By Edward Taylor
Of THE WALL STREET JOURNAL
Of THE WALL STREET JOURNAL
FRANKFURT (Dow Jones)--German premium car maker BMW AG (BMW.XE) issued a hefty profit warning Friday and signaled a return to more conservative sales tactics, reversing a policy of using steep discounts and cheap leases to win U.S. market share.
BMW said it would cut production and raise prices globally, especially in the U.S., as it revealed that second-quarter profit fell 33% to EUR506 million, down from EUR751 million in the year-earlier period. Revenues were down to EUR14.6 billion from EUR14.7 billion.
Like other premium German brands selling in the U.S., BMW faces an increasingly tough choice between trying to hold onto market share in the world's biggest market for premium cars and protecting profits, industry analysts say.
In recent years, BMW has pushed aggressively to sell cars in the U.S., using discounts and easy leasing terms. That trend accelerated over the past year as the U.S. market turned sour, forcing brutal price competition to draw customers into showrooms.
(This story and related background material will be available on The Wall Street Journal Web site, WSJ.com.)
Auto executives and analysts warn that BMW, as well as rivals Mercedes-Benz and Audi AG (NUS.XE), risk losing their most valuable asset, exclusivity, by copying the hard-sell high-volume tactics U.S. car makers have used for decades. BMW now appears to be struggling to return to its previous sales strategy known as "pull" - making customers line up to wait for cars and pay full price, attracted by the belief they are getting an exclusive product.
"Any premium auto maker that strives to push volume for its own sake, runs the risk of losing exclusivity," says Vic Doolan, president of Volvo Cars of North America until March 2005, and president of BMW of North America until July 1999. "This creates a situation where it has to push cars in the market rather than relying on the pull of the brand to generate sales."
BMW said Friday it wants to "retain its position as the world's leading premium manufacturer." In 2005 BMW eclipsed Mercedes-Benz to become the world's biggest-selling premium auto maker by sales, in part as a result of its aggressive sales tactics.
But the Munich firm said Friday that "volume growth will not be pursued at the expense of profitability. In the light of the ongoing weakness of the U.S. dollar and market, sales volumes will be reduced in the U.S.A. on a targeted basis as part of a new strategy for this region."
Rather than seeking to top the 336,000 cars BMW sold in the U.S. in 2007, sales volume figures are "likely to be lower than a year ago," the company said. On a group level, BMW has decided to "reduce production volumes and increase selling prices."
Rival auto maker Audi recently reduced its sales target in the U.S., to 95,000 units from the 100,000 in sales it previously had targeted for this year, a spokesman for the company said Friday. Daimler AG (DAI), the Stuttgart parent company of Mercedes-Benz last week gave a profit warning and also said it would give increased emphasis to growing volumes profitably.
BMW's bid to boost sales volumes appears to have been eroding the company's profitability for some time. While auto sales climbed to 1.5 million cars in 2007 from 1.05 million cars in 2002, operating margins for the company's auto business shrank to 6.4% at the end of 2007 from 9.2% in 2002. Currency factors, rising investments in fuel efficient technology, the rising price of raw materials and slumping demand in the U.S. have contributed toward eroding profits, the company says.
A sharp downturn in auto markets in recent weeks means BMW won't meet its previous profit target for 2008, the company said, warning that 2009 will also be a tough year. BMW said it expects the operating margin in its automotive division to reach "approximately 4% or higher" in 2008, down from the 6.4% in 2007.
BMW has been among the most aggressive companies in its use of discounts to sell cars in the U.S., offering an average $4,680 worth per car during June, up 62% on the same period last year. Rival Mercedes-Benz offered $4,692 worth of discounts, roughly 35% more than in June 2007. Audi, which offered $4,085 per car in June ramped up its incentives by 50% compared with June last year, figures supplied by Autodata Corp. show.
The incentives are higher than those granted by mass auto makers Ford Motor Co. (F) and General Motors Corp. (GM), which sell cheaper cars. But they're also higher than those of rival premium makers like Lexus, which offered incentives worth $1,557 per car in June while Acura offered $1841 worth in June.
