Investors alarmed by a substantial drop in profits from BMW's Chinese joint venture with Brilliance received few reassurances that this will change anytime soon, as BMW executives braced the market for a profit-eroding performance in China weighed down by rising investment costs and an aging product lineup.
BMW's earnings from its joint venture with Brilliance China Automotive look to have nearly halved in the first three months of this year as overall pricing in the country's premium segment deteriorated and BMW suffered from an aging products, in particular for locally-built models such as the 3 series.
“China is slowing down more than we anticipated at the end of last year,” finance chief Friedrich Eichiner told analysts on Wednesday, confirming market suspicions that the days of easy money and oversized profit margins for BMW in China are drawing to a close.
Worse, the poor performance at the start of 2015 contrasted with improving figures reported by its German rivals. While BMW’s China JV quarterly profits fell 43 percent to about 128 million, Daimler's China JV profits quadrupled to 117 million as its BBAC joint-venture finally digested the 720 million euros in investments needed for the start of local production for the Mercedes GLA crossover in April.
BMW executives spent roughly two-thirds of the time answering questions devoted to China during a conference call with investors on Wednesday. Analysts inquired on everything from the future run rate of JV earnings and potential China-related risks to its full-year guidance to far more granular aspects such as the sales split and transaction prices for imported versus locally-built JV cars.
Worried that BMW is suffering more than its competitors Mercedes and Audi, Arndt Ellinghorst of Evercore ISI summed up the market’s concerns over China during the call when he warned that the issue “is scaring so many of your investors.”
Eichiner could offer little hope that the sagging first-quarter JV profits were only a temporary blip, blaming part of the drop on its deteriorating pricing power related to a lack of new products, in particular with the core volume models built by the BMW Brilliance joint venture, known as BBA.
He expects this to drag on until the end of this year when the next-generation X1 built in Shenyang goes into production.
Eichiner said that BMW has started cutting production back and balancing dealer stocks to prevent a buildup of pressure within its sales channel. The Brilliance joint venture produced 2,800 fewer cars than it had sold in the first quarter, compared to building 8,300 more JV cars than it sold a year earlier, according to BMW's interim report.
He warned that fresh expenditure related to shifting future production of some models to China weighed on the results, a factor that will continue. “We are preparing to localize a further three products at our joint venture, that means we are basically doubling the JV portfolio,” he said. “We are now ramping up for this investment – there are planning costs, development costs and other things going on in order to prepare – and this is a major effect. So we again are investing into the future growth of BBA with those initiatives.”
BMW keeps insisting that it was only surprised by the speed of the slowdown, not by the normalization itself. Yet any investor will tell you, predicting a trend change is the easy part – the trick is getting the timing right.
And here BMW seems to have been slow to react, preferring to pocket the profits last year while Mercedes invested heavily to localize more production at its JV and catch up with its two larger rivals.
During the call, a defiant outgoing CEO Norbert Reithofer denied investor perceptions that BMW is underperforming its rivals in China, while Eichiner seemed to belittle the improvement by Daimler as only being temporary. “This momentum will level out,” the CFO said.
While BMW permabulls might give management the benefit of the doubt and sign off on the lifecycle argument, more skeptical investors would be right to wait for further evidence of a turnaround at BBA before changing their mind.