BMW to lower forecast amidst China slowdown

Bayerische Motoren Werkes AG, more commonly known as BMW to the likes of you and me, has announced that they are thinking of lowering their global profitability forecasts as market conditions continue to worsen in the world’s largest automobile market, China.

BMW has already slashed production in China by 16,000 cars as market condition was hit by the anti-corruption drive, the stock market crash and fierce competition from its rivals. Consumers are discouraged from making big purchases and those that still are buying are making demands for bigger price reductions. The conditions are so acute that it has led BMW's CFO to believe that car sales may actually drop in China during 2015, the first time that this has happened since 1998.

Earnings for BMW before interest and taxes from car manufacturing are still expected at 8 to 10% of sales, though “if conditions on the Chinese market become more challenging, we cannot rule out a possible effect” on the forecast, CEO Harald Krueger said for the Munich-based manufacturer.

BMW is also revising the future of the famed 7-series as part of its effort to refresh its model line-up. Historically, BMW has been known for supplying cars to the luxury end of the market; however, more of the company’s sales came from lower-margin compact cars in the second quarter, driven by a nearly fivefold increase in 2-Series shipments and a 24% jump in MINI-brand sales. Deliveries of the 5-Series, 6-Series and 7-Series all declined, with the 7-Series posting the biggest drop of 27%.

Across all manufacturers, auto sales in China fell 3.2% last month, the first decline in more than two years. The country’s auto market has been the key growth driver for luxury car makers in recent years. Audi and BMW both reported Chinese sales declines for June. This had meant large subsidies being paid to dealer networks to avoid large scale defections. BMW led the way on this earlier this year when they gave over 800 million dollars in rebates to their dealer network to avoid a ‘strike’. (See Toyota set to lose top spot to VW and Cooling China creates problems for Car Manufacturers.)

Industry analysts are now looking at how the large car companies strive to maintain profitability within their dealer networks. “As sales drop and service intervals increase, they (auto manufacturers) are having to look at gaining maximum value from every customer that comes back to service their vehicles. Adding a good array of Value Added Products from reputable vendors is one way that they are helping to maintain profitability at the dealer level,” said a spokesperson for one large auto manufacturer.