BMW’s Pricey China Ride Can Handle a Bumpy Road
(Bloomberg Opinion) -- BMW AG is driving into China at full speed on a bumpy road. Fret not, it will steer through.
Just as a luxury crackdown takes hold and the auto market slows, the German carmaker has agreed to spend $4.1 billion to increase its stake in a venture with Brilliance China Automotive Holdings Ltd. to a controlling 75 percent. The purchase of an additional 25 percent extends its foothold in the world’s largest car market until 2040. The deal will close only in 2022, when new foreign ownership rules kick in.
Despite widespread jitters, luxury car sales are doing reasonably well in China. While mass-market sales have fallen sharply, BMW Brilliance and Beijing Benz have managed to push up the average industry-wide pretax margin to 10 percent. Exclude those two and margins fell to 8.7 percent in the first half. In the first three weeks of September, sales of beemers jumped 22 percent.
For BMW, the China hedge will be crucial amid an increasingly difficult global environment. The group issued its first profit warning in a decade late last month. It now expects full-year Ebit margins to be close to 7 percent, from the previous 8 percent to 10 percent. The profit warning didn’t mention China, where BMW sold more than 400,000 units, or a quarter of its global total, in the year through August. It was the company’s fastest-growing market, with a 16 percent increase in retail sales.
BMW so far has gotten the China market right, resisting the herd’s plunge into mass-producing SUVs. Luxury sedans accounted for 72 percent of its sales volume last year, against 24 percent for SUVs. Localizing more production means U.S.-China trade tensions won’t grate. Under the agreement, BMW could now make the popular X5 model at its Chinese plants.
Sure, it will have to contend with the fluctuating impact of import tariffs on consumers’ purchasing decisions. But luxury cars are unlikely to lose their appeal in China. The sheer cost of license plates in upper-tier cities and the replacement cycle for cars should ensure they maintain their hold.
BMW is paying the price for its foothold. The $4.1 billion tag values Brilliance China at $16.4 billion, more than double the Chinese carmaker’s $6.9 billion market value as of Wednesday’s close in Hong Kong and an almost 20 percent premium above the joint-venture's value (back of the envelope). An additional 25 percent would be worth $1.7 billion at the current price (the shares were suspended from trading Thursday).
BMW is navigating tough terrain that’s already claimed many casualties, at a time when Chinese car sales are slowing. But its lock on a relatively inelastic segment of demand should give it plenty of grip.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.
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