BMW is on something of a roll this year. A new 5 Series helps, but the company is also benefiting from effective management that has accelerated new model momentum, cut costs and hedged currency risks. Strategic challenges remain, but the short-term outlook for BMW is decidedly upbeat.
The BMW brand increased sales by 12% in July on the back of soaring demand in China. It expects volumes to rise by 10% this year to 1.4m cars.
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The gain reflects strong sales in established markets as well as high-growth emerging markets. In July the company managed to make a small gain in Germany of 3.6% (23,384 BMW and Minis registered) against the strong downward trend (-30%) in the overall market. In the month of July US deliveries rose 10.1% to 23,390 vs 21,253 a year ago. In Europe the group reported the largest increase in the UK (like Germany, another market in decline), up +25.6% to 11,748.
Sales chief Ian Robertson said: “Sales increased for the 11th straight month since September 2009. We also expect our sales performance to remain strong over the coming months.
“We saw significant growth again in July. We are reaping the benefits not only of the global economic recovery but also of customers’ positive response to our vehicles.”
The BMW Group, including Mini and Rolls-Royce, reported an increase of 9.1% last month to 119,982 sales, up from 109,933 in July last year. So far this year the number of deliveries has climbed 12.5% to 816,014 vehicles compared with 725,403 in the same period of 2009.
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By GlobalDataThe group expects a boost from new model launches including the BMW 5 series Touring estate, the long wheelbase version of the 5 Series for China, the second generation X3 and the Mini Countryman.
Orders for Mini’s all new SUV are already well over plan, the company said, while Rolls-Royce sales jumped five-fold to 251 cars thanks to the new, smaller Ghost model.
If there are underlying concerns for the industry as a whole over a possible double-dip recession and lower demand growth ahead, BMW is at least confident that it is well-placed.
Strongest growth in July was in Asia where deliveries were up 52.1% overall, In China they were up 81.7% to reach 13,852 units.
Analysts say that BMW’s management under CEO Norbert Reithofer has played a key role in ensuring that the company is well-placed to benefit from favourable market geography.
“It has taken a highly pro-active business approach and introduced a modular production & development strategy for future products, accelerating the model momentum and also efficiently hedging currency,” says Creative Global Investments analyst Sabine Blümel.
“This has put BMW in a position to better take advantage of external factors such as a strong global recovery in demand and pricing of premium cars, and increased volatility in the currency markets,” she adds.
Blümel says she has just upgraded her profitability estimates for the company.
“We have sharply upgraded our estimates and now expect BMW to reach its challenging 2012 target, that implies for the auto division a sustainable EBIT margin of more than 8%,” she says.
The trigger for her upgrade is the record second quarter results which she maintains not only reflect strong external factors (demand and pricing), but are also the first proof that BMW’s recently adopted ‘modular strategy’ is actually working.
CEO Reithofer laid out the ‘modular’ strategy at the IAA in Frankfurt last year.
“We have defined more than 600 modules that must be used in the development of new vehicles in the future,” he told a press conference last September.
“Exceptions are only allowed with the permission of the Board of Management. I’m sure you can all imagine how that will have a disciplinary effect.” Indeed.
He said that the use of modules will streamline the process of product development, reduce structural and planning costs, through optimised standardised production processes to reduce manufacturing costs – throughout the entire process chain.
Modules will also promote scale economies across all model series. BMW currently uses 12 different roof systems in 19 models. In the future it will have only 9 roof systems for 23 different model variants.
Other factors driving the expected strong earnings recovery include a favourable outlook for BMW’s cost-cutting potential more generally – for example in areas such as materials – and pricing, both of which are supported by an accelerating model momentum.
In addition Blümel says that for the next few years BMW will be able to operate at a EUR/USD transaction rate that is not worse than 1.30 while the EBIT contribution from the Chinese markets will grow strongly from an estimated EUR 0.6bn in 2009, to EUR 1.4bn in 2012.
She tempers the upbeat assessment with caution over some strategic challenges that remain for BMW in the longer term. Blümel notes that there are risks associated with maintaining a high degree of independence.
“The problem is that BMW is at a cost disadvantage versus its peers Mercedes-Benz Cars and Audi that are part of larger groups. The recent forging of alliance agreements by its German competitors has reduced BMW’s relative size even further,” Blümel says.
Size-related disadvantages include R&D costs, procurement costs and also a greater exposure to currency fluctuation due to a more limited opportunity for natural hedging.
And she maintains that BMW is now also having to face the challenges of having to develop cars with alternative drivetrains such as EVs and becoming more active in the smaller car segments, where it is notoriously difficult to generate premium margins.
But for all the obvious challenges, BMW’s management is currently steering the company on a growth path that should please investors.
Dave Leggett
