• The multi-brand premium OEM reported stellar 2Q14 results, ahead of its peers  and surprising on the upside  
  • Modular strategy allows for record 16 model introductions in 2014
  • Recently introduced electric vehicles and small car platform set to keep BMW on profitable trajectory 
5 Series LWB assembly in China. Strong demand for premium cars and low-cost manufacturing in China with its partner Brilliance is helping to keep China - which now accounts for around a fifth of all BMW sales - a major profit centre.

5 Series LWB assembly in China. Strong demand for premium cars and low-cost manufacturing in China with its partner Brilliance is helping to keep China - which now accounts for around a fifth of all BMW sales - a major profit centre.

An accelerating model momentum that includes product renewal and proliferation of the portfolio into an increasing number of new sub-segments has been and continues to be the key driver of the strong earnings growth at the BMW Group, the home of the BMW, Mini and Rolls-Royce brands. CEO Reithofer and his management team plan to grow the number of models from 24 in 2005, to 46 in 2015 and 60 models by 2020. During 2014 alone, they are launching 16 models, 12 of which are new models and only four are face-lifts and are on track of selling well over two million cars. However, it is thanks to the adoption of a modular strategy called 'Baukasten' seven years ago, that this firework of new model introductions is possible without incurring crippling costs for development, launch and marketing.

Indeed the BMW Group reported stellar second quarter results and surprised on the upside yet again. The dominant Auto division sold 533,200 cars, 5.3% more than a year ago and generated a 23% year-on-year increase in EBIT (earnings before interest and tax) to EUR 2.36bn and a 12.8% margin, up from 10.5% in 2Q13 and 10.9% in 1Q14. This was the best quarterly result since 2Q11 and the highest margin since 3Q11. Excluding the profit from the JV operations in China, the division generated an operating profit of EUR 2.61bn or 11.7%, exceeding management's long-term profitability target range of 8-10%.

The Munich-based OEM thus beat hands down its peers in terms of sales volume and profitability. Stuttgart-base Mercedes-Benz sold 432,600 cars and generated an EBIT of EUR 1.41bn and a 7.9% margin and Ingolstadt based Audi, part of the VW group, sold 456,900 cars and generated an operating profit of EUR 1.36bn and 9.9% margin. 

The strong improvement in BMW's profitability was due to a richer model mix, a more favourable country mix, better pricing, mainly in Western Europe, and helped by a disproportionally low allocation of costs. 

BMW Auto benefited from the global availability of key models introduced towards the end of last year, such as a new generation X5 and the 4-Series coupé, replacing the 3-Series coupé. Indeed, sales of the X5, driven by strong demand in China and the US boomed and were up 47% at 37,300 units, a quarterly record and 7% of group sales.  

The model mix was also 'enriched' by a low share of Mini sales as the new generation hatchback was introduced; sales of the sub-compact Mini brand were down 10.4% year-on-year at 74,000 units and accounted for only 13.9% of group sales, compared to 16.4% in 2Q13.

Looking at the various markets, the most important increases in terms of profitability were China (where sales were up 20.5% yoy at 116,900 units, accounting for 21.9% of BMW's global sales) and Germany where sales increased 5.3% yoy to 73,800 or 13.8% of total. 

Headwinds in 2Q14 included a strong euro, launch costs and higher additional costs in context of BMW's ongoing efficiency programme Strategy Number One (SNO). 
Management confirmed their bullish outlook for the full-year of a 'significant' increase in earnings, but cautioned that the EBIT margin in the second half would be below the 11.9% generated in the first half. During the rest of the year, the model momentum is set to continue to accelerate, but so are costs that include ramp-up and launch costs for new models, costs for capacity expansion and future technology, and seasonal costs. 

Recent model launches that should drive earnings in the next six to twelve months include (in March) the compact 2-Series coupé and the mid-sized 4-Series convertible and (in June) three top-end models in the upper medium segment, the 4-Series grand-coupé, BMW's first four-door coupé in this segment and the high performance M3 saloon and M4 coupé.  In July BMW also launched the X4, a four-door coupé based on the X3, thus downsizing a sub-segment BMW created with the launch of the X6 in 2008.

However, CEO Reithofer's strategy is also directed towards safeguarding and sustaining BMW's premium profitability in the long term. Particularly daunting is the challenge of ever more restrictive emission standards, led by the EU regulators. In order to comply with the EU's CO2 emission target (of 95g/km industry-wide) for 2020, BMW needs to greatly increase the share of smaller cars with ICE (i.e. those below the 3-Series) and cars with varying degrees of electrification.

Between November 2013 and September 2014, BMW is introducing four models that should become milestones in this endeavour. They include the all-electric  compact i3 (EV) and the high-performance plug-in-hybrid sports-car i8 (PIEV) that both have a passenger cell  constructed of carbon fibre-reinforced plastic (CFRP) and the new Mini hatchback and the BMW 2-Series Active Tourer, the first two vehicles on BMW's new front-wheel drive platform. The BMW 2-Series Active Tourer, the first FWD BMW-badged car will become brand's new entry model and is expected to have an 80% conquest rate.

By introducing a small car platform that is straddling Mini and BMW models, BMW should be able to generate considerable economies of scales. The new architecture could well reach a an annual volume of up to 1m units, underpinning 20 different models, their body length ranging from 3.8m to 4.3m, covering cars in the basic to the compact segment.  

However, equally importantly, BMW is pursuing its long term strategy by remaining true to its core value of driving pleasure captured as 'The Ultimate Driving Machine', 'Sheer Driving Pleasure', and 'Ultimate Driving Experience'.

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