BMW has long called itself the ultimate driving machine, but lately it
does not seem to be the ultimate destination for customers in the market
for German luxury and performance.
In 2016, BMW lost its crown as the top selling luxury brand around the
world to fellow German rival Mercedes Benz.
In 2012, the BMW brand led Mercedes Benz and global annual sales, but the
three-pointed star gained the top spot in 2016 and has held it since.
Mercedes has also surpassed BMW in their home continent of Europe, a major
market for both.
To be fair, in 2018, the total sales for the entire BMW group slightly
outsold Mercedes Benz cars.
BMW Group sold 2,490,664 units that year, compared with
2,438,987 for Mercedes Benz cars.
But still, investors and industry observers have noticed the edge.
Mercedes has gained on BMW.
Sales growth at BMW has slowed over the last five years, and investors
worry the brand has become a bit stagnant.
BMW really has become a bit stale and boring, too much consensus driven,
doing more of the same.
And I think they need to go back to really innovate a bit more
aggressively. And the design has become, you know, it's just more of the
same. So I think BMW is a bit of an identity crisis.
And ultimately, that's you know, really, if you sit back, the reason why
they're replacing a CEO, because everything has become a bit lame.
BMW appointed a new CEO in August 2019 and has assured investors it is on
its way to reinvigorating itself.
To understand how a name as storied as BMW now elicits such opinions from
the investment community.
It is important to look at its history and what turned it into such a
powerful automaker in the first place.
BMW was founded in 1916 as an airplane engine manufacturer, also out of
the First World War came a remarkable German effort, the BMW.
Now this engine is the first engine that I know of in all of history that
attempted to overcome the effects of altitude on power.
The famous blue and white emblem, which has changed little since the
company's founding, incorporates the blue and white colors of the Bavarian
state flag in a form that is meant to resemble a rotating airplane
propeller. In the years following the First World War, a state prohibition
on the manufacturer of airplane engines led the company to make railway
breaks and inboard engines.
BMW announced it would make its first complete vehicle a motorcycle in
1923. The basic engine design of that first BMW motor model has remained
largely the same ever since the company acquired an automotive
manufacturer in 1928 and produced its first cars under the BMW name in
1929. The earliest BMW cars were designs licensed from the Austin Motor
Company. But BMW started producing its own designs in 1932.
When World War 2 broke out, BMW made weapons and other wartime materials,
often relying on forced labour from convicts, prisoners of war and
concentration camp prisoners.
The company said it is painfully aware of the suffering it caused at this
time and regrets the fate of these forced workers in the wake of the war.
The machines used for armament manufacturing were destroyed and the
company made household appliances.
The occupying U.S.
military government ordered BMW plants to be dismantled and a considerable
portion of machines were shipped to other countries as reparations for the
war. BMW eventually restarted motorcycle manufacturer after World War 2,
beginning with an improved version of the original R23 model the company
had first designed in the early 1920s.
The motorcycle exceeded sales expectations, selling 9,144 units in its
first year. BMW began making cars again in the early 1950s.
Its first postwar car was the 501, which was not a sales success.
The company's first real hit car came in 1961 with the compact 1500 sedan.
The group established its racing subsidiary BMW Motorsport in 1972, which
would provide direction and inspiration for BMW s performance oriented
cars. The 1500 was something of a turning point for the brand.
BMW soon came out with similar models a 1600, 1800 and 2000.
But it was the 2002 that really made waves, and it is often credited with
being the first model that distinguished BMW as a purveyor of a new type
of vehicle. The German sports sedan BMW replaced the 02 series with the
3-series in 1975, and since that time, the small sporty car has been the
sports sedan to beat.
BMW also eventually began selling cars bearing the M badge from BMW Motor
Sport Division. Cars such as the M3 and M5 were and still are higher
performance versions of BMW sedans that offer ordinary customers the
performance needed for the track BMW, whose sales grew as the company,
solidified its reputation for combining luxury performance with a European
pedigree. But over time, buyer tastes begin to shift, starting with a boom
in sport utility vehicles in the late 1990s.
BMW and German rival Mercedes were both keen to meet the need.
BMW introduced its first sport utility vehicle, the X5, in 1999.
Purists cried foul, as they would with other brands embracing the SUV
trend. Perhaps sensitive to this.
BMW notably referred to its SUVs as sport activity vehicles, avoiding the
association of its products with utility.
Despite the backlash, selling sport activity vehicles has boosted the
company's top line.
They accounted for 37.3
percent of total BMW sales in 2018, an increase over the 33.8
percent in 2017.
However, some investors worry that BMW has strayed a bit too far from its
identity as a German performance brand.
I mean, I think that what they're trying to do is create a drivers car,
even if it is a large SUV or a midsize SUV, and still make it fun to drive
for that segment.
Obviously at next seven will not drive like an.
That is just not possible in physics.
But in terms of cannot drive and be more fun than some of its competitors.
Maybe that's their strategy.
But I do think that certainly waters it down.
And I think when people think of performance, they're not necessarily
thinking an SUV.
In recent years, BMW sales have not kept pace as well as Mercedes with
growth in the global luxury market.
