BMW, maker of some of the most coveted luxury cars in the world, expects to sell a record number of vehicles in 2005 but its years of uninterrupted profits growth look to be over.
Yesterday the German group reported that third-quarter pre-tax earnings dropped 16.9% to €647m (£440m) despite a 15.4% jump in global sales of its own brand, Mini and Rolls-Royce models.
Analysts immediately argued that BMW would fail to meet its target of maintaining pre-tax profits at or close to last year's record €3.55bn and could see them come in 10% lower or even worse, the first downturn in earnings since the sale of Rover in 2000. Both BMW and Volkswagen - whose improved financial performance, also announced yesterday, masked poor earnings in its core car division - are suffering from higher raw material costs, driven by soaring oil prices, the strong euro and ferocious competition in a period of economic uncertainty.
Operating in a domestic environment of weak consumer demand and political crisis, German companies are driving forward economic reform by restoring their competitive edge through savage cost-cuts, including reductions in real wages.
But the Munich-based BMW, now expanding in India as well as China, has so far refused to follow the examples of VW and its arch-rival Mercedes, which are both cutting thousands of jobs. Its global workforce is unchanged at 107,000.
Shares in the group fell almost 2% in early trading but went into positive territory after Helmut Panke, chief executive, reiterated that its unchanged aim for 2005 was to achieve "approximately" the high earnings level of 2004 on sales up around 9%. He later explained this target meant a margin of plus or minus 10% - "and we have said we are coming at this from below; this is something I can confirm with exactly the same wording."
The third-quarter figures suffered a €175m hit on a bond exchangeable into shares in the aero-engine maker Rolls-Royce, in which BMW has a 9.1% stake and whose shares have been soaring. But analysts, who had been expecting quarterly pre-tax profits of about €739m, said that it was now virtually impossible for BMW to meet its full-year guidance. Jens Schattner, of Dresdner Kleinwort Wasserstein, said: "The figures were very disappointing, above all in the auto division and there are no one-off effects. After this very weak quarter, it's impossible to maintain annual earnings."
The group, which sold 341,932 cars in the quarter - bringing sales in the first nine months to 988,463 - said its revenues had so far this year risen 2.7% to €34.2bn. But, despite this and extensive measures to improve efficiency, the impact of external factors "could not be fully offset". Pre-tax earnings in the first nine months were €2.4bn, down 12.5% from last year's €2.7bn, with profits in the cars division down 10.7% to €2.15bn.
VW, Europe's largest carmaker, said it had made "the first steps towards a fundamental improvement in performance" after posting a 57.8% rise in operating earnings for the first nine months to €2bn. Pre-tax earnings rose €44.45 to €1.1bn.
The group, which aims to make €5bn before taxes in 2008, has been making heavy losses in the US and China but it expects both operating and pre-tax profits to surpass last year's levels.
Backstory
BMW has remained aloof from the recent manoeuvres that have seen German carmakers club together to ward off fierce competition from the ever-more global car market. Porsche has become the biggest shareholder in Volkswagen with an 18.53% stake designed to stop a foreign takeover. DaimlerChrysler, Mercedes' owner, has also been linked to VW. BMW has been independent since 1959, when it almost collapsed into the arms of Mercedes. Helmut Panke reaffirmed BMW's go-it-alone strategy. "We will proceed under our own power. We are not thinking of link-ups, stakes, takeovers," he said.
