BMW: A Wake-Up Call for the Auto Industry

Research evidence excerpt

BMW: A Wake-Up Call for the Auto Industry

er structure, but also in partnership with other Chinese partners

Style Exposure

(please see our latest note on the JPM China summit).

Despite the radical earnings cut, BMW is executing very well as illustrated by Mr.

Mertl with regards to the IX3 orders hitting now ~100k units and we truly believe

in the flexibility of the industrial footprint as described by Milan Nedeljkovic, CEO

of BMW, during the call. This will ensure that BMW continues to generate free

cash flow, allowing the firm to react from a point of cash strength (not necessarily

Ebit margin) in order to invest in future products. With all this in mind, BMW in

our view will take one-time charges to downsize the production footprint globally

but with a particular focus in Europe. The UK market is a unique example of

globalization in Europe as the market does not have any import tariffs for Chinese

OEMs. We estimate BMW will lose ~1% of its market share in the UK this year

and we are already seeing similar early signs across countries such as Spain where

Chinese OEMs are particularly successful.

This effectively means that in our view BMW will announce at the October CMD

measures to cut 10-15% capacity in Europe – depending on the market evolution,

market share developments, overall pricing environment and tariff regime. All of

this will ensure that BMW can continue to generate a low but healthy free cash

generation in an unusually declining capex cycle. But we ask ourselves, a) should

BMW not use its current cash flow strength to accelerate the product offensive in

the compact premium segment in China? b) is it reasonable to assume that the

compact premium segment could halve in size over the next two years as Chinese