A Bayerische Motoren Werke AG (BMW) 330e electric automobile sits connected to a charging station at the IAA Frankfurt Motor Show in Frankfurt, Germany (Photographer: Martin Leissl/Bloomberg)

BMW Warns Rising Costs for Electric Cars to Hurt Profitability

(Bloomberg) -- BMW AG warned that profitability this year will remain under pressure after the German automaker’s third-quarter operating margin declined on increased spending to develop electric cars and slumping sales in the U.S.

BMW’s return on sales from carmaking fell to 8.5 percent from 9.1 percent a year earlier, the Munich-based manufacturer said on Friday. That compares with a profit margin of 11.4 percent for rival Mercedes, which is winning customers with an updated lineup of models. BMW shares fell as much as 2.2 percent.

“Over the coming years, we will need to make significant upfront investments,” Chief Executive Officer Harald Krueger said on a call with reporters. “This applies not only to sustainable drive trains, but also to digital connectivity, autonomous driving and mobility services.”

BMW, which is set to lose its crown as the world’s best-selling luxury car brand this year to Mercedes, is trying to boost profitability by selling pricier, larger cars in order to finance a push into electric mobility. The automaker was an early mover in that segment, unveiling the standalone all-electric i3 city car in 2013. Its efforts to boost sales are stalling in the U.S. where the carmaker says pricing remains challenging as the auto market is cooling after six years of consecutive gains.

Increasing Costs

Costs will continue to rise in the coming months, in part due to the revamp of the 5-Series sedan that’s due to go on sale early next year. Expenses will have a “dampening” effect on earnings during the fourth quarter, Chief Financial Officer Friedrich Eichiner said on the call.

The shares were down 1.7 percent to 73.97 euros at 12:03 p.m., bringing the drop this year to 24 percent and making them the worst European performer on the Bloomberg World Auto Manufacturers Index.

See also: Quick highlights of key analyst reaction

In the U.S., sales dropped 8.7 percent, the only major region to show a decline in the period, as BMW failed to keep up with Americans’ growing appetite for SUVs. BMW’s struggles there may be intensifying, after October sales for the namesake brand slumped 18 percent, driving down deliveries for the year through the first ten months by 9 percent.

While BMW has responded by boosting production of SUVs such as the X5 at its factory in Spartanburg, South Carolina, the move hasn’t been enough to offset the slump.

Demand Peaking

“The U.S. will be a concern into the next year as demand looks to have peaked,” said Dominic O’Brien, a London-based analyst with Exane BNP Paribas. “Mercedes and Audi are doing better in the U.S. because they’re at a stronger point in their product cycle.”

Deliveries in Europe rose 10.4 percent, as economic growth boosts purchases, while sales in mainland China gained 10.7 percent, with luxury demand catching up after a government crackdown on ostentatious spending.

BMW’s increased spending on new technologies comes as China, the world’s largest auto market, considers quotas for zero- and low-emission vehicles. The country is looking at mandating that at least 8 percent of a carmaker’s sales in the country be either electrics or hybrids by 2018. The proportion would rise to 10 percent in 2019 and 12 percent in 2020.

Those failing to meet the target would either need to buy credits from other automakers, pay penalties or reduce their output to meet the percentage total.

BMW sold 1,796 plug-in hybrid and i3 electric city cars in China in the first nine months of the year -- a tiny fraction of the 379,176 total it delivered in the country during that time.

Record Sales

While BMW is set to sell a record number of cars globally this year, the brand is losing market share to its biggest competitor. Global sales of BMW’s namesake marque rose 6 percent in the year through September to 1.48 million vehicles, growing at only half the rate of Mercedes, according to data published in October.

Earnings before interest and tax at the BMW group rose 1.1 percent in the third quarter to 2.38 billion euros, helped by gains in the financial services business, while profit at the automotive unit fell 3.9 percent to 1.8 billion euros.

Those results come after Mercedes parent Daimler reported a 10 percent rise in third-quarter operating profit and Volkswagen AG’s luxury Audi unit cut its outlook amid rising costs related to the emissions cheating.

BMW reiterated its margin target of 8 percent to 10 percent in 2016, and that sales and pretax profit will show “slight increases” in 2016.

(An earlier version of this story was corrected to show that Spartanburg is a city in South Carolina.)