in China generally go for high-specced models and China is already the biggest market for the 7-Series, the X6 and the 5-Series. The joint venture with Brilliance seems to be working well with output rising fast.
BMW’s third-quarter sales in China increased by 21% to more than 56,000 units and China therefore accounted for 14% of total sales in the third quarter.
BMW is also benefiting from healthy capacity utilisation which makes fixed costs per unit of output look better. In the third quarter, the company produced almost 437,000 units in total and described its capacity utilisation rate as ‘excellent’.
The positive impact from currency was overshadowed by negative raw material prices in the third quarter. This led to a negative impact on earnings. BMW expects these adverse effects to continue throughout the fourth quarter. However, the impact of currency effects and changes in raw material prices should largely offset each other over the full year, the company says.
BMW expects to meet its 2011 targets – to sell more than 1.6m vehicles and achieve an EBIT margin of over 10% in the Automotive segment. At Group level, it says that ‘pre-tax profit will be considerably higher than last year’.
There is some caution on the outlook for next year, but the company believes it is well prepared. Dr. Friedrich Eichiner, BMW’s finance chief, sums it up: “We expect to see continued volatility – due to the high level of national debt, the euro crisis and rising inflation. We will remain vigilant. We have explored various scenarios and made the necessary preparations.”