BMW has long called itself the
ultimate driving machine, but lately it does not seem to be the ultimate
destination for customers in the market for German luxury and performance. In 2016, BMW lost its crown as
the top selling luxury brand around the world to fellow German
rival Mercedes Benz. In 2012, the BMW brand led Mercedes
Benz and global annual sales, but the three-pointed star gained the top spot in
2016 and has held it since. Mercedes has also surpassed BMW in their
home continent of Europe, a major market for both. To be fair, in 2018, the total
sales for the entire BMW group slightly outsold Mercedes Benz cars. BMW Group sold 2,490,664 units
that year, compared with 2,438,987 for Mercedes Benz cars. But still, investors and industry
observers have noticed the edge. Mercedes has gained on BMW. Sales growth at BMW has slowed over
the last five years, and investors worry the brand has
become a bit stagnant. BMW really has become a bit stale
and boring, too much consensus driven, doing more of the same. And I think they need to go
back to really innovate a bit more aggressively. And the design has become, you
know, it's just more of the same. So I think BMW is
a bit of an identity crisis. And ultimately, that's you know, really, if
you sit back, the reason why they're replacing a CEO, because everything
has become a bit lame. BMW appointed a new CEO in August 2019
and has assured investors it is on its way to reinvigorating itself. To understand how a name as storied
as BMW now elicits such opinions from the investment community. It is important to look at its history
and what turned it into such a powerful automaker in
the first place. BMW was founded in 1916 as an
airplane engine manufacturer, also out of the First World War came a
remarkable German effort, the BMW. Now this engine is the first engine that
I know of in all of history that attempted to overcome the effects
of altitude on power. The famous blue and white emblem,
which has changed little since the company's founding, incorporates the blue and
white colors of the Bavarian state flag in a form that is
meant to resemble a rotating airplane propeller. In the years following the
First World War, a state prohibition on the manufacturer of airplane engines
led the company to make railway breaks and inboard engines. BMW announced it would make its
first complete vehicle a motorcycle in 1923. The basic engine design of that
first BMW motor model has remained largely the same ever since
the company acquired an automotive manufacturer in 1928 and produced its first
cars under the BMW name in 1929. The earliest BMW cars were
designs licensed from the Austin Motor Company. But BMW started producing
its own designs in 1932. When World War 2 broke out, BMW
made weapons and other wartime materials, often relying on forced labour from
convicts, prisoners of war and concentration camp prisoners. The company said it is painfully aware
of the suffering it caused at this time and regrets the fate of these forced
workers in the wake of the war. The machines used for armament
manufacturing were destroyed and the company made household appliances. The occupying U.S. military government ordered BMW plants to
be dismantled and a considerable portion of machines were shipped to
other countries as reparations for the war. BMW eventually restarted motorcycle
manufacturer after World War 2, beginning with an improved version of
the original R23 model the company had first designed in
the early 1920s. The motorcycle exceeded sales expectations,
selling 9,144 units in its first year. BMW began making cars
again in the early 1950s. Its first postwar car was the 501,
which was not a sales success. The company's first real hit car came
in 1961 with the compact 1500 sedan. The group established its racing subsidiary
BMW Motorsport in 1972, which would provide direction and inspiration
for BMW s performance oriented cars. The 1500 was something of
a turning point for the brand. BMW soon came out with similar
models a 1600, 1800 and 2000. But it was the 2002 that really made
waves, and it is often credited with being the first model that distinguished BMW
as a purveyor of a new type of vehicle. The German sports sedan BMW
replaced the 02 series with the 3-series in 1975, and since that time,
the small sporty car has been the sports sedan to beat. BMW also eventually began selling cars bearing
the M badge from BMW Motor Sport Division. Cars such as the M3
and M5 were and still are higher performance versions of BMW sedans
that offer ordinary customers the performance needed for the track BMW,
whose sales grew as the company, solidified its reputation for combining
luxury performance with a European pedigree. But over time, buyer tastes begin
to shift, starting with a boom in sport utility vehicles
in the late 1990s. BMW and German rival Mercedes were
both keen to meet the need. BMW introduced its first sport utility
vehicle, the X5, in 1999. Purists cried foul, as they would
with other brands embracing the SUV trend. Perhaps sensitive to this. BMW notably referred to its SUVs
as sport activity vehicles, avoiding the association of its
products with utility. Despite the backlash, selling sport
activity vehicles has boosted the company's top line. They accounted for 37.3 percent of total BMW sales in
2018, an increase over the 33.8 percent in 2017. However, some investors worry that BMW has
strayed a bit too far from its identity as a
German performance brand. I mean, I think that what they're trying
to do is create a drivers car, even if it is a large SUV or a
midsize SUV, and still make it fun to drive for that segment. Obviously at next seven will
not drive like an. That is just not possible in physics. But in terms of cannot drive and be
more fun than some of its competitors. Maybe that's their strategy. But I do think that
certainly waters it down. And I think when people think
of performance, they're not necessarily thinking an SUV. In recent years, BMW sales have not
kept pace as well as Mercedes with growth in the global luxury market. Mercedes has kept up share along with
some of the peers that have stolen share from BMW. And a big reason for that is