Mercedes has kept up share along with some of the peers that have stolen
share from BMW.
And a big reason for that is Mercedes just simply sells more model
variants than BMW does.
And if a consumer is moving more towards premium or luxury versus just
driving experience, we think more customization and more model variety
kind of plays into Mercedes' hand.
Investors also worry BMW is falling behind in the race to make profitable
electric vehicles a key frontier in the auto industry.
The company had an early lead over many other car companies with its fully
electric i3 city car and its hybrid i8 sports car.
BMW said it will end production of the i8 after releasing a limited
ultimate sophistio addition.
The i3 has not been a resounding sales success either.
Its design was unique but polarizing, with many reviewers remarking on its
odd shape and its lack of consistency with BMW s overall aesthetic.
The car also cannot drive as far on a single charge as other electrics
even less expensive ones.
Of course, there are elements of the i3 that are remarkably innovative,
such as the carbon fiber chassis.
BMW uses to reduce weight and extract more range from the car on a charge.
And despite the fact that the car is so small.
BMW has said it has the same amount of interior space as the brand's
famous three series sedan.
Now many automakers are pushing their own fully electric vehicles out into
the market. And BMW has at times appeared to waver in its commitment to
electric vehicles. Critics accused former CEO Harald Krueger of being a
bit too cautious in investing in electrification.
The brands electrification strategy has also changed tax while the i3 is a
fully electric vehicle.
BMW now is pushing more aggressively into plug in hybrids, cars that run
on both gasoline and a rechargeable electric battery and motor.
This might be less costly than investing in fully electric vehicles in the
short term. But industry analysts wonder what will happen when the larger
industry switches over to fully electric cars.
The concern we have longer term for them is that they are approaching
electrification with a very aggressive plug-in hybrid strategy.
And the concern there is what happens if consumers want full battery
electric cars quicker than expected.
One of BMW key competitors is Audi, which is owned by the massive German
automaker Volkswagen.
VW has thrown its full weight behind battery electrics, betting that it
can manage the costs of going all in on the technology and selling
electric cars at the high volumes.
Vw is capable of the reason for that.
They just have more scale right there doing the Jaguar with Naut Volt.
When you have scale, you can cut out most of the costs when making it
better. A large chunk of it 30 percent is just manufacturing scale.
So they're definitely in an advantage.
And you're right. UMW is going to face more margin dilution your term than
VW. At the Frankfurt Auto Show in 2019, VW reportedly said it has already
brought down the costs of batteries to 100 dollars per kilowatt hour.
And there are doubts BMW can achieve battery costs anywhere near that.
That said, premium automakers such as BMW are likely to have an easier
time managing the costs of the tech needed to comply with increasingly
stringent emissions regulations, since they can simply charge higher
prices for their vehicles and secure better margins than many mass market
automakers. The real reason for this is electrified car, especially fully
electrified cars cost more to me than their ICE counterparts.
And the real reason for this is the costs of the batteries so much today.
Now, over time, the battery costs could come down.
But as we've seen from the likes of Tesla, for example, the premium
consumer is less price sensitive and can pay more.
We know that the EVs will cost more than the AC ICE counterparts.
So having the premium offering should help with meeting CO2 requirements
and and getting the consumer demand and consumer willingness to
effectively pay more for these products.
BMW current story does have some bright spots.
The brand has a slew of new cars coming out over the next few years,
including a new addition to its electric I sub brand and new M division
models. BMW also has strong brand recognition, but I don't think the
products are necessarily the problem is competition in the market itself.
The fact that, you know, people have come along like Elon Musk and have
just wowed people and got them apart to be a part of something that is
completely different than when BMW is doing.
I mean, BMW, Tesla.
It's just not possible.
So in terms of refreshing their image, perhaps it is.
It is a marketing, advertising and image exercise rather than a product
exercise, because I don't think that there's a problem there.
Things like the way the vehicles, they like the way that they drive.
It's not that necessarily.
It's just it's it's a tough market out there, though.
It has arguably gone from sports sedan purveyor to a high end family wagon
maker. Its cars are still highly desired among buyers around the world.
That includes the largest and perhaps most important market in the world
today, China.
The Chinese auto market has been slowing over the last few quarters, but
much of the softness has been in the mainstream segments.
The premium segment where BMW plays has remained strong.
And BMW is still seeing solid growth there.
It is by far. BMW's largest market, accounting for 30 percent of its
global sales in 2018.
BMW Group's China sales rose nearly 8 percent to 640,800 three units.
That's up from 595,020 units in 2017.
In 2018. BMW said it would be increasing its stake in its Chinese joint
venture in 2022.
Typically, foreign automakers doing business in China have to enter into
50/50 partnerships with local firms.
By increasing its stake, BMW is increasing the profits it can pull from
its venture. This is also important because in the coming decade, emerging
markets will account for 100 percent of incremental auto sales.
70 percent of that will be in China.
Furthermore, BMW China margins are higher than its non China margins.
BMW told CNBC it considers itself the ultimate driving machine.
No matter the model or drive train, the legendary German brand will likely
need to plow those profits back into its business if it hopes to regain
its title of the world's best selling premium brand.