Electric, Autonomous Cars Will Drive BMW Growth.
“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”
Monster auto makers like Toyota are probably close to the maximum level of output for maximum profitability before the dreaded law of diminishing returns sets in, and BMW’s spectacular recent success prompts the same question about the limits of its own more specialized formula.
Mass car makers like Toyota, Volkswagen and General Motors are all close to around 10 million sales a year, while premium specialist BMW surpassed 2 million last year. BMW has surprised investors with its ability to accelerate sales while retaining impressive and much higher profits than the biggest manufacturers but doubters wonder if its markets are close to saturation and another direction needs to be taken.
Some experts say the peak economies of scale could be close for BMW, while the company has filled most conceivable niches and then some. BMW, with its huge cash reserves, could get into the acquisition game and buy another premium car maker, or even a mass vehicle manufacturer, although the sobering experience with the takeover of Britain’s Rover suggests the latter won’t happen. Some wonder if BMW could buy 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.
Swooning emerging markets
“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.
“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 ($1.1 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 maximizing its growth yet, and will concentrate on electric and autonomous cars to expand the business.
“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 said.
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. There is speculation too that BMW will expand its “M” sub-brand of hotted up vehicles.
“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.
BMW’s most recent earnings report, for the third quarter, showed EBIT (earnings before interest and tax) rose 4.3 per cent to 2.35 billion euros ($2.5 billion) compared with the same period last year. The automotive profit margin slipped to 9.1 per cent from 9.4 per cent. This compared with 10.5 per cent at Mercedes, and 8.0 per cent at Audi.
BMW said it still expects full year profits to be in the eight to 10 per cent long term range target, compared with 9.6 per cent in 2014.