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China’s Spending Slump Is Crushing Global Carmaker Profits

The wheel hub of a BMW M4 luxury automobile in the BMW Welt automobile showroom, operated by Bayerische Motoren Werke AG, in Munich, Germany, on Wednesday, Nov. 4, 2020. BMW ended an upbeat quarter for European automakers by warning that the rapidly resurging coronavirus pandemic could wreck a sales recovery driven by strong demand in China. Photographer: Andreas Gebert/Bloomberg (Andreas Gebert/Bloomberg)

(Bloomberg) -- BMW AG and Volkswagen AG capped a painful earnings period for global automakers that are contending with waning electric-car sales and weak demand in China.

Both manufacturers on Thursday reported declining second-quarter earnings after their sales fell in the world’s biggest auto market, where a deepening home sales crisis is weighing on spending.

The China slowdown — which adds to persistent inflation and poor EV sales in Europe — is complicating strategies for automakers. They’ve raised spending to retool their factories and develop new electric models, but the shift risks derailing because sales growth is slowing. Mercedes-Benz Group AG trimmed the upper range of its annual margin forecast last week, with results at Stellantis, Nissan and Ford also missing expectations.

The slump in China is affecting demand across cars, watches and designer clothing. While executives may hope for a short-term blip, it’s not clear how soon things will turn around. The country is dealing with multiple problems, from the property crisis to rising trade tensions over EV subsidies. Western carmakers are also struggling to keep pace with more agile homegrown manufacturers led by BYD Co.

Toyota Motor Corp.’s poor first-half showing in China — where its sales fell 11% — canceled out a resurgence of hybrids in North America. Daimler Truck Holding AG cut its annual outlook on Thursday due to softening sales in Europe and China.

BMW flagged “heightened competition and weaker consumer sentiment,” in China, adding that it expects the country’s economy to stabilize in the current quarter. Chief Executive Officer Oliver Zipse said he’s confident that new Mini models will bolster sales there in the coming months.

BMW shares fell as much as 5.2% in Frankfurt, the steepest intraday drop since May 16. The company reported second-quarter automaking profitability that missed analyst expectations and flagged higher costs for personnel as well as research and development.

VW’s stock declined as much as 2.5% as restructuring charges weighed on its mass-market brands, hurting margins. Chief Financial Officer Arno Antlitz said more cost cuts will be needed in the second half of the year to reach annual goals.

The companies’ shares are down 18% and 10% this year, respectively. 

In China, BMW is increasing prices across its lineup and reducing sales targets for dealers in the country to escape a bruising price war. Volkswagen is turning to local partners including Xpeng Inc. and preparing a new EV brand in China to turn the tide.

Unlike most other automakers, BMW did have success selling EVs. Its global deliveries of battery-powered models such as the i4 and iX1 surged by more than a fifth in the second quarter, beating rivals Mercedes-Benz and Audi. The company cited its attractive product portfolio for the rise in a challenging market.

The luxury-car maker is betting on fresh momentum from its Neue Klasse generation of EVs, with sales slated to begin in late 2025. In the first half of this year, the company’s research and development spending — including on the new platform — jumped to €4.2 billion.

With Neue Klasse, BMW aims to slash battery costs in half from current levels and increase driving ranges by around 30%. The vehicles will allow for bi-directional charging, which enables buyers to use them as a backup battery at home.

The new EVs “will raise BMW to a completely new technological level,” Zipse said in a statement.

(Updates with details on China slump in fourth paragraph.)

©2024 Bloomberg L.P.