By on November 5, 2010

BMW is on a roll at the moment. They’ve booted Mercedes-Benz (their most hated rival) off the number one slot in India, they’re making big steps in China and their profit is rising fast. That last point is the fulcrum of this article. You see, profit is where BMW is forecast to have problems. Not lack of profits, but the size of them.

Bloomberg reports that although BMW achieved a profit margin of 8.1 percent, it’s still the smallest of the 3 German luxury car makers. Mercedes-Benz had an operating profit margin of 9.5 percent and Audi’s was 11 percent. The (relatively) low operating profit margin is, as Bloomberg posits, indicative of BMW’s vulnerability.   Mercedes-Benz is the world’s largest maker of trucks and buses. Not to mention it has alliances with Renault & Nissan and a joint purchasing department for certain parts with BMW which will further help their margin. Audi, unsurprisingly, has the higher margin due its cost sharing with the rest of the Volkswagen group.

Despite announcing high profits of €871 million ($1.229 billion) for the 3rd quarter, BMW’s stock fell 3.3 percent on the stock market. Which is also indicative of an unhappy market. Though we know how accurate the market can be. “The profit margin looks clearly weak, much lower than Audi and Mercedes,” said Adam Hull, an analyst with WestLB, “The guidance is low. They should be able to do better.” Mr Hull has a “reduce” rating on BMW shares.

BMW refutes this criticism. “We’re at the beginning of a major model offensive,” said CFO Friedrich Eichiner, “We’re on an upward trend.” So BMW’s CEO, Norbert Reithofer, raised his operating profit target to more than 7 percent. Up from 5 percent. This disappointed some investors, according to Bloomberg. Especially when Daimler is aiming for an operating profit margin of at least 10 percent by 2012. BMW’s target for 2012? 8 percent. The message is clear from the market for BMW: Fast cars doesn’t necessarily equal fast money.

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16 Comments on “BMW’s Profit Margins Are Something. To Worry About...”

  • avatar

    Only some analysts who have never had a proper job in their lives could complain. BMW is well run, with a solid brand (for now). They make good project – at least equal to what Toyota is on a much smaller volume. So what if they ONLY make 8% profit – that is very good.

    • 0 avatar

      It matters because it makes them more susceptible to changes in operating conditions. If development costs go up, if currencies fluctuate a lot, if there is waning demand for some product lines (they have less diversification so they are hit harder), or any number of other things, then changes hurt BMW more quickly and drastically than their competitors. It also increases their cost of capital, putting them at a disadvantage to their competitors that are bringing in more cash.

      Obviously, they are doing well right now, but if any number of things change, BMW could be hurt more quickly than their competitors, regardless of their product.

  • avatar

    BMW is very much like Honda: a one-trick engineering pony.  That “one trick” is rear-drive unibody (Mini excluded), and that’s not enough to avoid getting swallowed by someone else, nor enough to avoid having someone else eat your lunch should they make a better product.
    Analysts have every right to be nervous about their future.  Were I BMW, I would be shopping around for a partner who is currently non-competitive (again, Honda comes to mind) and/or work on getting my best-of-breed technology licensed to other companies (which is a dangerous route as those buyers will dump you as soon as they can do it themselves, much as Ford has done with Mazda and Volvo).

    • 0 avatar

      That was the whole point of the BMW/Rover saga back in the 90’s; buy a volume manufacturer who were less susceptible to fashion whims and who could use hand-me-down technology to amortize costs.
      As for joining up with Honda, it has been well documented that the reason Rover bled so much red ink after being bought by BMW was because all of their current and future product plans used Honda technology, and Honda refused to allow BMW access to it leaving Rover to start over from scratch. BMW may not see Honda as a competitor, but Honda sees BMW as one.

    • 0 avatar

      Um…what about Mazda?

      Mazda has always been to me the poor man’s FWD bimmer anyhow.

  • avatar

    They could, maybe, possibly, trim some of the useless electronic BS and frilly extras out of their cars to reduce costs.

    It’d also have the added bonus of making them more reliable, with lower ownership costs.

    It’d also return them to their roots.

    Electronic differentials, steering, drive by wire, SMG gearboxes etc. do not fundamentally alter the driving experience. Nor the driver’s perception that it is a luxury car. (leave the sat nav, heated seats etc if you must, but i’d like to see those chucked as well)

    You’d not damage the brand by building a car that doesn’t include needlessly technical solutions to the wheel.

