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BMW’s Profit Margin Drops to Four-Year Low After Recall

A badge sits beside the brake caliper on the wheel hub of a BMW 8 Series electric concept automobile, manufactured by Bayerische Motoren Werke AG (BMW), during the second media preview day of the IAA Frankfurt Motor Show in Frankfurt, Germany, on Wednesday, Sept. 13, 2017. The 67th IAA opens to the public on Sept. 14 and features must-have vehicles and motoring technology from over 1,000 exhibitors in a space equivalent to 33 soccer fields. Photographer: Simon Dawson/Bloomberg (Simon Dawson/Bloomberg)

(Bloomberg) -- BMW AG’s main measure of profitability fell to the lowest in more than four years in the third quarter as a costly recall and weak demand in China weighed on earnings. 

The company’s auto-making margin before interest and taxes slumped to 2.3%. That’s well below its 2024 target of at least 6% and the lowest since the second quarter of 2020, when the coronavirus pandemic was crushing commerce.

BMW walked back its outlook for the year in September after a faulty braking system, supplied by Continental AG, forced it to recall as many as 1.5 million vehicles. The company has set aside a provision of almost €1 billion ($1.1 billion) to fix the defects and had to temporarily halt deliveries of hundreds of thousands of higher-priced vehicles.

The problems have added to an already difficult time, as faltering demand in China and Europe hit sales and damped margins further. 

BMW shares fell as much as 5.7% in Frankfurt. They’re down more than 30% this year.

In China, BMW’s biggest market, sales plummeted 30% in the three months through September as consumers cut back on luxury spending and local carmakers offered less expensive alternatives. BMW and Mercedes-Benz Group AG have fallen behind BYD Co., which has put a range of fully electric and hybrid vehicles on the market.

BMW expects demand to remain muted in the biggest auto market also in the current quarter, Chief Financial Officer Walter Mertl said on a call with reporters.

What Bloomberg Intelligence says:

BMW’s 3Q significantly missed our low expectations with a 2.3% auto Ebit margin — adjusted to 6% excluding a near €1 billion warranty provision for a faulty Continental IBS brake recall — and implies only about 6% in 4Q, the midpoint of reiterated 6-7% full-year guidance, vs. a 8-10% strategic target. Weakness in China and a higher mix of low-margin battery EVs aren’t likely to improve in 2025.

— Michael Dean, BI automotive analyst

The German manufacturer’s sales declined in every region in the third quarter, though it did have some success with EVs. Deliveries of battery-powered BMWs — such as the i4 sedan and iX1 sport utility vehicle — rose 10% from a year earlier. At Mercedes, wholesale deliveries of passenger EVs plunged 31% in the period. 

Lower sales volumes and higher inventory levels due to the recall resulted in negative free cash flow of €2.48 billion in the third quarter. BMW aims to reduce inventory levels to the previous year’s level in the final three months of the year and confirmed its outlook of reaching annual free cash flow of more than €4 billion. Net profit fell 36% from last year to €6.1 billion.

BMW confirmed its adjusted full-year guidance, expecting a significant decrease in group earnings before taxes and slightly lower vehicle deliveries than in the previous year, with an automaking margin between 6% and 7%.

(Updates with shares in fifth paragraph)

©2024 Bloomberg L.P.