BMW is struggling to hit financial targets set by its own ‘number ONE’ strategy which calls for a return on sales of 8 to 10% by 2012, an investors note said this week.
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Rising global commodity prices, increasing research and development costs and difficulties in finding staff willing to take voluntary redundancy or early retirement to avhieve 8,100 targeted job cuts are all putting the goal under threat, according to Global Insight auto analyst Tim Urquhart.
Urquhart said BMW had grown in the last decade to become the world’s largest manufacturer of premium passenger cars but, though the company’s independence had been a key strength and factor in this rise, it also needs to form alliances for R&D and components synergies to reduce costs in a period of record price rises.
The German automaker has already formed an engine alliance with PSA for its Mini line and announced it would share architecture and componentry with Fiat’s Alfa Romeo.
“BMW has a fight on its hand to hit its key financial targets over the next few years and have its financial performance match its immense sales success in recent years,” Urquhart wrote in his note this week.
After overtaking Mercedes-Benz in 2005, the company sold 1.5m units in 2007 and wants to increase this figure to 1.8m by 2012.
“However,” Urquhart added, “while its success in increasing sales volume and global distribution network has been immense, this has not been matched by profit margins or investor dividend returns. BMW’s management, headed by CEO Norbert Reithofer, pinpointed this issue as a key weakness last year and vowed to implement a new corporate plan called the ‘number ONE’ strategy.”
The programme included a drive to save EUR6bn per annum by 2012 through efficiency savings and increased supplier value. The company also wanted to generate a return on sales of between 8% and 10% on passenger car sales by 2012, up from the current 5-6%. BMW also planned to extend its currency hedging programme and analyse all cost structures, while other targets included a reduction in cost and capital expenditure per vehicle across development, production, sales and administration.
Urquhart said BMW is facing increasing challenges in trying to meet its goals. “Despite a successful fiscal 2007, which saw net profit rise by 9% to EUR3,134bn, BMW said it had to contend with high costs resulting from the weak US dollar and rising raw material costs; best defined by the rising cost of steel, which by the end of May had almost doubled to US$900 per billet.
“However, other commodities that are intensively used in the automotive industry such as rubber have also risen sharply. BMW is also facing increasing difficulties in generating the kind of staff cuts it was looking for through early redundancy packages and natural wastage.
“As part of its cost-saving strategy, it is looking to cut around 8,100 jobs, mainly from its German production operations. However, it was hoping to avoid compulsory redundancies in order to achieve this target.
“Speaking earlier this year, the company’s head of personnel Ernst Baumann said the company was hoping to generate cost savings of about EUR500m from 2009 onwards. However, BMW has been left disappointed by the response to its voluntary redundancy plans.
“According to a Dow Jones report, Manfred Schoch, deputy chairman of the supervisory board and head of the workers’ council, said: ‘The company was surprised that not as many people wanted to leave the company as it had been expected.’
The Global Insight analyst also wrote that BMW is also facing rising component and research and development costs rises despite BMW stating that it wants to make savings.
As a result of this BMW announced last week that it had signed a memorandum of understanding (MoU) with Fiat Automobile to investigate potential cost savings involving component sharing and the possibility of joint vehicle platforms.
He added that despite “huge progress in terms of sales growth and brand development over the past decade” and recent “proactive steps to increase profitability, the company still faces an extremely difficult operating environment in which to achieve this goal”.
Other measures include countering the weak dollar with enhanced hedging and ramping up production at Spartanburg to 240,000 units from 140,000, making it the SUV production base.
“However, despite the ongoing sales success of the X5 and the immense initial interest in the X6 sports activity vehicle (SAV), this strategy may prove flawed if there is a wide scale downturn in global premium SUV demand as a result of record high oil prices,” Urquhart wrote.
“The company’s MoU with Fiat has a sound basis in terms of lowering the cost structure with regards to component supply and platform R&D costs. While BMW has always seen its independence as a key asset, it has also left it unable to compete with rivals like Audi and Mercedes-Benz that are, or have been, part of much larger vehicle groups and are better able to amortise vehicle development costs as a result of bigger economies of scale.”
He suggested BMW should be wary of cutting R&D costs given its reputation as a technical innovator and for “engineering integrity and drivetrain technology”.
“At the same time, BMW faces being squeezed by rising raw material costs and by its own pledges to increase shareholder dividends, which it must continue to do the placate the investment community and maintain its share price.
“This is the high wire act that BMW needs to pull off successfully if it is to achieve the goals outlined in the number ONE strategy.”
BMW has not responded to an invitation to comment.
