German premium automakers find themselves in unfamiliar territory: trailing mass market rivals in profitability. BMW and Daimler have seen returns shrink in the normally lucrative second quarter, pushing their profitability below those of volume peers.
BMW's closely watched automotive EBIT margin collapsed to 2.8 percent in the first half, while Daimler's Mercedes-Benz car division had a 1.4 percent operating return on sales. The results are well below the 8 percent to 10 percent margin that BMW and Daimler strive to achieve.
Volkswagen Group's core VW passenger car brand and its Czech brand, Skoda, posted second-quarter returns of 5.2 percent and 8.1 percent, respectively. PSA Group's result was even better than Skoda's as the French automaker's adjusted automotive margin was 8.7 percent over the period.
Automotive equity analyst Arndt Ellinghorst of Evercore ISI believes investors have not realized shares in the premium duo are overpriced compared with volume peers such as VW, which generate far more cash. "The market seems to happily ignore this given VW trades at a 20 percent discount to BMW and Daimler," he wrote in a recent note.
Results from VW Group's Audi brand, which has suffered in past months due to WLTP-related supply constraints, look great compared with its German premium rivals as it only had a slight narrowing in operating returns to 8 percent of revenue.
To be fair, however, that figure is flattered somewhat by a decision this year to reallocate a chunk of turnover to the VW Group. Equivalent to roughly a tenth of its sales, the financial move lifted Audi's margin by a full percentage point -- allegedly to improve comparability with BMW and Mercedes.
Investments in future technologies such as electric cars and autonomous driving are a key factor in the struggles at BMW and Daimler.
As a group, Daimler spent nearly 5.8 percent of its revenue on r&d in the first half. This figure has been steadily rising since 2014, breaching its previous annual peak of 5.3 percent in 2009. The high came when r&d dropped at a less dramatic rate than Daimler's revenue in the aftermath of the global financial crisis a decade ago.
BMW's r&d ratio came in at 5.9 percent for the first six months, another increase over the previous period. Last year, the level hit 7.1 percent, the highest since at least 2006 and substantially above its target corridor of 5.0 percent to 5.5 percent.
This level of r&d spending was manageable when profits from China were soaring. That is no longer the case as China is expected to contract for a second straight year, which is a blow to German brands in particular because they are overly dependent on cash generated from the world's biggest auto market.