BMW Faces Trade, Cost Headwinds of Over $1 Billion in 2019

(Bloomberg) -- BMW AG expects headwinds from U.S. President Donald Trump’s trade war with China as well as higher commodity prices and foreign exchange swings to weigh on earnings next year by at least 1 billion euros ($1.1 billion).

In some of its first comments on expectations for 2019, the Munich-based carmaker laid out an array of hurdles that will drag down profit, while high-margin models will only boost performance toward the end of the year.

“Our strategic profitability target of between 8 percent and 10 percent remains unchanged,” Chief Financial Officer Nicolas Peter said in a speech to investors. “Whether we achieve this in 2019 will depend on many different factors.”

Key Insights

  • The lackluster outlook for 2019 will put further pressure on Chief Executive Officer Harald Krueger to respond, as the company’s record model offensive has yet to show tangible results.
  • The headwinds laid out by BMW show the difficulties weighing on traditional carmakers, which are tasked with investing vast sums on self-driving, electric cars while navigating increasingly volatile markets
  • The effect of U.S. and China tariffs will lead to a charge in the “mid-three-digit-million euro range,” BMW said. That figure would diminish if U.S. President Donald Trump makes good on his tweeted claim that China will “reduce and remove” tariffs on American-made cars.
  • Exchange rates and commodity prices will likely continue their “negative development,” Peter said. These issues are expected to weigh on results in a range of mid- to high-three-digit-million euros next year. Goodwill and warranty issues that hit third-quarter earnings will have an impact in the fourth quarter as well.

Market Reaction

  • BMW dipped briefly on the outlook. But ultimately it didn’t do much to dampen the stock’s gain based on optimism the U.S.-China trade war may be winding down. The shares ended up 4.8 percent in Frankfurt, the steepest jump since August 2015.

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  • Because of tougher environmental regulations, BMW is forced to pack more technology in its cars, Peter said. That increases costs for equipment that customers don’t necessarily pay for.
  • To offset higher expenses and maintain its investment in new technology, BMW is reducing the number of engine variants and looking at other ways to rein in costs.

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