Due To Declining Demand In China, BMW Intends To Further Cut Costs

BMW has lowered its profitability forecast for this year and announced further cost cuts, warning that deteriorating demand in China is seriously affecting the carmaker’s business results. 

The German automaker now expects a profit margin in its automotive business of between one and three percent, down from a previous estimate of six percent. The company cited the deepening crisis in the Chinese market and the negative impact of the war in the Middle East on consumer sentiment as the main reasons, Bloomberg reports.

BMW said it would extend its cost-cutting programme through 2026, which will cause one-off negative effects in the second half of this year. It was not specified whether the plan includes job cuts.

The downgraded forecast comes just a month after Milan Nedeljković took over as CEO, succeeding Oliver Zips in May. Nedeljković was previously in charge of production and is now leading the implementation of BMW’s new generation of electric vehicles, dubbed the “Neue Klasse”, which cost billions of euros to develop.

But weakening demand in China, the company’s biggest market, is putting the expected benefits of its big electrification investments in question. Jefferies analyst Philippe Houchois said a profit warning was to be expected, but not a “reset of profit margins of this magnitude”. He said BMW could rethink its global production model, which still relies heavily on exports of combustion-engine vehicles from Germany.

BMW shares, which are traded in the US in the form of American depositary receipts (ADRs), fell as much as 6.9 percent, while shares of other European manufacturers, including Mercedes-Benz Group, Volkswagen AG, Porsche AG and Renault, also weakened.

JPMorgan Chase analyst Jose Asumendi said the “radical reduction in expected earnings” was a warning for the entire automotive industry, noting that all European premium manufacturers have currently lost competitiveness in the compact vehicle segment in the Chinese market.

BMW plans to start sales of its new-generation “Neue Klasse” iX3 electric SUV in China in November. However, the company warns that the Chinese market deteriorated further in the second quarter, intensifying competition across the Asia-Pacific region and suppressing positive trends in Europe and the US.

The company now expects a significant drop in profit and free cash flow in the second quarter, as well as a slight decline in vehicle deliveries this year, despite previously forecasting stable sales. Despite this, BMW said it would continue with its planned dividend payment and share buyback programme.

• Also See: BMW’s iX3 Just Needed Two Months To Reach 10,000 Sales In Europe