BMW’s decision to add a car plant in Mexico was motivated by a desire to reduce its reliance on the cooling Chinese market, CEO Norbert Reithofer said.
Reithofer said the automaker decided to increase its exposure in the NAFTA region to serve as a counterweight to China, where the annual growth rate in unit sales is dropping, which is shrinking profits.
“We were really spoiled in the last few years with the growth rates,” he told reporters in Munich during BMW’s annual results press conference. “At one point it was 70 percent, then 60 percent, 50, 40, 30 and then we noticed last year with 16 to 17 percent growth that it was slowing down more and more.”
Even more troubling to Reithofer is the steady decline in the money generated by BMW’s business in China.
“Above all, the contribution margins that we achieved three or four years ago are no longer possible [at those levels]. We saw that in 2014,” Reithofer said without quantifying BMW’s profitability per car sold in China before or after the slowdown.
This year BMW only expects China to provide a volume increase in the high single-digit percent range. Last year the group posted a 17 percent gain in China sales to 456,732 vehicles, which represented approximately a fifth of BMW’s global volume.
‘Next big challenge’
“I believe that a further normalization of the (Chinese) market means this development will certainly continue,” Reithofer said, adding that he sees this change as being BMW Group’s “next big challenge.”
The group’s Rolls-Royce brand in particular is under pressure because of a 32 percent decrease in China’s ultraluxury segment last year.
“At the moment we are building cars for China only when there is a real customer order,” said Peter Schwarzenbauer, who is the BMW board member in charge of Rolls-Royce and Mini.
The big drop in sales came despite an increase in the number of people in China who can afford a Rolls-Royce. That is because ultra-high net worth individuals in China don’t want to draw attention to themselves at a time when the government is cracking down on exorbitant spending by top earners in the county.
BMW Chief Financial Officer Friedrich Eichiner said that as China’s growth slows competition among brands intensifies.
“It’s no longer the case that there are enough customers around to give everyone double-digit percentage growth,” he said.
To improve its position in China, where it builds the 3 series, 5 series and X1, the automaker plans to add three new locally built BMWs. The increase in local production, however, could hurt earnings. While BMW can fully book the profits from imports sold in China, sales of locally built cars are split 50-50 with joint venture partner Brilliance Auto.
‘Margins under pressure'
Analysts are also worried that China’s slowdown will hurt BMW’s earnings.
“We have long highlighted our concerns on sustainable China growth rates, even for premium OEMs, and even despite growing finance penetration. BMW's 2.7 percent China growth rate for February 2015 highlights this slowdown,” wrote Morgan Stanley in a research note on Tuesday. “Further, as amply illustrated by BMW's announced FY14 dealer agreement, we believe China mix and margins will also remain under pressure.”
BMW plans to build up to 150,000 cars a year near San Luis Potosi, central Mexico, starting in 2019. It aims to take advantage of the country's growing industrial base and tariff-free access to the U.S. market. The move also helps reduce the German automaker's dependence on higher-cost plants at home.