IHS Global Insight Perspective | |
Significance | BMW has said that its 2009 sales volumes could collapse by up to 20% as a result of the global financial crisis, while it also revealed that management will have their bonuses cut by 40% and that workers have also been told to expect pay cuts. |
Implications | Despite being the world's largest manufacturer of premium passenger cars, BMW has struggled to translate this into strong profitability even during the boom times. It is now introducing tough measures in an attempt to meet long-standing long-term profitability targets and ensure its continued independence. |
Outlook | BMW remains in a strong overall position in terms of its vehicle technology and model line-up and stature in the market. However, the unprecedented nature of the current slump will require it to take some drastic steps in order to cut costs and boost margins. |
At the press conference to announce the company's 2008 annual report, BMW's management announced that sales could fall by as much as 20% in 2009. BMW CEO Norbert Reithofer said, "2009 will be a transitional year for which we cannot yet make any reliable forecasts. Nevertheless, our long-term profitability targets for 2012 remain intact. We want to preserve the independence of the BMW Group." The latter point is key to BMW's stated intention to focus on liquidity, cash flow, and working capital, and to keep down fixed costs and investments. The company must drastically increase its levels of profitability in order to continue generating the kind of income required to maintain its independence and technological advantage. Reithofer added, "Liquidity and free cash flow are top priorities in such economic times", pointing to the 8.1-billion-euro (US$) net liquidity of the group at the end of 2008.
As a result, BMW is taking aggressive action to lower salary and bonus costs. The decline in the company's sales volumes in 2008 of 4.3% to 1.44 million units will directly affect BMW's board members, who receive more than 70% of their pay in the form of an annual performance-related bonus. They will see a 40% cut in their bonuses paid early this year, while senior executive management will lose 30% of their bonuses. BMW's workers have also been told to expect a 10% fall in their salaries. Speaking about these cuts, Reithofer said yesterday: "A profit-sharing programme for our board members, executives and all employees is an important element of our compensation system. We apply this system in good times as well as in challenging times. I am convinced that our employees understand the difficulty of the current situation and are willing to accept this hardship."
Salary cuts and workforce reductions are expected to save 500 million euro a year. Shareholders are also bearing the brunt, with the company's dividend being cut from 1.06 euro to 0.30 euro. BMW is also developing the next generation of its vehicles to have in-built higher margins, beginning with the next-generation BMW 5-Series, which is due to go on sale in 2010. In an additional strategy to cut costs and increase profitability, Reithofer also announced that the company will expand a joint component purchasing and procurement programme with Mercedes-Benz that has already begun to be implemented. According to BMW's purchasing and procurement chief, Herbert Diess, the existing collaboration with Mercedes-Benz has already netted savings of as much as 15% on its components purchasing programme. BMW is also cutting output by 40,000 units over the next two months, bringing this year's total production cuts to around 78,000 units (see Germany: 18 March 2009: BMW to Extend Short-Time Working at Two German Plants).
Outlook and Implications
These measures follow on from the company's 2008 financial results released last week (see Germany: 13 March 2009: BMW's 2008 Results Show 89.5% Fall in Net Profit, 2.423 bil. Euro in One-Off Expenses), which showed that it suffered a 90% fall in net profit to 330 million euro, while it also experienced a significant financial hit in the fourth quarter with a 962-million-euro loss. BMW is hoping that by aggressively lowering its cost base it will be able to hit the ambitious profitability targets that were part of the Number ONE strategy announced by Reithofer in 2007. These include a return on sales profit of 8-10% by 2012, which seems a highly ambitious target as things stand at the moment. Although it may be a valid business strategy to pursue higher margins on its next generation of vehicles, it must be careful that it does not sacrifice quality and its image as a technology leader. BMW already announced last week that the next-generation 5-Series will have an all-steel body construction in contrast to the current (E60) car's part-aluminium construction, which appears a retrograde step in terms of maintaining BMW's image as a technology leader (see Germany: 11 March 2009: Next BMW 5-Series to Have All-Steel Construction—Report).
Given some of the less-than-positive data suggested by the company's own revised sales projections, increasing profitability will be a difficult task. BMW is expected to miss its 2012 sales target of 1.8 million units by more than 100,000 units, according to Reithofer, while Ian Robertson, BMW's board member for sales and marketing, told the Financial Times that it is also "highly unlikely" that BMW will reach its 1.6-million sales target for 2010. As a result, it is likely that BMW will look to firm up a more comprehensive research and development (R&D) alliance with another manufacturer in order to improve efficiencies and economies of scale. A shrinking sales environment will increase the costs incurred by BMW by continuing to develop its own bespoke platforms and powertrains. At the press conference Reithofer himself said that more "major cooperation" with competitors is possible as a way of scaling back costs. However, this is unlikely to come from the discussions that the company has been holding with Fiat over the possibility of the next-generation Mini sharing a platform with a small Alfa Romeo, as this idea has now been shelved (see Germany - Italy: 11 March 2009: BMW and Alfa Romeo Abandon Plans for Shared Mini/MiTo Platform).