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How BMW Will Offset a Profit Decline in 2019

John Rosevear, The Motley Fool

German automaker BMW AG (NASDAQOTH: BAMXF) (NASDAQOTH: BMWYY) has expanded on the preliminary 2019 guidance it gave earlier this month. It also announced a sweeping cost-reduction program.

If you think those two things might be related, you're not wrong. BMW isn't in trouble, but its near-term outlook isn't exactly rosy.

A blue 2019 BMW 3 Series, a compact luxury sedan, driving on a road with a grassy mountain in the background

BMW said its all-new 3 Series will boost sales later in 2019, but full-year profits will be down. Image source: BMW AG.

BMW's guidance for 2019: Profits will drop

In a preview of its full-year guidance, BMW told investors on March 15 that it expects a slight increase in its automotive sales volume in 2019 versus 2018, despite "strong headwinds" affecting the auto industry. It also said that it expects much of that sales increase to arrive in the second half of the year, when its all-new 3 Series will be in full production. 

At the automaker's annual meeting last week, we learned the rest of the story:

  • BMW is investing heavily in electric vehicles, self-driving, and shared-mobility initiatives. While it's working with some big-name partners -- including archrival Daimler AG, Mercedes-Benz's parent -- to share costs, its own spending on those initiatives will be substantial. 
  • BMW, like rivals including Ford Motor, is also seeing rising commodity costs and unfavorable exchange-rate movements. And, in Europe, it's facing "significantly higher costs" as it works to comply with stricter carbon-dioxide emissions regulations.
  • BMW's long-term target for the operating margin in its automotive segment is between 8% and 10%. But because of the above factors, it's forecasting a margin between 6% and 8% for its automotive business in 2019. (BMW's automotive operating margin was 7.2% in 2018, down from 9.2% in 2017. The company expects the operating margins in its motorcycle and financial-services units to be similar to 2018's results.) 

The upshot is that BMW expects its overall pre-tax profit to be "well below" the 9.82 billion euros ($11 billion) it generated in 2018. 

Cost cuts to ease the pressure of tech spending

With that forecast in mind, CFO Nicholas Peter said that BMW will step up a cost-cutting program it began in 2017, examining "structural issues across the BMW Group" in search of greater efficiency. 

What does that mean? Peter gave some highlights:

  • BMW is reducing the number of product variants in its portfolio, as well as model variants it has offered in specific countries (but not globally). It's eliminating slow-selling and low-profit models, and simplifying drivetrain options -- in some cases, cutting its total offerings by half. The goal is to reduce manufacturing costs by reducing complexity, while getting somewhat more flexibility to meet market demands. 
  • The automaker has reduced the time it takes to develop new models by about a third. This not only reduces development costs, it -- again -- helps BMW address new opportunities more quickly. 
  • The company is streamlining its corporate organization to make better use of shared resources. An example: Starting in April, sales teams for BMW's three automotive brands (BMW, Mini, and Rolls-Royce) will be combined into a single sales division. 

The upshot? BMW expects total cost savings of over 12 billion euros ($13.5 billion) by the end of 2022. That won't help much in 2019, but it should help boost profits and margins once some of that future tech makes it out of the labs and into BMW's products.

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John Rosevear has no position in any of the stocks mentioned. The Motley Fool recommends BMW and F. The Motley Fool has a disclosure policy.