    • 0 avatar
      John Horner

      “It’d also have the added bonus of making them more reliable, with lower ownership costs.”
      Lower ownership costs would probably mean reduced profits for BMW. It sure would be interesting to know how much of BMW’s profit comes from selling replacement parts!

    • 0 avatar

      Useless electronic BS is in the long run more reliable than pure mechanics. It will only take a generation or two to get the chinks out.

  • avatar

    BMW makes excellent cars.  Many manufacturers are TRYING to be like BMW in terms of handling and overall feel, yet they can’t seem to keep up.  BMW’s problem is price.  Once you start adding in option packages that come standard on Korean and many Japanese marques, the price is borderline astronomical…
    If BMW wants to improve margins, open another factory in North America to assemble vehicles where profit margins are struggling!  The company takes a beating on the exchange rate since cars like the popular 3 and 5 series are built in Germany and shipped to the US of A.
    This won’t solve all their problems, but it’s a start.  VW already has plans to assemble vehicles in the US for this very reason.

  • avatar

    To the extent BMW’s return on capital is thinner than its rivals’ it’s more vulnerable to adverse changes in the business environment than they are.

    You can see the effects in BMW’s expanding model range. More models and more variants within models reuse the big expensive components to spread the cost over more units. It’s financially necessary but it remains to be seen if BMW is damaging itself in other ways. The F10 is a cut down 7-series. It makes financial sense to use the 7-series platform and electronic architecture but the big heavy cars that are the result mark the end of the distinguished 5-series. The dorky looking 1-series is an overpriced, cut down 3-series. And there are the deeply silly vehicles like the morbidly obese X6 and the cringeworthy F10 GT. There has been a slightly frantic aspect to BMW’s model proliferation.

  • avatar

    An Audi dealer told me last year that the reason the A4 is more expensive than a similarly equipped 3 series is that the A4 is a lower volume car and therefore more expensive.  This was quite amusing and I shared my laughter at the silliness of his comment.  After driving both cars, it’s hard to believe Audi wanted anything close to the BMW based on how they drove, although the A4’s leather seats were clearly a step up from the cheap feel of BMW’s leather.
    Maybe Audi is right, though.  They’re asking more for less.  But then again, I chose the 3 series, so maybe not.

    • 0 avatar

      Good choice. As for the leather I’m not sure how the different grades stack up or are offered. I have a ’03 325iT with premium/sport package and the leather is of Nappa quality. Since I bought it pre-owned I don’t know how it was ordered.  We recently had a new A6 in our design department for review and the leather was awful for a 54k car.

  • avatar

    I say meh…

    These stats never really tell the complete story. IIRC, the year before last I read the same stats but back then Porsche was no1. at 17,x% (for obvious reasons) and Toyoda and BMW were joined 2nd best at 8%.

    Mercedes can try all they want to have a 12% margin in 2012 but I say let them achieve it first and then we’ll talk.

    As for Audi having an 11% profit margin; no surprises there then…If people keep buying these tarted up FWD Veedubs I say good for Audi. Personally I’m not impressed by mostly anything they have on offer today, at least not in comparison to BMW and some of the other usual suspects. That A5 Coupe is pretty but only works with the smaller engines cause the bigger engine versions get clobbered by the 335/M3 and the R8 is nice, but well, still rather have something else in that segment. Otherwise, not so much.

    (I realise a comparison between BMW and Audi products was not necessarily the point of this article but there you go).

  • avatar

    BMW bought Rover because they thought that you had to be large to survive…What they found out is that it was better to be good.
    A takeover of BMW would be very difficult as one family…the Quandt family owns a huge percentage of the company

  • avatar

    November 5th, 2010 at 6:50 pm

    Useless electronic BS is in the long run more reliable than pure mechanics. It will only take a generation or two to get the chinks out.
    It can be done now, no need to vait except how many are willing to pay sky price for the gadgetry.
    Most contacts do have a useful life, and the corrosions, salt, harsh environment will do the plugs in after few yrs. At least the computer will tell where it is not in contact with the Mother ship when it boot up.
    One BMW service tech told about a radio short caused the whole car not to function right, it cannot get out of 2nd gear. Took them a long time to found out is the stoopid radio caused all that.

  • avatar

    Do you like the EPS steering assist?  I believe I will stick to hydraulic .

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