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by Stephan Bauer, Euro am Sonntag
W.hen BMW CFO Nicolas Peter presents the results for July through September on Wednesday, investors are eagerly listening. For Brsians, the BMW advertising slogan “The joy of driving” could translate into the joy of making money, because one thing is clear: the German premium car manufacturer had an unexpectedly strong quarter in the middle of the pandemic. As a foretaste, the Munich cash flow figures brought the free funds from the auto business after investments have risen to over three billion euros. In the previous year, BMW had not even recorded a quarter.
The traffic lights were still on red in the first half of the year: Peter reported strong cash outflows due to Corona. With sales falling drastically, the costs continued, the Bavarians burned 2.5 billion euros. The turn for the better succeeded in the summer quarter with an increase in sales of 8.6 percent thanks to high demand from China: Between July and September, Asians bought almost a third more BMWs than in the previous year.
The people with higher incomes in the People’s Republic like to spend money on the “joy of driving” despite Corona. The simple reason: China hardly has any more corona cases and is recovering much faster than Europe or the USA. While the number of cases in the USA is at a record level and numerous European countries are about to or already in a new lockdown, China is giving full throttle. From July to September the economy grew by almost five percent.
Since the Chinese like to show their wealth, manufacturers of luxury products benefit. BMW and the Swabian premium company Daimler are clearly one of them. Especially long versions of the premium bodies like BMW’s 530 Le or Daimler’s S-Class, the best-selling upper-class vehicle in the world, inspire the rich. “The S-Class has sold fantastically recently,” says Harald Wilhelm, Daimler’s CFO. The top model, which has just been replaced by a high-tech successor, or SUVs with the Swabian star ensured that Daimler achieved a sales increase of 23 percent in China in the quarter – and the inflow of funds soared to five billion euros.
The rain of money is most welcome to the auto companies stressed by industry change. The trending topics of electromobility, autonomous driving or digitalization approached and left thick skid marks in the figures. Sharply falling margins and several profit warnings, for example at Daimler, frightened investors and scratched the paintwork of the premium brand.
In the spring, CEO Ola Kllenius had to represent a drop in profits of almost two thirds for 2019, “a sack full of work” is what the Swede admitted contrite. The Swabians used the Corona months to do their homework. Because the DAX group from Stuttgart, which was battered a few months ago, will find its way back to excellent profitability in Corona times.
Chief Financial Officer Harald Wilhelm reported an unexpected 9.4 percent operating margin in the Mercedes-Benz auto business for the third quarter. In 2019, the brand with the star had just presented 3.6 percent. Now the Swabians are even increasing their profit forecast, are confident that the 2020 operating result will match the previous year’s level despite the virus – and are driving towards the margin targets recently set by Kllenius of an average of eight to ten percent.
In terms of strategy, Kllenius relies on luxury and wants to market premium brands like Maybach even better. The rest is typically Swabian: Chief Financial Officer Wilhelm has to save, the fixed costs are to be reduced by 20 percent by 2025, variable costs should be reduced by one percent per year until then. Negotiations with employee representatives are ongoing, the path will be painful for the workforce.
Maybe Daimler will get the curve in time. Like the premium rival from Munich, the Swabians need every euro to work through the long-term issues – above all the switch to electric drives.
Daimler is also on the brakes when it comes to investments and development expenditure. In the quarter, these items shrank by a third to 1.9 billion euros. The figures for BMW next week should show a similar picture. However, analysts see the focus of the savings on combustion models. “The car manufacturers are saving on the variety of models, for example. With electromobility they have to adjust the capacities upwards, there is more demand here than can currently be delivered,” says analyst Marc-Ren Tonn from M.M. Warburg.
Stromer increasingly popular
The fact is that the demand for electric vehicles increases during the crisis. This is due to government incentives to buy. Corona may, however, accelerate the fundamental shift in consumer behavior – similar to online shopping. Daimler recently recorded strong demand for plug-in hybrids, with the Swabian company selling a total of 45,000 electrified models in the quarter. “There is a strong upward trend,” says Wilhelm. Daimler is therefore on track to achieve the EU’s 2020 CO2 targets for fleet emissions. Only last year, very few of the people from Stuttgart believed that.
Observers warn that part of the high demand in the summer is catching up to be made. “We saw an exceptionally good quarter with the premium providers. It could continue to be very volatile,” warns analyst Gerhard Wolf from LBBW, who sees a possible hard Brexit as a risk factor for the manufacturers in addition to fading catch-up effects.
In addition to the trend towards luxury, e-mobility in particular remains a permanent driver for the industry. The world market leader provides the best testimony to the success of the Stromer. The Californian Tesla has just set several records of its own: The Americans sold almost 140,000 cars in the quarter, 44 percent more than a year ago, and around 2.4 billion dollars in cash flowed from operations – a threefold increase compared to the previous year. boss Elon Musk drummed into selling half a million cars in the Corona year.
The established premium manufacturers, on the other hand, find it difficult to make money with electric vehicles. The battery costs alone are significantly higher because of the still low number of units. The electric leader, on the other hand, makes good money. Tesla also collects for CO2 emission rights. The auto business is profitable, however, with an operating margin of 9.2 percent.
The fact that Daimler is one step ahead here is due to the margins that the combustion engines deliver. The same applies to premium manufacturers: the proportion of electrical equipment must increase and the margin should not decrease. “The challenge is to lower our costs overall so that the margin fits,” says CFO Wilhelm. BMW colleague Peter also has this feat of strength ahead of him.
Daimler is concentrating on the luxury segment, the strong sales in China give reason to be confident that the strategy will work. The Swabians are also making clear progress on costs. The margin in the auto business is 9.4 percent – a quantum leap. The turnaround of the van division in the quarter also brings momentum. Sales are not expected to exceed the 2019 level until 2022, and according to the recently raised forecast, profits should be leveled by 2020.
In China, BMW also scores highly because of the inexpensive model cycle. The operating margin in the auto business still lags behind that of its rival from Swabia. For 2020, boss Oliver Zipse has so far put zero to three percent operationally in prospect. Analysts expect BMW to point to the upper end of the range on Wednesday. Hold.
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Image sources: THOMAS KIENZLE / AFP / Getty Images, BMW Group