BMW plans to cut more costs after China slump hits outlook

[MUNICH] BMW slashed its profitability forecast for the year and ramped up its cost-cutting programme, as the German automaker warned of worsening demand in China.

The manufacturer now expects carmaking returns of 1 to 3 per cent, from as high as 6 per cent previously, it said late on Tuesday (Jun 16).

BMW cited a deepening slump in China and negative sentiment from the war in the Middle East.

The company will expand its 2026 cost-cutting programme, leading to a one-time negative impact in the second half of this year, it said.

The automaker did not specify whether the plans include job cuts.

The lower forecast comes just one month into the tenure of CEO Milan Nedeljkovic, who took over in May from Oliver Zipse.

The former head of production is tasked with overseeing the build-out of BMW’s updated electric line-up, dubbed Neue Klasse, that cost billions of euros to develop.

The payoff for that could be complicated by weakening demand in China, its biggest market.

BMW had so far been on more solid footing than its peers in the face of the difficult transition to electric cars.

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Unlike Mercedes-Benz or Volkswagen, the Munich-based company stuck with a more flexible plan to make a range of powertrains well into the future, setting it up to better withstand disappointing electric-vehicle demand and policy reversals in the US. 

Recent weakness in China had fostered expectations of a profit warning, said Philippe Houchois at Jefferies. 

“But not a margin reset of such magnitude,” he added.

“It seems to us that BMW could be rethinking a global assembly business model still largely based on exporting” cars with internal combustion powertrains from Germany, he noted.

BMW’s American Depository Receipts (ADRs) declined as much as 6.9 per cent in New York while the ADRs for Mercedes, VW, Porsche and Renault also fell. 

Wake-up call

The company’s “radical earnings cut” is a “wake-up call” for the car industry, JPMorgan Chase analyst Jose Asumendi said, with all European premium automakers currently priced out of the compact vehicle segment in China.

BMW is planning to start sales of its iX3 Neue Klasse SUV in China in November. 

While China demand is declining, carmakers are also battling sluggish sales in Europe, where VW, Mercedes and Stellantis have already taken steps to cut production.

BMW is expected to downsize its production footprint globally, but with a particular focus in Europe, said Asumendi.

The company had already cut spending earlier this year in areas ranging from research and development to investments. The newer measures are designed to adapt to a “drastic downturn in market conditions”, Nedeljkovic said.

The Chinese car market has further deteriorated in the second quarter, causing competition to become more intense throughout the Asia-Pacific region, the company said. That is overshadowing growth in Europe and the US, it added.

The impact of the Middle East conflict is proving more damaging than BMW previously expected, both from higher energy prices and the deterioration in consumer sentiment around the world, it said.

BMW now expects a significant decline in profit and free cash flow in the second quarter.

The automaker also expects deliveries to drop slightly this year, having previously anticipated flat sales. The dividend payout ratio and share buyback programme will continue as planned.

The company plans to publish its quarterly results on Jul 30. BLOOMBERG