In the past nine months, BMW Group has encountered significant challengesIt has faced intense pricing pressures in the automotive market, impacting profit margins and leading to a notable decline in sales, especially in ChinaThe company's decision to withdraw from an aggressive price war in the latter half of the year resulted in a significant drop in sales volume, compelling them to revise their global performance forecasts downward.

On September 6th, BMW made headlines with its announcement of a massive global recall affecting approximately 1.53 million vehicles due to issues with the Integrated Braking System (IBS). Subsequently, the company also announced a decrease in their earnings outlook for the year

The trend of disappointing performance continued when, in October, BMW was forced to shut down its first global 5S store due to operational inefficienciesNovember 6th marked the release of the group's Q3 financial reports, detailing the extent of the company's struggles.

The financial report revealed a staggering 15.7% drop in revenue for the quarter, totaling €32.406 billion (approximately ¥249.3 billion). This figure fell short of analysts’ expectations of €34.3 billion (approximately ¥263.8 billion). The earnings before interest and taxes (EBIT) came in at €1.696 billion (around ¥13 billion), a hefty 61% decrease year-over-yearWithin the automotive sector, EBIT plummeted from €3.135 billion (about ¥24.1 billion) in Q3 2023 to just €634 million (around ¥4.9 billion), marking a dramatic 79.8% decline.

The downturn in performance was primarily a result of weak sales figures and the significant impact of the vehicle recalls

• US November CPI Seals the Deal on December Rate Cut
• ETFs Leading the Tech Charge
• Nikkei 225 ETFs See Wild Swings
• Leading the Way in New Energy Vehicle Production
• Evergrande's Losses Exceed 800 Billion: Debt Restructuring Crucial

In response, BMW is working diligently to halt the negative trend, emphasizing that "increasing delivery volumes and a stronger product mix will support our income." According to BMW's Chief Financial Officer, Walter Mertl, strict management practices are still expected to allow the company to meet its free cash flow targets in 2024.

Acknowledging Sales Pressures Amid Progress in Electrification

Breaking down the EBIT for the automotive segment in Q3 reveals that nearly 80% of the drop was due to strained revenues, high repair costs, and increased research and development (R&D) investmentsThe reported revenue of €32.406 billion represents a 15.7% reduction in comparison to the previous year, largely driven by a 13.2% decline in automotive revenue to €27.854 billion.

During this quarter, approximately 540,000 vehicles were delivered, signifying a 13% year-over-year decline

Deliveries for the main brands—BMW, MINI, and Rolls-Royce—also reflected this downturn, with decreases of 11.4%, 25.2%, and 16.2%, respectively.

Sales in various global regions showed declines, with the largest drop occurring in China, where volumes dropped from approximately 210,700 vehicles last year to just 147,800, accounting for a staggering 30% decreaseContrastingly, sales across Europe displayed moderate growth with total deliveries reaching 680,000, up by 1.4% year-over-year.

The challenges faced in China are mirrored by others in the industry, with BMW CEO Oliver Zipse acknowledging the ongoing difficulties in the Chinese market, stating, "The situation in China remains challenging, applicable to all market participants." Soon after, it was revealed that other German counterparts, including Mercedes-Benz, Audi, and Volkswagen, are experiencing similar pain points, indicating a collective struggle within the German automotive sector, with decreases in sales of 13%, 8.5%, and 15% respectively

Consequently, this has led to softening performance metrics overall, with Mercedes-Benz's EBIT seeing a 48% drop, Audi's plummeting by 91%, and Volkswagen's EBIT declining by 20.5%.

Despite the overall downward trend, BMW's progress in electric vehicle (EV) transitions is beginning to bear fruitIn Q3 2024, the organization delivered 103,400 pure electric vehicle models (BEVs), marking a 10.1% increase year-over-year; while for the period of January to September, total BEV deliveries approached 300,000, with an impressive 19.1% growthThis aligns with BMW Group Chairman Zipse's ambition of having 50% of sales comprised of pure electric models by 2030, as BEV deliveries accounted for 16.8% of total deliveries during the first nine months of 2024.

Major Recalls Weighing on Performance, Yet R&D Investment Remains Strong

The substantial drop in profits during Q3 is closely tied to the IBS brake system incident that emerged early in 2024. This significant safety concern over the brake system designed and supplied by the supplier, Continental AG, prompted BMW to swiftly initiate an extensive inspection process, leading to the highly publicized recall announcement in September.

Reports indicate that approximately 1.53 million vehicles across five countries are estimated to be affected, with roughly 370,000 in China, 270,000 in the U.S., 150,000 in Germany, 70,000 in South Korea, and 60,000 in France

The models primarily impacted include selected BMW X series (excluding the X3 and X4), the 5 Series, 7 Series, Rolls-Royce Ghost, and MINI Cooper and Countryman.

These affected vehicles represent roughly 60% of BMW Group's total global delivery volume of 2.55 million in 2023. In response, BMW indicated that out of the 1.53 million vehicles impacted, they would remotely inspect and provide repair services for 1.2 million that had already been delivered, pausing deliveries of 320,000 units pending internal resolution of the technical issues.

However, the current technical issues extend beyond the recalls themselves, causing overall operational disruptions within the company"The IBS incident impacted our sales and revenue and increased stock levels," stated Walter Mertl, which was echoed in the financial data that confirmed millions in warranty provisions for the quarter.

The financial reports show that by the end of Q3 2024, the anticipated long-term liabilities related to the automotive segment saw a substantial increase from €8.55 billion at the end of 2023 to €8.98 billion, reflecting anticipated future warranty risks

Additionally, while operational costs in the automotive segment decreased by 6% compared to the same period in 2023, this was contrasted by a 13% decline in revenue, indicating that the recall incident has increased cost burdens, compressing profit margins.

Despite the short-term turbulence, BMW remains focused on its long-term strategic objectivesOliver Zipse remarked that BMW is dedicated to achieving short-term results without compromising on the organization’s long-term strategic vision.

In terms of R&D expenditure, BMW Group's financial data revealed that R&D spending reached €6.642 billion for the first three quarters of 2024, a 27% increase from €5.223 billion in the same timeframe in 2023. This funding primarily aims to advance the digitalization and electrification of the Cross series models as well as the developmental work on the new NEUE KLASSE series

For BMW, establishing a flagship model capable of providing profit margins and boosting sales remains central to their long-term strategy.

According to an executive at BMW Group, the first three quarters of 2024 have seen a double-digit surge in the sales of pure electric vehiclesDuring this period, the organization delivered 294,100 pure electric vehicles—up by 19.1% year-over-year, with deliveries for the BMW-branded electric vehicles alone reaching 266,200, marking a 22.6% increase.

Looking ahead, BMW showcased two new generation concept cars at the Paris Auto Show in October 2024, which are slated to enter global production in 2025, while the first model from this new generation is expected to roll out from its plant in Shenyang in 2026. BMW remains steadfast in its efforts to reclaim a dominant position in the automotive market.