Is the German auto industry better?

Do you really think so? MG Rover was never the most thriving part of the british car industry, most of the car production in GB has been from Foreign companies for years.

The car industry here isn't in the best of health either. Most of VW's production, and nearly all of any profit they just about make from making cars, happens outside Germany. The only German manufacturer really thriving in Germany is Porsche.

BMW is keeping it's head above water, but it has a size issue itself and only survives as long as it can sell lots of high value cars. If they get a major recall, or the luxury car market collapses, the don't have the reserves to survive for long, new developments are just too expensive these days.

Daimler Chrysler has had to pull out of Mitsubishi, and have had to take drastic measures at Smart. they profits they make with Mercedes don't really support the losses of their other Automotive ventures, and they are surviving mostly from their industrial and aviation sectors.

Opel is struggling in its own right, and GM can't back them much anymore, as they have their own problems.

Ford is just about surviving in Europe, but the parent in America is suffering drastically.

The biggest part of German industry was the supply chain to the car manufacturers. Unfortunately purchasing price politics has forced most of the supplier manufacturing base out of Germany, so while the companies themselves might still be surviving, they are not contributing to the economy as they did when everything was home-grown.

From that viewpoint, the German automotive sector is not in a much better position than the British, only Britain is not that dependent on its automotive sector.

and Audi.

See VW!

Audi is the only part of VW that is making a profit.

But only a very small part. They don't make much with Skoda and SEAT, and VW itself struggles to make anything at all.. VAW would have been bought out long ago, if the Niedersachsen state didn't have a say in things.

sorry to be blunt, but that is the biggest load of drivel i have heard in a long time (not meant as a personal attack, just think the comment is drivel). Admittedly this was the "buzz-word" about 15 years ago, when manufacturers were fighting each other to be the largest in the world and mergers and acquisiton in the automobile industry (manufacturers and suppliers) were going crazy. Bu this view is out-dated and has been proved repeatedly to be incorrect. BMW has posted record after record after record. Only Porsche achieves a higher margin (Deckungsbeitrag) per vehicle sold than BMW. BMW now sells well over a million vehicles per year. Not all of these cars are "luxury". BMW has now proved its "Premium" philosophy which means that as long as the product is right, the brand is right, etc "Premium" vehicles can be sold in any segment from the MINI to the 7 series and Rolls-Royce.

BMW is invests heavily in new models. 15 years ago BMW consisted of the 3-,5- and 7-series plus the 8-series coupé and experts were dubious as to how and if the brand could be expanded. Which is also one reason BMW bought Rover. The situation now is completely different. Just look at the recently developed and launched vehicles. Besides the traditional 3,5 and 7, BMW developed the X5, the X3 the Z3 (followed by the Z4), the 1 and 6-series, the MINI, and of course the Rolls-Royce Phantom.

BMW invests heavily in new technology both for the vehicles themselves and in production. Believe me, there is no shortage of funds for investment in new models. In fact, finances have been so stable the last few years that BMW recently announced a share buy-back scheme, not something that German companies often do.

This not to say that there aren't problems to be overcome and difficulties to be faed (dollar fx-rate and steel prices for a start) but the management as shown its ability to respond to the market and produce the goods.

Big is no longer beautifull. Profitable is beautifull. And BMW is VERY profitable.

Plus the V3, V5 and X6 that are planned.

I am not allowed to talk about or comment on any models that may or may not be launched in the future.

As to the names you have quoted, i can 100% confirm that no decision has been taken as what these vehicles will be called, if these vehicles are to be produced at all.

Sorry to be blunt in return, but the source of BMW's current profitability is in market segments, which have been succesful over previous years, but are also proven to be segments which are sensitive to economic and fuel supply flucuation.

And to be more blunt: If a company makes 10 quid profit year in year out, then 11 Quid in one year, that is a record profit, if it makes 12 quid the following year, that is record after record. It is not the amount that is important, it is the relative value of the amount.

1 million vehicles per year are not large quantities in global automotive language, so maintaining the momentum can very well become difficult. Yes, BMW have more models in their pallette than ever before, but each new development is more expensive than the last, and the more models there are to replace, the more that costs. If sales and overall profitability falls, how do they finance this?

We can't expect fuel prices to drop back to what they were. In the states, SUV sales have fallen through the floor, because of fuel prices, causing major problems for Ford and GM. This takes longer here, because we have higher taxes on fuel, which dampens the effect of oil price rises, but it is only a matter of time. Exactly BMWs main model pallette will be most affected by this. Mini, 1 & 3 series are not that profitable, that BMW can exist on those volumes alone.

Operating profitability on a per unit sold basis alone is not enough in the medium and high volume sectors. Small manufacturers like Porsche can survive on unit profits, but Porche's are higher than BMW's, and they also do a lot of contract work. That is the crux.

Rising steel prices only complicate this picture. They create an additional divergance between rising cost of production, and lower attainable sales price, as exisitng capacity competes for a smaller market. Not only that, but it is becoming difficult to get some steels for any price. Additionally, BMW models have more competitors in each segment than used to be the case.

