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BMW Warns of Profit Slump, Sets $14 Billion Savings Plan

March 20, 2019
BMW to cull models, cut drivetrain options, development times.

BMW AG warned earnings will fall “well below” last year’s level and embarked on a 12 billion-euro (US$14 billion) efficiency drive to offset the impact of trade conflicts and unprecedented spending on electric cars.

The shares fell the most since September after the German luxury carmaker said Wednesday that pretax profit is expected to decline by more than 10% this year. BMW is responding by stepping up a savings program with plans to cull models, reduce development times by as much as one third and hold the workforce steady this year.

“Our industry is witnessing rapid transformation,” Chief Financial Officer Nicolas Peter said. “A sustained high level of profitability is crucial if we are to continue driving change.”

BMW already flagged a challenging year ahead last week, saying great efforts will be necessary to push through the costly shift to electric and self-driving cars as markets fall and trade concerns mount. The automotive profit margin will be in the range of 6% to 8% this year, below an 8% to 10% long-term target. Peter added that guidance could fall even lower if conditions worsen.

BMW shares extended losses, dropping as much as 5.9%. The stock was down 4.9% to 71.98 euros as of 10:40 a.m. in Frankfurt. BMW’s muted forecast also dragged lower the shares of luxury rival Daimler AG, which fell as much as 2.4%. Volkswagen AG declined 2.7%.

BMW is particularly hard-hit by trade concerns, with earnings suffering from extra tariffs on vehicles made in Spartanburg, South Carolina, and shipped to China. Concerns over Brexit continue to weigh, and BMW has said it may move production of the Mini city car in Oxford to elsewhere in Europe should the U.K. leave the European Union without a deal. In addition, U.S. President Donald Trump has threatened to slap levies on European-made cars exported to the U.S.

The struggles are adding to challenges from higher spending on new electric cars, while efforts to comply with stricter carbon emissions regulation will also drive up the manufacturing cost. Currency swings and higher raw material prices will have a medium-to-high three-digit million euro negative impact, BMW said.

New models like the full-size BMW X7 sport utility vehicle and the revamped 3-Series sedan will help boost business in the second half of the year to help deliver growth in all major sales regions, BMW said. The carmaker’s deliveries have dropped 2% through February as the European market declined for a sixth straight month.

BMW is unveiling the revamped 1-Series compact late this year and the all-new 2-Series Gran Coupe in early 2020. Further out, the company will eliminate about half of its drivetrain variants from 2021.

Cost Cuts

Other carmakers are responding to the same stresses. Volkswagen’s Audi brand is scaling back management ranks for savings and faster decision-making, while Mercedes Benz-parent Daimler vowed comprehensive cost-cutting measures last month.

In addition to thinning ranks, carmakers are also looking to each other for savings. BMW and Daimler have pushed aside rivalries to joined forces in sharing and autonomous cars. They’re also studying a deeper cooperation on key components in conventional vehicles, people familiar with the matter said in December.

By Oliver Sachgau

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