FRANKFURT (Reuters) -- BMW's record car sales have meant big profits that have funded incentives and investment in new technologies. But now sales of competitors such as Audi are catching up and profits are shrinking.
BMW expects that higher spending on technologies will slow profit growth this year to a medium to high single-digit percentage after 2014 earnings before tax rose 10.3 percent to 8.71 billion euros ($9.23 billion) last year.
Some industry observers are wondering if the old "sales grow, profits look after themselves" formula no longer works.
BMW invested almost 4.6 billion euros on new models and technologies such as self-driving systems last year. That meant capital expenditures amounted to 5.7 percent of revenue, slightly higher than its goal of spending 5 percent to 5.5 percent. It's a sign that the sales crown title it has successfully defended for almost a decade is increasingly costly.
"There is an obsession with volume growth in the German premium segment and it needs to come to an end, otherwise it becomes a negative spiral of discounting, eroding the brand equity," said Arndt Ellinghorst, head of automotive research at Evercore ISI.
But BMW's conundrum is shared by rivals Mercedes-Benz and Audi. All have relied on a similar formula for growth: building cars which emphasize performance while expanding their sales footprint into emerging markets and developing new vehicles, such as SUVs.
Too much product?
When Norbert Reithofer became CEO of BMW Group in September 2006, the automaker only sold 18 BMW-branded sports cars. Today there are 35 as the company has expanded its range to boost sales and capture different segments in the car market.
Some managers agree with the analysts. BMW's board member for Mini, Peter Schwarzenbauer, told Reuters late last year: "The auto industry has become too focused on volume sales."
He has cut the number of Mini models on offer, discontinuing the Mini Coupe and Mini Roadster models.
BMW says it has an ongoing strategy review as it prepares to celebrate its centenary next year and install Harald Krueger as its next CEO in May.
A BMW spokesman said on Tuesday that volume sales is not a goal by itself and that maintaining profit margins is more important. BMW still has growth potential to exploit with its current strategy, the spokesman said.
BMW achieved a new sales record last year, after deliveries of its core brand jumped 10 percent to 1.81 million cars, outpacing Audi, which sold 1.74 million, and Mercedes which sold 1.65 million of its own-branded passenger cars.
But despite a sales rise of 5.2 percent to 131,416 vehicles in February, Audi still remains ahead of BMW in the ranking of the world's best-selling premium carmakers over two-month sales. Audi has sold 260,250 vehicles through February compared with 255,981 for BMW brand. Mercedes brand ranks third in the race with a two-month volume of 246,135.
Both Mercedes and Audi have vowed to take the luxury sales crown from BMW by 2020.
And the traditional model looks set for more pressure.
Emerging markets are no longer growing at the same pace as in previous years. Sales in Brazil, Argentina and Russia have fallen sharply. In January, BMW revealed it would pay local dealers in China some $800 million in rebates for sitting on large stockpiles of cars.
Once known for creating the 'ultimate driving machine' BMW is also working to meet the demands of EU regulators and cut average vehicle fleet emissions to 95 grams per kilometer in Europe by 2021. This makes it harder to sell larger, more powerful cars, once a mainstay of profit.
According to the German Center of Automotive Management, BMW Group needs to cut emissions by 30 percent from the average 135.7 grams average carbon dioxide output from BMW and Mini branded cars in 2014 to meet EU rules.
This requires it to invest billions in alternatives such as hybrid and electric cars, as well as into technologies to make cars lighter, such as carbon fiber.
Audi, the premium brand owned by Volkswagen, has also said its profit margins could fall this year because of investments in low-emission technologies.
There is also little room left in the market for new types of vehicle that are not already being made. "All segments are quite covered by these three makes," analysts at JATO Dynamics said in research prepared for Reuters.
Aside from executive and luxury sports cars, Audi, BMW and Mercedes have expanded their model range to develop SUVs and compact cars.
"If you are already struggling to find a new niche, then the company and the auto industry as a whole should ask itself: have we reached a point where it still makes sense to further diversify the product range," Schwarzenbauer said.
Bloomberg contributed to this report