BMW Success Means Sales, Profit Limits Could Be Close.
Surely It’s Filled All The Niches Now?
“It’s a good quandary to have, but I think there is plenty of growth potential left”
BMW has been spectacularly successful over the last 10 years, surprising investors with its ability to accelerate sales while retaining impressive profits, but doubters wonder if its markets are close to saturation and another direction needs to be taken.
As BMW production reaches around two million a year, the economies of scale could be close, while the company has filled most conceivable niches.
Experts say BMW, with its huge cash reserves, could get into the acquisition game and buy another premium car maker, or even a mass vehicle manufacturer. The sobering experience with the takeover of Britain’s Rover suggests that won’t happen, although some muse excitedly about BMW buying Alfa Romeo or even Ferrari. BMW could return cash to shareholders with dividends, or effectively do the same thing by buying back shares.
Richard Hilgert, auto analyst with investment researcher Morningstar in Chicago agrees that the question is worth asking, but doubts there will be any major change of direction.
“Should BMW change direction or stay the same? It’s a good quandary to have, but I think there is plenty of growth potential left although emerging markets like Russia, Brazil are in a swoon,” Hilgert said in an interview with AID.
“China is where that growth is going to be and BMW might have to invest a bit more there to keep up. Investing in (stagnating) Europe might not be a good idea. BMW might in addition think about returning cash to shareholders by raising the dividend or even share repurchases. They could shore up the underfunded pension, like Daimler just did,” Hilgert said.
In mid-December Daimler decided to inject €1 billion into its pension fund.
Professor Stefan Bratzel of the Center of Automotive Management in Bergisch Gladbach, Germany doesn’t think BMW is close to maximising its growth yet, and will concentrate on electric and autonomous cars to expand the business.
Two pillars for Krueger
“BMW may be pretty close to capacity, but of course the company is thinking about growing further otherwise they will get into trouble from competitors. I think the new CEO Harald Krueger sees two big pillars of growth; electro-mobility and autonomous driving. The electric car will get more interesting for BMW and it is hoping the German government and others will push this issue further (with subsidies),” Bratzel told AID.
Car magazines have been full of teaser pictures recently of the BMW i5, an all-electric SUV to match the Tesla Model X. BMW has yet to confirm the vehicle, which would be the third product for the “i” brand after the i3 electric city car, and the i8 plug-in hybrid sports car.
“The second pillar of growth for BMW will be autonomous driving and this should bring more qualitative growth,” Bratzel said.
Bratzel predicted electric car sales will start to accelerate between 2017 and 2018 with global sales reaching perhaps to three per cent by 2020.
Will BMW launch takeover bids for car companies with a sporty bias that might fit with its ethos?
“I don’t see any signs of a bid for companies like Alfa Romeo at present. They are very hesitant about taking over new manufacturers, but of course that could change although I don’t see any signs in this direction,” he said.
Has BMW run out of niches to fill?
“There are more niches to come in SUVs, and some growth potential in China. I think BMW will continue to grow, but not as fast as in the last 10 years,” Bratzel said.
Morningstar’s Hilgert agrees there are still niches left.
“BMW has expanded its product portfolio dramatically with just about every niche they can, but they don’t have a very large SUV and that might be an opportunity in the U.S. market,” Hilgert said.
He also sees a big push from BMW on electric cars but it will be careful not to get ahead of demand.
“Electric cars aren’t at the point yet for the consumer to buy on a large scale. After all, the market is heavily incentivised by governments around the world and it is difficult to make money,” he said.
As for its leadership in the premium sector, Hilgert expects this to continue.
“If they protect the brand they should be able to protect their share of the luxury market. We think they have comparative advantage in the brand and have invested heavily in the quality of their vehicles,” Hilgert said.