New Models, Improved Manufacturing Efficiency Spell Advancing Profits.
Are BMW, Audi, Mercedes Losing The Plot?
“German premium manufacturers are addicted to volume growth, a drug which the industry has been hooked on since its inception”
BMW has been the investor’s favourite for some time, but Mercedes has taken its lumps, dusted itself down, come up with a scintillating new product line-up and is back in the race.
Investment banker J.P.Morgan reckons that Mercedes parent company Daimler is the best automotive stock to own, not only because of new cars like the top-of-the-range S-class, the new GLA compact SUV and most of all the new C-class, but because its investment in more efficient manufacturing will boost profits to a higher rate than its rivals.
Barclays Equity Research though believes BMW is top of the class at managing its brand, and expects it to keep its profit-making leadership.
International Strategy and Investment (ISI) likes BMW too, but is beginning to see clouds forming on the horizon in the form of pricing pressure, and wonders if all the German premium manufacturers including VW’s Audi are showing signs of out-of-control egos as they vie for world sales leadership at the expense of profitability.
J.P.Morgan analyst Jose Asumendi rates Mercedes over BMW because of what he calls its “superior product momentum, pricing-power and platform strategy.”
“We expect Mercedes-Benz margins will expand throughout 2014 on higher second half “Fit for Leadership” cost savings, while BMW margins might stabilize, at best, due to higher savings on its “Future ONE” costs in the second half of 2014,” Asumendi said.
Ageing fleet
Mercedes’ fleet age will fall quickly in 2014 and 2015 as BMW’s ages slightly. But BMW will revive in the second half of 2015 with the new 7-seires and X1.
“In 2014, Mercedes will likely have 37 per cent of its total volumes built on its efficient new-generation platforms while the equivalent ratio is just 10 per cent for BMW. As it has to wait for new versions of its core models, BMW will catch up on Mercedes levels only by 2018. We believe this offers Mercedes-Benz a greater opportunity to generate cost savings that will offset incremental development costs to lower CO2 emissions for its fleet,” Asumendi said.
You cannot be serious, says Barclays analyst Kristina Church.
“BMW is not only the best in class at brand management but also at technological leadership. We think investors will increasingly value this advancement and the consistency of margins at BMW above near-term product momentum at Daimler, which will likely come with a longer-term payback as Mercedes requires a large step-up investment to enable compliance with 2020/21 (CO2) regulations,” Church said.
Church expects BMW to meet the pricing issue, and thinks spending on R&D ratios will decline although not in absolute terms as the company leads the way in technological leadership in lightweight materials and engines. Church said BMW’s “i” brand is more about lightweight technology than electrification, and expects carbon fibre to be rolled out in larger BMWs starting with the 7-series in 2015. The i8’s plug-in technology will form the basis for powering SUVs.
Future proof
“We continue to believe BMW have “future-proofed” themselves to prepare for rising global emissions standards, making progress far ahead of peers, and that the market will increasingly credit this technology leadership with a valuation premium, although not yet a Tesla-esque multiple,” Church said.
Although ISI analyst Arndt Ellinghorst rates BMW a “strong buy”, Daimler a “buy” and is neutral on Audi parent VW, he is worried by what he calls their addiction to raising sales which is leading to poor pricing discipline.
“It seems German premium manufacturers are addicted to volume growth, a drug which the industry has been hooked on since its inception. Yet, often the victim of volume ambitions is pricing. And without pricing, we question whether German manufacturers can be described as premium at all,” Ellinghorst said.
Pricing test
Ellinghorst estimates that lack of pricing discipline has cost BMW, Audi and Mercedes €6 billion since 2008. As Europe slowly improves and the U.S. remains solid, the next year will test the German’s pricing resolve, he said.
Meanwhile, J.P.Morgan’s Asumendi says Mercedes’ new model programme is lessening pricing pressure, allowing it to offer smaller discounts in China and Europe.
“As with the S-class, we expect the introduction of the new C-class in China in the second half of 2014 to be a catalyst in bringing down the model’s discounts versus competitors. BMW has not seen its discounts reduce versus a year ago in Europe, China or the U.S.,” Asumendi said.
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