In May, we talked about the ascension of Harald Krueger and the daunting task he was going to face as supremo of the BMW Group. Based on the companies first half results which were announced recently, we weren’t too far from the truth. The company saw a lower return on sales in its automotive division in the second quarter at 8.4% compared to 11.7% from a year earlier as it sold a higher proportion of low-margin cars and invested in new models. This put BMW in third spot after its two key rivals Mercedes-Benz and Audi fared better with margins of 10.7% and 9.9%, respectively.
Having said that, BMW Group (including Mini and Rolls Royce) sold more cars in the first six months of a year than it ever did with a total of 1.099 million units, despite the drop in profit. Growth was led by Europe (its largest contributor) and the Americas at 9.5% respectively, while Asia, slowed by cooler Chinese market sentiments, managed only 4.4%. Like many of its competitors, BMW sales were boosted by a global increase in SUV sales. The X5 and X6 SUVs both rose over 20% in the first half of the year. These increases, aided by favorable exchange-rate shifts, spurred an increase in revenue of 17% (revenue would have increased 9.6% without the exchange-rate boost, BMW said).
The chink in the armour
China however, is Munich’s biggest headache. The country represents 22% of BMW’s volume and despite a 2.3% rise in sales for the second-quarter (BMW, Mini and Rolls-Royce vehicles), sales fell in May and June after a decade of mercurial growth. By its own reckoning, BMW is facing brutal competition in China. “If conditions on the Chinese market become more challenging we cannot rule out a possible effect on the BMW Group’s outlook,” the company said in its quarterly report. That’s corporate speak for, “we may not hit our profit targets”.
China, once the darling of the automotive industry has been the fly in the ointment for many brands, Audi recently warned of slowing growth along with General Motors. Mercedes-Benz though are confident of continued growth but this is on the back of a lower base. May sales of BMW and Mini cars in China fell 4.2% from a year earlier, the first monthly decline in a decade. “It is difficult to make an estimation about how the market will develop. We expect continued growth,” Finance Chief Friedrich Eichiner said. “It will definitely not be double-digit growth,” he added.
A reversal of fortunes
In Malaysia, things aren’t coming up smelling like roses either. After several years of strong growth and leaving Mercedes-Benz in the dust, the first half of the year saw BMW (not including Mini) register a fall in sales of 17% compared to the same period last year (3,075 units against 3,724 units of 2014). More significantly, Mercedes-Benz Malaysia saw a 53% increase and bested BMW by 2,088 cars with its record-breaking, first-half total of 5,163 units. This makes the Stuttgart company No. 1, at least for now. Mercedes-Benz also stole the ultimate bragging rights with the S-Class decimating the uber-luxury sweepstakes, selling 719 units, while the E-Class, driven by the E300 BlueTec Hybrid, bagged 1,976 new registrations. The more telling pattern here is that this 53% growth is on the back of a 24% increase for the same period in 2013.
This is a tangential shift and suggests that BMW Malaysia may have hit a wet patch. While the company has continued to launch a slew of new models and seen positive results in the Motorrad division, sales of its cars have been slowing. This reverses the pattern of growth for the Cyberjaya-based subsidiary, which saw it growing faster than its rivals and increase market share, bit-by-bit from 2003. While one can hardly call their current staples ageing, it would seem that the appeal of the brand is waning somewhat. Looks like the all-new X1 crossover can’t come sooner. When approached, BMW Malaysia deferred comment on its first half performance and outlook for the rest of the year to a later date.
Not so “freude am fahren”
Of course this is barely a storm in a tea cup and Krueger has got far bigger fish to fry then a dismal first half in Malaysia (the largest dealership in Munich sells more than all of Malaysia combined). The company crossed the Rubicon with his predecessor’s electric car gamble as well as some other materials technology and sink or swim, the new CEO, needs to make it pay off. It is also again prudent to understand that the mantra of unfettered growth has had an impact on the brand. Yes, a lot more “less premium” buyers are now getting into BMWs but on some level, the compromises made to reach down lower have a longer-term consequence.
In a sense, Krueger’s predicament is like driving an M5 on an icy road with traction control off. You’ve got a lovely toy in your hands, but blink and you’ll find yourself on the wrong side of a ditch. Having said that, there’s no reason to go selling your BMW stock now because it’s not like the company is in trouble. What it does mean is that while in the last decade BMW looked like it could floor the throttle and never worry about missing the apex, this decade won’t be sheer driving pleasure.