BMW Confirms 2006 Sales, Earnings Targets

BMW On Track for New Record

Germany's BMW has confirmed its sales and earnings targets for this year saying it is on track to record performance on the market place and will increase its pre-tax profits by around 21% on the previous year to 4 billion euro (US$5.09 billion) in 2006. "We're fully on track for a new sales record, and we're also well on our way on the financial side to reach the targeted 4 billion euro pre-tax profit in 2006", BMW chief executive Helmut Panke told reporters at an event in BMW's home town Munich on Wednesday night (12 July), as quoted by Dow Jones.

The comments follow BMW's recently released sales results for the first half of this year. BMW's sales in the six-month period ending 30 June increased by 8% on the previous year to 698,470 units, with the strong performance of the company's core BMW brand leading the positive developments, especially in China. Strong Chinese demand means that output at BMW's local production site will reach its maximum capacity of 30,000 units per annum (upa) this year or next, leading to rumours that a new joint venture (JV) could be set up. Speaking in Munich last night, Panke denied the existence of such plans. Instead, he shifted attention towards the company's plans in India by saying that sales there would "maybe rise to 5,000 in three years, or 10,000 - if you give it another three to five years" after BMW sets up its own sales organisation in India at the end of this year.

Elsewhere, the U.S. market remains firmly in BMW's sights. Although Panke declined to comment in more detail about plans to create a new model for the U.S. market, he was quoted by Dow Jones as saying that capacity at the company's Spartanburg plant in South Carolina could be increased in the next five years or "as soon as BMW decides to produce another model there". Currently, the plant has production capacity of 150,000-160,000 units. "It has to be the right product for the U.S. market," Panke said, thus adding fuel to rumours that BMW's X5 is likely to be joined by a new crossover on the same platform in 2008.

New Euro Bond Due

In separate news, it has been reported that BMW will return to the debt capital markets later today by issuing a euro-nominated benchmark bond. Citing sources familiar with the deal, Reuters reported that the 750 million euro bond will mature in January 2012 and be priced to yield 19 basis points over mid-swaps, with investment banks BNP Paribas, Dresdner Kleinwort, JP Morgan and Royal Bank of Scotland managing the sale.

Outlook and Implications

Although BMW remains a bright star in the automotive world with its 7% profit margin, the company has failed to translate robust revenue growth directly into earnings due to currency fluctuations and rising raw material prices. BMW's 2005 net profit decreased marginally, by 0.1% on the high level seen in 2004, to 2,239 million euro due to such pressures. BMW has tackled the issue by localising production in key markets such as China and the United States while cooperating with other manufacturers in areas such as hybrid development with General Motors (GM) and DaimlerChrysler (DCX), but has so far refrained from forming major alliances in its search for further efficiency.

Playing down suggestions that BMW might join the proposed GM-Renault-Nissan alliance, Panke yesterday said that BMW would continue to focus on maintaining its independence in the long term. Whilst acknowledging that cooperation with other manufacturers would continue "where it makes sense", Panke highlighted the importance of retaining the company's core asset, its strong brand identity. "We always have to keep our own profile as a brand", he was quoted as saying. So far, the strategy has served BMW well. The BMW brand has proven flexible enough to carry out a diversification of the German premium manufacturer's product line-up to cover compacts and sports-utility vehicles (SUVs) along with its traditional sedans.

Last year, BMW sold over 1.2 million cars, granting it the pole position ahead of compatriot Mercedes Car Group as the leading premium manufacturer in the world. Looking further ahead, BMW wants to increase its global sales to 1.4 million units next year and to 1.6 million units by 2010. Efforts in the large emerging markets of China and India will support longer-term strategic goals, but success in the U.S. market remains a key contributor to the ambitious targets, placing stronger importance on BMW's product development efforts to design a winning luxury crossover, known as the X6 in media reports. Panke's comments indicate that BMW's financial performance is firmly on track this year. Looking ahead, BMW's margins could be pressured by its ambitious growth targets that will require significant investments, leading to its reported drive to tap into the debt markets.