Behind sales, a profit struggle at BMW, Mercedes

Automakers focus on how their monthly new-vehicle sales results compare to those of their competitors. But an equally telling measurement is competitive profitability.

That metric is currently bedeviling two of the industry’s top luxury makers.

BMW and Daimler find themselves in unfamiliar territory: trailing mass-market rivals in profitability. The two saw returns shrink in their normally lucrative second quarters. BMW’s auto segment margin was 6.5 percent, down from 8.6 percent in the year-earlier period. Daimler’s Mercedes-Benz segment margin was negative 3 percent (5.2 percent when excluding substantial one-off charges), down from 8.4 percent.

For the first half, BMW’s closely watched automotive earnings before interest and taxes margin collapsed to 2.8 percent, while the Mercedes car division had a 1.4 percent operating return on sales. The results are well below the automakers’ targeted 8 to 10 percent margin.

The returns are out of step with what some mass-market producers achieved. Volkswagen Group’s core VW brand and its Czech brand, Skoda, posted first-half returns of 5.2 percent and 8.1 percent. PSA Group’s adjusted automotive margin hit 8.7 percent.

Automotive equity analyst Arndt Ellinghorst of Evercore ISI believes investors haven’t realized that shares in the luxury companies are overpriced compared with shares of volume peers.

“The market seems to happily ignore this given VW trades at a 20 percent discount to BMW and Daimler,” Ellinghorst wrote in a note.

Investments in future technologies such as electric vehicles and autonomous driving are a key factor in the negative financial picture at BMW and Daimler. As a group, Daimler spent nearly 5.8 percent of its revenue on r&d in the first half. This figure has been steadily rising since 2014, breaching its previous annual peak of 5.3 percent in 2009.

BMW’s r&d ratio came in at 5.9 percent for the first six months, an increase over the previous period. Last year, the level hit 7.1 percent, the highest since at least 2006.

The automakers found that level of r&d spending to be manageable when profits out of their China operations were soaring. But sales in China are expected to contract for a second straight year. The recent slump, triggered by trade friction between China and the U.S., has coincided with cost-cutting programs at Germany’s luxury brands. Lucrative exports of U.S.-built crossovers, such as the Mercedes GLE and the BMW X5, have been hit by China’s retaliatory tariffs.

Over the last decade, the greatest strategic strength of BMW, Mercedes and other German automakers has been their dominant share of the dynamic Chinese auto market. The good news for these companies is that forecasters believe a rebound will come. But for now, the German carmakers are paying the price for their success in China.

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Section Page News – Automotive News

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