BMW Flashes Its Warning Lights
German car maker said orders are weakening and cut its outlook for cash flows due to weak production and higher electric-vehicle investments
By Stephen Wilmot
BMW said order intake was lower than a year ago./ PHOTO: GETTY IMAGES/GETTY IMAGESMost car makers have stuck with their existing travel schedules this earnings season, reassuring investors worried about weakening demand.
Not BMW BMW -5.56%▼.
Bayerische Motoren Werke, as the Munich-based company is formally known, broke its habit of not surprising the market Wednesday by downgrading its outlook for full-year free cash flows to “at least €10 billion,” equivalent to $10.2 billion, from a previous estimate of at least €12 billion.
It blamed two factors: weak production due to the continuing shortage of semiconductors and higher spending on electric vehicles.
Perhaps more worryingly, the company also said order intake was lower than a year ago and that its order book would normalize toward the end of the year, particularly in Europe.
This would appear to confirm concerns about the darkening outlook for consumer demand.
The stock fell about 6% in morning trading, an unusual move for a company that typically reports numbers after its peers and likes to present itself as boringly reliable.
“What BMW is saying is what investors are thinking about the whole sector, but it has still been punished for being the one to say it,” said Charles Coldicott, an analyst at brokerage Redburn.
Most other car makers have either stuck to their previous full-year guidance or raised expectations.
BMW’s most direct competitor, Mercedes-Benz, last week increased its margin outlook and said it continued to see demand as exceeding supply.
Perhaps BMW is simply being more cautious in interpreting the data than others. Investors will look for more clarity over the coming months.
BMW’s results are highly skewed this year by its taking control of its Chinese joint venture BMW Brilliance Automotive (BBA) in February through the purchase of an additional 25% stake.
If the reduced €10 billion target for annual free cash flow still seems high for a company valued by the market at about €51 billion, it is because BMW is consolidating BBA’s cash balances for the first time.
BBA had about €8.7 billion of cash at the end of the first quarter which, net of the €3.7 billion BMW paid for the quarter stake, led to cash inflows of €5 billion.
BMW agreed to increase its shareholding in BBA in 2018, soon after the Chinese government ditched its rule requiring auto makers to operate through 50:50 JVs amid pressure from the Trump administration over trade.
In many ways it is a strategic advantage for BMW to have more control over its key production asset in the world’s largest car market, but the latest tensions over Taiwan offer a reminder that investing in China comes with a large dose of geopolitical risk.
Stellantis Chief Executive Carlos Tavares said last week that being “asset-light” in China was the right strategy.
He was talking his own book, having just pulled out of a JV to manufacture Jeeps in China due to a breakdown in trust.
But Renault’s huge Russian write-downs are an ominous precedent, and no other car manufacturer has followed BMW’s lead to double down on its Chinese JV.
In simple shareholding terms, only Tesla is more exposed with full ownership of its Shanghai plant, though so far this has only been a benefit.
For now, investors remain laser-focused on the risks of an economic slowdown for car makers.
When tensions between the West and China are again front and center, though, BMW will also face more questions than most.
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