Thursday, November 5, 2009

Premium-Plated BMW


As a luxury car maker, BMW wasn't expected to benefit much from the scrapping schemes that have propped up sales of small cars at Europe's mass-market manufacturers. But after a turnaround at Mercedes helped Daimler report a third-quarter net profit last week, hopes rose that BMW's auto division would also make it back into the black.

No such luck. BMW's auto unit reported a €76 million ($112.2 million) operating loss compared with a €141 million operating profit a year earlier. A 3.4% rise in sales of relatively low-margin Minis wasn't enough to compensate for a 9.2% fall in sales of higher-margin BMW sedans and sport-utility vehicles and the slump in demand for Rolls Royce limousines. In contrast, Mercedes benefited from robust demand for its new C-class and E-class sedans.

Only a return to health of BMW's financing arm, helped by a recovery in the U.S. and U.K. used-car markets, enabled the company as a whole to turn a net profit for the quarter.

Still, the 6% drop in BMW's stock price Tuesday looks to be an overreaction. The German company appears relatively well-positioned for the future assuming a sluggish economy recovery in which pricing power -- and not government subsidies -- is the determining factor for success.

BMW is renewing its luxury 5-series and smaller 1-series and 3-series lineups over the next three years, which should help sales. It continues to create niches in the sector, with its new X1 luxury compact SUV the latest example. BMW isn't the first to share platforms and more components for new models, but the 20% reduction in costs it hopes to achieve should leave it well-placed should demand prove slack. As an example, BMW will soon have nine roof systems for 23 models compared with today's 12 roof systems for 19 models.

If the benefits of Europe's scrapping schemes wear off quickly and merger benefits that other European auto makers are hoping for prove hard to come by, BMW's premium market rating will look deserved.

source: online.wsj