BMW's very meaningful profit warning

During an interview on France Inter on Saturday, PSA's CEO Carlos Tavares mentioned BMW's "profit warning" as a sign of weakening of the entire sector by regulatory requirements. The obligation for car manufacturers to carry out forced electrification of their commercial ranges - whereas though customers seem reluctant to take the plunge - can only erode margins.

Indeed, in the case of BMW, the management is justifying the  impossibility of meeting 2018 profit targets by both the trade war between the US and China - which hinders the sales in China of vehicles (X3, X4, X5, X6) assembled in the American plant in Spartanburg - and by the transition to the new WLTP procedure which "causes strong price pressure".

Besides the very heavy investments that BMW has to make, it has indeed become clear that, for BMW as for Mercedes, Volkswagen and Porsche, the transition from NEDC to WLTP no longer makes it possible to present most of their plug-in hybrid vehicles as "clean", i. e. emitting less than 50 g/km: in Germany, this deprives them of the 3000 euros of consumer grant. As a result manufacturers have taken such cars out of the catalogue after selling them off in August.
At BMW, the X5 HR was no longer right in the course with a battery  that can only cover 31 km. It must now be equipped with a battery that offers a range of 80 km to go back below the threshold of 50g/km at approval.
This is being done but it will not be ready until 2019 and, in the meantime, there is no longer any offer in plug-in hybrid X5. Knowing that, in France, the version concerned accounted for almost 45% of sales over the first eight months, we can see that this is a problem.

Beyond these very annoying turbulences associated with the transition to the new approval cycle, Carlos Tavares is right to point out that the decisions that are taking shape in Brussels, as well as those already taken in China, can only erode manufacturers' margins.
Since Frankfurt last year, the European automotive industry has been aware of this. There are now tangible signs of this and this is only the beginning of a costly transition.
The struggle in Brussels by environmental NGOs (ICCT and T&E) over post-2021 emission reduction targets was driven by the desire to force manufacturers to move away from simply rationalising their internal combustion engines and/or limiting themselves to mild-hybrid'.
In particular, ICCT sought to show that Diesel was not needed to reduce emissions and that it would be cheaper for everyone to invest  everything on electricity rather than putting one part of the envelope into R&D on improving what already exists and another part into "new energy vehicles": with targets of -20% in 2025 and -45% in 2030 (if the tightening proposed by the European Parliament is adopted), manufacturers no longer have a choice and, as Carlos Tavares still says, politicians have decided for them: "We have moved from the era of technological neutrality to an electrification injunction".
Indeed ICCT has been working on convincing politicians that carmakers would not spontaneously take the best path.

From the point of view of manufacturers and their shareholders, the problem is that we must invest massively in technologies, anticipate the probable problems of supply of raw materials and cells and mobilize a lot of cash while convincing unwilling customers.
For example, Klaus Froehlich, BMW's R&D manager, told Automotive News in September that his company was actively deploying a strategy to secure a supply of batteries cheaper than those of its competitors and was beginning to sign agreements with mining companies for this purpose: this means that the company is leaving cash today to prepaid for items that will fit into vehicles that BMW will sell tomorrow.
This is the condition for being able to deliver electric or electrified vehicles tomorrow and to be able to sell them without losing too much money, but it is understandable that this can only erode margins.

This means that for the moment, economically, the EV equation is not balanced: just as Tesla loses 10,931 euros per vehicle sold, GM losses amount to 9,000 euros per Bolt or FCA admits to losing 20,000$ each time it sells an electric version of its Fiat 500 in the United States. Manufacturers know that the additional costs associated with manufacturing rechargeable electric or hybrid vehicles cannot be fully reflected in selling prices if they want customers to be convinced.
In the first period - which it is difficult to say how long it will last - it will be necessary, despite government subsidies, for profits made on sales of combustion engines to finance the losses that will have to be incurred to design its electric ranges, install them on the markets and benefit from the volume and learning effects that are still only hypothetical.

When we look at BMW's "profit warning", we can ask where's the fire:  it is just a question of getting shareholders to accept that the 10% operating margin to which they had become accustomed will be reduced by 2 or 3 points. For companies that are less profitable and/or more exposed to the risk of market reversals, this can be more problematic.
What is certain is that the obligation to comply with regulatory injunctions greatly reduces the strategic latitude of both parties: Whether or not believing in its benefits, whether ahead of schedule or not, whether or not seeking to move upmarket, whether regional or global, car manufacturers must invest massively in this electrification and accept that the management of this transformation will be for years to come to play this forced game. Depending on whether it is  played well or badly, will make each carmaker gain or lose places in the world hierarchy.

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Translated with, amendments by Géry Deffontaines

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