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BMW, Daimler Face Rocky Financial Reports, But Not VW

BMW, Daimler Face Rocky Financial Reports, But Not VW.

“An industry-wide shift towards electric vehicles threatens BMW’s (profitability) lead”

Investors in big German carmakers are bracing themselves for financial results in the next weeks that will underline gloomy long-term profit prospects, except for Volkswagen that is.

Mercedes Benz parent Daimler and BMW are both facing leadership uncertainty, although the former at least has new management in charge, while BMW must wait a while to find out who is its new CEO.

Ola Kaellenius took over as CEO of Daimler AG in May, replacing Dieter Zetsche, who faced mandatory retirement but will return as chairman of the supervisory board in 2021. BMW CEO Harald Krueger announced in July he would not stay on beyond April 2020.

Daimler and BMW have presided over formidable profit performances, but the good times have come to an end. BMW had for years stuck with a forecast that operating profits margins would hit an impressive 8 to 10 per cent range. Battered down by the huge investment requirements of electric cars and fading markets, both companies will have to get used to more frugal times. Questionable accounting methods have flattered the bottom line too, according to report from Citi Research.

We believe that both companies have flattered margins over a multi-year period by transferring profits from their financial services divisions and capitalizing investment. With volumes disappointing, cash flows looking thin, and the costs of electrification now becoming clear, we expect this will necessitate a major margin reset to re-base guidance to a sustainable level,” Citi Research analyst Angus Tweedie said.

“While we believe the Daimler re-set is more imminent with the new management team already in place, at BMW we believe the scale of the downgrades could be larger although the timing is less certain with the CEO set to depart in April 2020,” Tweedie said.

Profit target
After its first quarter results, BMW said the automotive profit margin will fall to between 4.5 and 6.5% for 2019, not the 6 to 8% expected earlier, and compared with the long-term profit margin target of 8 to 10%. Daimler has a profit target of between 6 and 8% for 2019, and Citi Research expects 6%, for now.

The Center of Automotive Management (CAM) in Cologne, Germany, reckons Daimler will do better than that, but said BMW is struggling.  CAM said in 2019’s first quarter operating earnings of the biggest global automakers fell to an average 3.4% from 5.3% in all of 2018 and over 6% in 2017’s first quarter.

“While Daimler, Toyota, GM and Volkswagen still achieve returns of between 7.1 and 6.4% thanks to cost cutting programs, BMW, Honda and Nissan are already below 3%. It is expected that profits will level off at a lower level over the next few years,” CAM said in recent report.

Meanwhile, Volkswagen, Europe’s biggest carmaker, apparently sails serenely on, and is perceived as having made risky but impressive bets on an electric future, as well as putting the hugely expensive dieselgate scandal to rest. Investors like the recent spin-off of the truck subsidiary Traton too.

According to investment bank Credit Suisse, VW is its top investment pick amongst European carmakers as higher profits begin to flow, even as markets contract, from its investment in a common engineering platform known by its acronym in German MQB. This has allowed the VW brand to design cars with much standardized engineering, and this is being rolled out across its mass market subsidiaries like Skoda and SEAT. Credit Suisse also expects VW’s electric car equivalent engineering, MEB, to allow it to make profits eventually from this area too.

Citi Research said VW has outperformed its rivals with a superior profit performance.

Peers grapple
We see little risk of this trend reversing in 2019 as peers grapple with management change and unwinding historic business models while VW continues to gain from improving mix. In 2020 EVs (electric vehicles) become the focus and while we cannot discount all risks from this transition this seems to be discounted and the potential for VW to develop sustainable market leadership seems to be overlooked,” Citi’s Tweedie said.

VW’s perceived lead in electric car engineering contrasts with BMW’s laggard role, and probably explains why CEO Krueger was told his contract wouldn’t be extended.

Reuters’ Breaking Views columnist Liam Proud pointed out BMW has held back from developing vehicles designed to be electric from the ground up and has hedged its bets, although last month it bought forward targets to launch 25 electric or hybrids vehicles from 2025 to 2023, and said that more than half the new models would be battery-only. 

“An industry-wide shift towards electric vehicles threatens BMW’s (profitability) lead. Like most carmakers, BMW is investing in cleaner engines to meet European carbon-emission rules in the early 2020s. Yet unlike VW, which is betting mostly on pure battery-powered electric vehicles, BMW retains what it calls “flexible vehicle architectures” covering fully electric, plug-in hybrid vehicles and combustion-engine cars,” Proud said.

“Hedging its bet will pay off if VW and others prove too overoptimistic about demand for electric vehicles,” Proud said.

Daimler reports its 2nd quarter results July 24, VW the next day, and BMW on August 1.


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