Mercedes just simply sells more model variants than BMW does. And if a consumer is moving more
towards premium or luxury versus just driving experience, we think more
customization and more model variety kind of plays into Mercedes' hand. Investors also worry BMW is falling behind
in the race to make profitable electric vehicles a key frontier
in the auto industry. The company had an early lead over
many other car companies with its fully electric i3 city car and
its hybrid i8 sports car. BMW said it will end production of
the i8 after releasing a limited ultimate sophistio addition. The i3 has not been
a resounding sales success either. Its design was unique but polarizing,
with many reviewers remarking on its odd shape and its lack of
consistency with BMW s overall aesthetic. The car also cannot drive as far
on a single charge as other electrics even less expensive ones. Of course, there are elements of
the i3 that are remarkably innovative, such as the carbon fiber chassis. BMW uses to reduce weight and extract more
range from the car on a charge. And despite the fact that
the car is so small. BMW has said it has the same
amount of interior space as the brand's famous three series sedan. Now many automakers are pushing their
own fully electric vehicles out into the market. And BMW has at times
appeared to waver in its commitment to electric vehicles. Critics accused former CEO
Harald Krueger of being a bit too cautious in
investing in electrification. The brands electrification strategy has also changed
tax while the i3 is a fully electric vehicle. BMW now is pushing more aggressively into
plug in hybrids, cars that run on both gasoline and a
rechargeable electric battery and motor. This might be less costly than investing
in fully electric vehicles in the short term. But industry analysts wonder
what will happen when the larger industry switches over to
fully electric cars. The concern we have longer term for
them is that they are approaching electrification with a very
aggressive plug-in hybrid strategy. And the concern there is what
happens if consumers want full battery electric cars quicker than expected. One of BMW key competitors is Audi,
which is owned by the massive German automaker Volkswagen. VW has thrown its full weight
behind battery electrics, betting that it can manage the costs of going all
in on the technology and selling electric cars at the high volumes. Vw is capable of the reason for that. They just have more scale right there
doing the Jaguar with Naut Volt. When you have scale, you can cut out
most of the costs when making it better. A large chunk of it
30 percent is just manufacturing scale. So they're definitely
in an advantage. And you're right. UMW is going to
face more margin dilution your term than VW. At the Frankfurt Auto Show in
2019, VW reportedly said it has already brought down the costs of batteries
to 100 dollars per kilowatt hour. And there are doubts BMW can
achieve battery costs anywhere near that. That said, premium automakers such as BMW
are likely to have an easier time managing the costs of the
tech needed to comply with increasingly stringent emissions regulations, since they
can simply charge higher prices for their vehicles and secure
better margins than many mass market automakers. The real reason for this
is electrified car, especially fully electrified cars cost more to
me than their ICE counterparts. And the real reason for this is the
costs of the batteries so much today. Now, over time, the battery
costs could come down. But as we've seen from the likes
of Tesla, for example, the premium consumer is less price sensitive
and can pay more. We know that the EVs will cost
more than the AC ICE counterparts. So having the premium offering should
help with meeting CO2 requirements and and getting the consumer
demand and consumer willingness to effectively pay more
for these products. BMW current story does
have some bright spots. The brand has a slew of new cars
coming out over the next few years, including a new addition to its electric
I sub brand and new M division models. BMW also has strong brand
recognition, but I don't think the products are necessarily the problem is
competition in the market itself. The fact that, you know, people have
come along like Elon Musk and have just wowed people and got them apart to
be a part of something that is completely different than when
BMW is doing. I mean, BMW, Tesla. It's just not possible. So in terms of refreshing
their image, perhaps it is. It is a marketing, advertising and
image exercise rather than a product exercise, because I don't think
that there's a problem there. Things like the way the vehicles, they
like the way that they drive. It's not that necessarily. It's just it's it's a
tough market out there, though. It has arguably gone from sports sedan
purveyor to a high end family wagon maker. Its cars are still highly
desired among buyers around the world. That includes the largest and perhaps
most important market in the world today, China. The Chinese auto market has been slowing
over the last few quarters, but much of the softness has
been in the mainstream segments. The premium segment where BMW
plays has remained strong. And BMW is still
seeing solid growth there. It is by far. BMW's largest market,
accounting for 30 percent of its global sales in 2018. BMW Group's China sales rose nearly
8 percent to 640,800 three units. That's up from 595,020 units in 2017. In 2018. BMW said it would be
increasing its stake in its Chinese joint venture in 2022. Typically, foreign automakers doing business in
China have to enter into 50/50 partnerships with local firms. By increasing its stake, BMW is increasing
the profits it can pull from its venture. This is also important
because in the coming decade, emerging markets will account for 100
percent of incremental auto sales. 70 percent of that will be in China. Furthermore, BMW China margins are higher
than its non China margins. BMW told CNBC it considers
itself the ultimate driving machine. No matter the model or drive train,
the legendary German brand will likely need to plow those profits back into
its business if it hopes to regain its title of the world's
best selling premium brand.
