BMW’s Cycle Could Help It Gain on Mercedes
German luxury car makers have introduced more updates in between major launches to reduce earnings volatility.
For years, manufacturers have been tweaking the way they manage product cycles to smooth out the peaks and troughs around the launches of their most popular cars. BMW, Audi and Mercedes-Benz have introduced more spin offs and updates in between major launches to reduce earnings volatility.
Audi, for example, followed its successful launch of the Q5 crossover SUV with the compact Q3 and the more spacious Q7. It plans to add a subcompact Q1 and an ultra-luxurious Q8 as well as relaunching the Q5. Research and development outsourcing and shared manufacturing platforms have helped to control costs, allowing premium auto makers to maintain operating margins of about 9%.
Despite these efforts, product cycles can still affect earnings, as the contrasting fortunes of Mercedes and BMW show.
Mercedes is considered to be at the peak of its product cycle: it is benefiting from recent launches of several higher-margin cars including its popular C-Class sedans. Its parent company, Daimler, reported a 15% sales increase in the first quarter.
In contrast, BMW is suffering owing to its relatively older lineup of more profitable models. Quarterly unit sales of its 5-Series, which accounted for 20% of total cars sold, dropped 3% year on year. Other popular models such as the X1 and the 7-Series fared even worse, with each declining by about 30%. And while defended its position as the world’s top premium car brand in the first three months of the year, sales growth for the brand was 5.4% compared with an 18% jump at Mercedes in the same period.
Nowhere are these weaknesses more apparent for BMW than in China, its largest market by sales.
The market is broadly slowing, and BMW’s performance there trails rivals. Its unit sales increased by a muted 6.5% in the first quarter, and growth for the year is expected to be half that of Mercedes, IHS says.
As products age, car makers need to reduce inventory and sell fewer cars, or discount more heavily. Capital expenditure also rises as manufacturers develop newer models. But BMW’s predicament should begin to turn around next year after a new version of the X1 is released, followed by the new generations of 7-Series and then 5-Series.
Of course, produce cycle is just one element fueling sales. But it is one that can make it easy to buy at the top of the cycle, rather than at its nadir.
Daimler’s stock has outperformed BMW in the past year, climbing 30% against its rival’s 18%. Both are trading at about 11 times forward earnings. Yet Mercedes is in the sweet spot of its product cycle, while BMW’s is yet to kick in. When it does, that should help the latter accelerate.