Cheap leasing deals, another tactic for pushing more cars onto the streets, have also hurt BMW's profits. In the second quarter, BMW booked a charge of EUR459 million related to its leasing business, following a EUR236 million charge in the first quarter.
BMW said it would cut production and raise prices globally, especially in the U.S., as it revealed that second-quarter profit fell 33% to EUR506 million, down from EUR751 million in the year-earlier period. Revenues were down to EUR14.6 billion from EUR14.7 billion.
Like other premium German brands selling in the U.S., BMW faces an increasingly tough choice between trying to hold onto market share in the world's biggest market for premium cars and protecting profits, industry analysts say.
In recent years, BMW has pushed aggressively to sell cars in the U.S., using discounts and easy leasing terms. That trend accelerated over the past year as the U.S. market turned sour, forcing brutal price competition to draw customers into showrooms.
(This story and related background material will be available on The Wall Street Journal Web site, WSJ.com.)
Auto executives and analysts warn that BMW, as well as rivals Mercedes-Benz and Audi AG (NUS.XE), risk losing their most valuable asset, exclusivity, by copying the hard-sell high-volume tactics U.S. car makers have used for decades. BMW now appears to be struggling to return to its previous sales strategy known as "pull" - making customers line up to wait for cars and pay full price, attracted by the belief they are getting an exclusive product.
"Any premium auto maker that strives to push volume for its own sake, runs the risk of losing exclusivity," says Vic Doolan, president of Volvo Cars of North America until March 2005, and president of BMW of North America until July 1999. "This creates a situation where it has to push cars in the market rather than relying on the pull of the brand to generate sales."
BMW said Friday it wants to "retain its position as the world's leading premium manufacturer." In 2005 BMW eclipsed Mercedes-Benz to become the world's biggest-selling premium auto maker by sales, in part as a result of its aggressive sales tactics.
But the Munich firm said Friday that "volume growth will not be pursued at the expense of profitability. In the light of the ongoing weakness of the U.S. dollar and market, sales volumes will be reduced in the U.S.A. on a targeted basis as part of a new strategy for this region."
Rather than seeking to top the 336,000 cars BMW sold in the U.S. in 2007, sales volume figures are "likely to be lower than a year ago," the company said. On a group level, BMW has decided to "reduce production volumes and increase selling prices."
Rival auto maker Audi recently reduced its sales target in the U.S., to 95,000 units from the 100,000 in sales it previously had targeted for this year, a spokesman for the company said Friday. Daimler AG (DAI), the Stuttgart parent company of Mercedes-Benz last week gave a profit warning and also said it would give increased emphasis to growing volumes profitably.
BMW's bid to boost sales volumes appears to have been eroding the company's profitability for some time. While auto sales climbed to 1.5 million cars in 2007 from 1.05 million cars in 2002, operating margins for the company's auto business shrank to 6.4% at the end of 2007 from 9.2% in 2002. Currency factors, rising investments in fuel efficient technology, the rising price of raw materials and slumping demand in the U.S. have contributed toward eroding profits, the company says.
A sharp downturn in auto markets in recent weeks means BMW won't meet its previous profit target for 2008, the company said, warning that 2009 will also be a tough year. BMW said it expects the operating margin in its automotive division to reach "approximately 4% or higher" in 2008, down from the 6.4% in 2007.
BMW has been among the most aggressive companies in its use of discounts to sell cars in the U.S., offering an average $4,680 worth per car during June, up 62% on the same period last year. Rival Mercedes-Benz offered $4,692 worth of discounts, roughly 35% more than in June 2007. Audi, which offered $4,085 per car in June ramped up its incentives by 50% compared with June last year, figures supplied by Autodata Corp. show.
The incentives are higher than those granted by mass auto makers Ford Motor Co. (F) and General Motors Corp. (GM), which sell cheaper cars. But they're also higher than those of rival premium makers like Lexus, which offered incentives worth $1,557 per car in June while Acura offered $1841 worth in June.
Cheap leasing deals, another tactic for pushing more cars onto the streets, have also hurt BMW's profits. In the second quarter, BMW booked a charge of EUR459 million related to its leasing business, following a EUR236 million charge in the first quarter.
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