BMW Profit Growth May Be Exhausted, While China Probe Clouds Future

on August 7 2014 | in Daily Headlines | by | with No Comments

BMW’s latest financial results excited most investors, again, but there are some who wonder if, just maybe, the leading German luxury car maker’s growing profitability might be peaking out.

And news that the Chinese government is investigating foreign automakers’ alleged monopolistic pricing won’t help BMW or for that matter its competitors like Daimler’s Mercedes, VW’s Audi and Jaguar Land Rover. Massive sales in China have been almost a license to print money for luxury car makers, with BMW accounting for one fifth of its revenues there. China provides around 30 per cent of BMW’s operating profit.

Long-term problems for luxury car makers include the huge expense of meeting ever-tighter fuel efficiency regulations, and BMW is seen as being ahead of the curve on this.

Investors applauded BMW’s burgeoning second quarter profit margins as it increased its model line with new niches. Max Warburton, analyst with Bernstein Research, thinks that maybe BMW will soon find it has run out of categories to fill, and profits may bump up against a ceiling.

New niche BMWs include the X4, 4-series, 2 series Active Tourer and Project “i” electric vehicles. The upcoming 2 series Active Tourer is BMW’s first minivan and front wheel drive vehicle, with technology borrowed from the new Mini. BMW is currently launching the i8 plug-in hybrid sports car, after previously introducing the i3 electric city car.

Meanwhile, the Financial Times of London’s Lex column was puzzled by the Chinese probe, saying a move to force lower prices for luxury cars seemed to conflict with government aims to limit car purchases and congestion in cities, and wouldn’t help domestic car makers trying to compete with foreigners. But investors may well shrug off the problem, given that they have much bigger fears at the backs of their minds about the Chinese banking system. A bursting Chinese banking bubble would be a huge problem.

Investors don’t seemed overly concerned about any China problem for BMW, but some see a rejuvenated Mercedes model line-up as a threat. Macquarie Research says it prefers to invest in Mercedes because of its even better product momentum and profit margin improvement potential.

Read more at Forbes.

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