BMW's 2008 Results Show 89.5% Fall in Net Profit, 2.423 bil. Euro in One-Off Expenses

The BMW Group has posted a disappointing set of financial figures for 2008 that reflects the harsh economic environment currently affecting premium vehicle manufactures and all original equipment manufacturers (OEMs). In a press statement BMW said that its net profit declined by 89.5% year-on-year (y/y) to 330 million euro (US$) during the year. The company also reported a fall in annual revenue of 5% y/y to 53.197 billion euro, down from the 2007 figure of 56.018 billion euro. At the same time profit before tax also fell by a significant 90.9% y/y to 351 million euro, down from 3.873 billion euro the previous year. Operating profit also sank by 28.4% y/y to 4,471 billion euro, a significant decline on the previous year's figure of 6.246 billion euro. Perhaps the most dramatic figure contained in BMW's latest financial statement was the fourth-quarter loss of 962 million euro, a figure almost three times as large as the company's full-year profit as the auto market contracted rapidly in the final three months of the year. This compared with a net profit in the equivalent period one year earlier of 991 million euro. Revenue also fell during this period by 18% y/y to 15.6 billion euro as sales dropped by 30%.

The company incurred one-off expenses to the tune of 2.423 billion euro thanks to a host of negative factors that had a significant impact on bottom-line earnings. These included additional risk provisions as a result of weakening residual values caused by weak used-car markets, as well as bad debt provision, mostly from leasing and finance deals. As part of this figure the company also incurred costs of 455 million euro as a result of personnel expenses arising from BMW's efforts to trim staffing levels. Commenting on the harsh economic environment in which BMW is currently operating, CEO Norbert Reithofer said, "The BMW Group has been able to make improvements at an operating level in the midst of extremely difficult economic times. Cost structures have been further optimised and, thanks to rigorous management of free cash flow, the BMW Group is in a very solid financial position."

BMW also recorded declines in its group sales and production figures. Combined global sales fell from 2007's record figure of 1.5 million units to 1.44 million units, a decline of 4.3%. Production fell by an even greater 6.6% to 1.44 million units in comparison to 1.54 million units as BMW rushed to adjust production to match reduced demand at the end of the year to ensure that inventories were held at a manageable level. However, BMW also stated that despite the slim profit the company generated in 2008, it is still on a very firm financial footing as a result of early action taken in anticipation of a prolonged global downturn. The company increased its cash funds and stock holdings by 86% y/y to 8.107 billion euro. Reithofer said, "We prepared ourselves early on and swiftly for severe business conditions, for example by taking immediate steps to bring production volumes into line with lower demand, and thus enabling us to further optimise working capital. This is also reflected in reduced inventory levels."

Outlook and Implications

Despite the positive spin put on these figures by BMW's senior management, there is no doubt that this latest set of financial data is hardly encouraging. In overall terms the group barely scraped into the black and the extent of the fourth-quarter loss is a worrying indicator of the company's ability to ride out the current global economic slump. The company has experienced huge growth in recent years, effectively doubling its overall sales volumes in a period of eight years between 1999 and 2007. However, some of the problems that BMW is now experiencing as the global economy contracts provide an object lesson in the dangers of growing too rapidly, especially when the products being sold are of a premium nature. Like its chief rival Mercedes-Benz, BMW has fuelled sales volume growth through the free availability of cheap finance deals and aggressive marketing. This has led to an explosion in the numbers of vehicles in circulation and this has had a corresponding negative effect on residual values, previously a unique selling point of premium German brands. Since the credit markets collapsed and effectively resulted in an instant withdrawal of affordable finance from the market in the fourth quarter of 2008, these dual effects have had a hugely negative impact on sales. To put it bluntly, even if a consumer has the finance and cash deposit to spend on a new BMW, purchasing a new model looks an increasingly poor-value proposition in comparison to a year-old model as buyers become increasingly careful. BMW is currently overhauling its U.S. strategy to focus on profitability rather than sales volumes and this strategy will no doubt be rolled out throughout its global operations.