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Bayerische Motoren Werke AG (FRA:BMW), more commonly known as BMW, produces motorcycles and upscale automobiles. The company sells vehicles under three luxury brands: BMW, Mini, and Rolls Royce.^[1] While BMW's sales volume has continued growing despite the worldwide automotive downturn in 2008, the US economic slowdown and weakening dollar have hit BMW hard because the U.S. is the company's largest sales market. The company has offset some of the weakness in the US and Western European by exporting cars to emerging markets where growth continues explosively.^[2]

Despite its many performance models, BMW has aggressively and effectively tapped demand for smaller fuel efficient vehicles. Demand for models such as the Mini and the 1-series has grown at double digit rates through 2008.^[3] Since the early 2000s, BMW has been one of the first automakers to utilize flexible factories, which can produce more than one vehicle model at the same time.^[4] This development has allowed the company to meet shifts in market demand more effectively than competitors, allowing sales to keep growing. In October 2009, BMW plans to invest 2.2 billion rand (approximately 288 million USD) at its Rossyln plant in South Africa.^[5] The investment will increase production from 60,000 units per year to 87,000 units per year, an overall increase of 45% in production.^[6]

Despite this, BMW challenges to retain its market position as the international market for luxury cars grows ever more competitive, as many automakers, such as Hyundai with its Genesis sedan or Nissan's Infiniti brand, are increasingly successful in realizing the higher margins earned on luxury vehicles.^[7] This scenario is especially worrying for BMW considering that J.D. Power ranked BMW's overall 2008 initial quality below the industry average, far behind luxury brands such as Lexus, Porsche, Mercedes, and Infiniti; all of which are in the top quartile.^[8]

Company Overview

BMW produces motorcycles and upscale automobiles under the BMW, Mini, and Rolls Royce brands. The Mini brand includes two models, both of which are small fuel-efficient hatchbacks. The BMW brand includes 10 model types, which are sold with a diversity of engines and other modifications. These vehicles range from the small 1-series all the way up to the large luxury 7-series sedan and X5 SUV. Finally, the Rolls Royce brand currently produces three models, two coupes and a sedan, the phantom. In addition, BMW offers financing for its vehicles through its financial services arm. As of mid-2008 BMW employed 105,802 employees at 17 production facilities in Germany, Austria, Great Britain, the U.S., South Africa, and China.^[9] The company also assembles cars from prefabricated components in Egypt, Indonesia, Russia, Malaysia, Thailand, and India.

Financial Services

BMW's financial arm was severely affected by the global economic and financial crisis in 2008 and 2009. Although the total business volume of the Financial Services segment in FY2008 rose, with revenues increasing to €15,725 million (12.8% increase compared to FY2007), "Financial Services" reported a loss before tax of €292 million.^[10] Despite the continued expansion of its portfolio, during the first half of 2008 BMW Financial's profitability fell 68% as economic slowdowns in Europe and the US increased defaults while also causing resale values for used cars to fall.^[11] In particular, the tense situation on the international used-car market and higher level of bad debts incurred fueled this net loss. In addition, refinancing costs on international capital markets accelerated to reflect higher net interest spreads.

BMW Financial Services FY2008 snapshot^[10]

Q3 FY2009 Summary

BMW's net income dropped 74% to €78 million in the third quarter of FY2009 compared to €298 million from the same reporting quarter in FY2008.^[12] Although revenue figures (€11.8 billion) were in line with analyst predictions, net income figures were below analyst predictions by about €150 million.^[13] BMW's lower net income figures were attributed to a 7.2% decline on the year to 324,100; this is largely due to the fact that luxury goods are hit hardest during times of recession.^[14] This factor is further accelerated by governmental programs throughout the third quarter that emphasized small car makers. In an effort to cut costs, BMW had reduced its work force by 5.3% during the year to Sept. 30 to 98,358 employees.^[15]

Key Trends and Forces

Emerging Markets Play an Important Role in BMW's Expansion

While new car registrations and sales have stagnated in Western Europe, the US, and Japan, BMW's sales in emerging economies of the BRIC countries have soared over the last five years.^[16] For example, BMW's sales in Russia have quadrupled in the past five years, and increased another 33% in the first half of 2008.^[17] Through the first half of 2008, BMW sales in other parts of Eastern Europe and India grew at over 10%, while sales in China grew by 25.2%.^[18] BMW motorcycles play an important role in these markets by exposing consumers to the BMW brand early with a lower cost product in the hope that if this consumer grows wealthier he will remain loyal to the BMW brand and later purchase higher margin cars.

