BMW’s second-quarter profitability slightly below expectations amid intense competition in China

BMW’s key automotive unit reported slightly lower-than-expected profitability in the second quarter, weighed down by stiffer competition and weaker consumer sentiment in China. The German luxury carmaker’s operating margin in the unit was 8.4%, missing the company’s consensus of 8.7% and coming in at the lower end of its 8% to 10% full-year target range.

“Despite the challenging conditions in the first half of the year, we continued to outperform our competitors in the electrical sector and achieved high profitability for ten consecutive quarters, within our annual target,” commented CEO Oliver Zipse.

Competition in China has intensified as local manufacturers have ramped up production of new, cheaper models, sparking a price war. However, BMW expects the economy in China to begin to stabilize in the third quarter. Sales in China have been tough because of intense competition from local manufacturers with faster software development cycles. Chinese consumers, lacking brand loyalty, are quick to switch brands in exchange for better prices and new features, noted Third Bridge analyst Orwa Mohamad. While Chinese manufacturers are gaining ground in the West, Mohamad believes they pose little threat to BMW in Europe for the next two years because Chinese automakers are focusing on budget electric vehicles rather than the premium market where BMW excels.

Despite the competition, BMW’s revenue rose in the first half of the year, driven by demand for fully electric vehicles and more expensive BMW and BMW M models, which posted double-digit growth. Total deliveries of the BMW, Rolls-Royce and Mini brands fell 0.1%, but deliveries of fully electric vehicles rose 24.6%.

BMW has invested heavily in its production facilities, premium cars and technology to accelerate its electrification plans. Research and development costs have risen sharply as the company has spent money on electrifying and digitizing its fleet and continued to develop its new Neue Klasse EV line. “We are well on track with our biggest future project, the Neue Klasse, which will take BMW to a completely new technological level from next year,” Zipse said.

The group’s net earnings before interest and taxes (EBIT) margin in the second quarter fell to 10.5% from 11.3%, while the consensus was for 10.6%. The group’s operating profit (EBIT) margin fell to 3.88 billion euros ($4.2 billion) from $4.7 billion a year earlier, while revenue fell 0.7%, slightly below the $40.4 billion expected.

Despite these challenges, BMW expects steady demand for its premium cars and anticipates positive momentum in the second half of the year thanks to the new BMW 5 Series and the expansion of production of the new Mini. The company continues to forecast a slight increase in deliveries to customers worldwide in 2024. The automotive EBIT margin is expected to end the year at between 8% and 10%, with group pre-tax earnings declining slightly.