The Future of BMW's Product Lines Lie in the Importance of Fuel Efficiency

While BMW is a producer of larger high-performance vehicles, as concerns over Global Climate Change have grown alongside Oil Prices, BMW has been placed under a variety of pressures from regulators and consumers to improve fuel efficiency. While BMW is currently developing Hybrid and Fuel Cell Vehicles, the immediate mainstay of BMW's campaign to improve fuel efficiency is a program known as "EfficientDynamics." This program utilizes existing modifications of existing technologies to improve efficiency. The major aspects of this program include: improving engine efficiency by using computer optimized direct injection, automatic engine shutoff when the vehicle is not moving, regenerative breaking, electric power steering (more efficient than standard hydraulic systems), improved aerodynamics, and low resistance tires.^[19]

BMW Faces Larger Demand for Smaller Cars that Generate Shrinking Margins

BMW makes the most money selling its larger, more luxurious automobiles.^[20] Yet as Oil Prices continue to increase BMW has responded to consumer demands by producing smaller vehicles such as the 1-series, mini cooper, and compact X3 SUV. Over the past several years sales increases for these smaller vehicles has been the main driver for the company's overall sales growth. This trend toward smaller cars is expected to continue as energy prices remain high, presenting a challenge for the company's long term level of profitability.

Commodity Prices Play an Integral Role in BMW's Profitability

• Steel: One of the main ingredients in cars is steel, so increases in steel prices reduce BMW's margins. BMW cannot easily substitute another material for steel to reduce its costs, unlike almost any other input into car production, even labor.

• Aluminum also affect BMW's margins as this metal is also a significant production input, accounting for around 300 pounds of a new car's weight.

• Oil prices: Through mid-2008 oil prices increased dramatically. Consequently, the cost of gasoline doubled inflating the day-to-day cost of car ownership. Since consumers buy cars only infrequently, rising oil prices have only a limited impact on year-to-year car sales, but over time they cut into the industry's sales. Although oil prices have since moderated they will likely remain definitive in the future as the global economy recovers.

Market Share

U.S. Auto Industry 2008 Market Share by Sales (May 2008)^[22]

Competition

BMW's major competitors are DAIMLERCHRYSLER AG (DAI), Lexus (Toyota), Audi (Volkswagen, Infiniti (Nissan), and Cadillac (GM) However, BMW is unique amongst automakers because unlike these companies which make commercial trucks, lower market vehicles, or even buses, BMW focuses exclusively on the production of premium personal automobiles and motorcycles, under a small number of brands. The successful development of the Mini has allowed BMW to increase its market share and exposure to the small car market considerably without compromising the cache of the BMW brand.

References

1. ↑ BMW 2008 Annual Report
2. ↑ Seeking Alpha: BMW Shifts Cars From U.S.: A Sign of Decoupling?
3. ↑ Autospies.com: BMW widens sales gap over Audi in May
4. ↑ USAutoparts: The inside story of how BMW's are made...
5. ↑ BMW to invest 2.2 bln rand in South African plant
6. ↑ BMW invests R2.2bn in Rosslyn plant
7. ↑ Seekingalpha: Will Hyundai's Luxury Car Be Like the VW Phaeton?
8. ↑ Autoblog: 2008 JD Power Initial Quality Ratings
9. ↑ BMW Group
10. ↑ ^{10.0 10.1} FY2008 Annual Report, Pg 27
11. ↑ BMW 2008 Q2 Report, page 3
12. ↑ German carmaker BMW 3rd quarter net income falls 74 percent to euro78 million; shares slide
13. ↑ UPDATE: BMW 3Q Net Falls 74% On Waning Demand For Luxury Cars
14. ↑ BMW posts dismal earnings
15. ↑ BMW sees only fragile market rebound after Q3 miss
16. ↑ BMW 2008 Q2 Quarterly Report, page 5
17. ↑ TIME: Risky Business in Russia
18. ↑ BMW 2008 Q2 Quarterly Report, page 5-6
19. ↑ BMWEfficientDynamics
20. ↑ WSJ: Europe's Luxury Car Makers Feel Pain
21. ↑ Auto Oberver - A Historic Year For US Vehicle Sales
22. ↑ ^{22.0 22.1 22.2} US News - How Toyota Could Become the U.S. Sales Champ
23. ↑ [http://oica.net/wp-content/uploads/world-ranking-2007.pdf OICA - World Motor Vehicle Production, 2007]
24. ↑ [http://oica.net/wp-content/uploads/world-ranking-2008.pdf OICA - World Motor Vehicle Production, 2008]