So call it drivel if you want, the future is not as rosy as you might want to believe. After 30 years in the automotive industry, I have seen a number of demographic changes take place, and the effect they have had on the world automotive sector. The biggest and the smallest survive, those in between struggle in the end. Look at the airline industry -- Budget airlines, small specialist carriers and the large flag carriers survive, but what of the medium sized? Eg. Sabena, Swissair!

BMW have remained independent because the Quandt family refuses to sell-out, as long as BMW is profitable. Economic developments in the near future can (I'm not saying will, but I was specific about possible causes in my last post) reduce that profitability to a loss. In that situation BMW could very well end up like MG Rover, not able to survive on its own, but too expensive to buy out. Although SAIC might very well be more interested in an ailing BMW than it has been in MG Rover.

It sounds as if Mike knows his stuff, too me anyway!!

Duncan.

i am sure he knows "his stuff", however, what he is saying about BMW is pure opinion. I may not have been in the business for 30 years but i have worked in both sales and finance of importers and manufacturers for many years and simply don't agree with his analysis. What Mike says is what was belived by many industry analyst in the 80's and 90's. Not many would now agree that to be true. The differences between the Airline industry and the car industry make comparison difficult. For one the major flag carriers had operated for many years on state subsidies before liberalisation. The ones that failed to re-structure, lower their costs etc were the ones that lost out. BMW is not state owned. It is not living off subsidies but is a highly profitable business. Neither the competition from Japan or the US has managed to achieve significant in-roads in to the premium sector, which is dominated by German manufacturers.

There will always be ups and downs in the industry, i am not going to dispute that. I am also not naiive enough to think that the future will always be rosy but i do think that BMW is flexible enough to be able to adapt quickly to market trends on new models. It is big enough to be a global player, and yet small enough to be managed efficiently. It is no longer lumbered with international alliances and subsidiaries that are loss making and in dire need of re-structuring (like Daimler-Chrysler). The management know that tough times are ahead and even though profits remain very good, compared to the rest of the industry, measure are quick to be put into place.

And just a by-the-by...Porsche buys pressed panels from no other than...BMW. I find that amusing, myself.

and now Owain sounds like he knows his stuff!

Turning into a real Battle of the Titans, isn't it?

you want relative amounts?

Porsche 2003 Net Profit €1.043 billion, 2004 €843 million
Daimler Chrysler 2003 Net Profit €448 million, 2004 €2.46 billion
Ford Group 2003 Net Profit €500 million, 2004 €3.5 billion

BMW?

2003 Net Profit €1.9 billion, 2004 €2.2 Billion.

BMW has made more profit in the last two years than Porsche and Daimler Chrysler. Slightly less than Ford which sells about 8 times as many vehicles.

And what you're saying, Owain, is also purely only your opinion. We are surely both entitled to our own opinions. Only I'm not claiming yours is drivel. (So I don't have to elucidate that it is not personally meant)

The question was, though, what happens when the premium sector dries up?

BMW a global player? With a total production less than that of a Ford Focus or VW Golf alone? Sorry, but the days are gone, where Benz and BMW had a market for themselves. BMW's competitors have larger volumes behind them, makes it easier to maintain a presence.

I have no doubt that BMW are flexible enough to have a good chance of surviving. My point about recalls was the main thing, though, larger companies than BMW have stumbled on recalls. For BMW, a major recall action on expensive systems can be fatal. And the likely hood of recalls is rising all the time, so when that happens when the market is down?


Makes sense for both. Porsche don't have the capital millstone of large presses, and BMW can optimise their capacity. Rolls Royce used to buy all their pressed panel from British Leyland, did that save either of them in the end?

About german tv censorship then, ok i give up!

I dont't think watching the profit is always a realistic measure, as far as I know in different regions of the world or market segments or whateveryouwannacallthem prices are different. Of course it is important, but as the industry gets mor cut-throat costs will play a really big role.

Does of any of our in-house experts have on-hand the costs for the companies under scrutiny?

yes but i am not at liberty to divulge that information. sorry.

Shame but that would have been a good indicator too. Ah well it has always been rumoured that the car companies charge more whenever possible i.e. UK car prices have always been seen in the media as costing more than europe and that the car companies used that to therefore get bigger returns from essentially the same car.

So it if one of these markets were to fall into a price war or demand drops then this could critically wound them very quickly.

I think you will find that the car company gets the same return on the car, it's just the tax that varies from country to country.

Duncan.

Thanks since moving to Germany first thing we did was to dump the cars so havent read anything about then for sometime. I am sure thoughI saw a report on an investigation where the prices for some german cars in the UK were higher not just due to tax, i,e, the margins made in the UK were higher than in Germany.

Hope I never have to buy a car again anyway.

@ Weeman: not entirely true. New car taxes and VAT in different companies meant in the past that manufacturers had to artificially lower the net price of cars in high tax countries to be able to sell any decent volumes. With the opening up of the european market and the introduction of the Euro, which stopped fx-rate ups and downs, these differences have become apparent to canny consumers who import at the net price.

Because you can't just change the price by 20% overnight without suffering a catasrophic collapse in the market, prices have crept towards divergence, rather than lept. There is still a vast difference in net prices between, say Denmark and Germany and the also the new entrants to the EU have in general much lower prices than here as well.

The margins that a manufacturer achieves per market depend on a number of factors, not just the gross and net retail prices. Dealer margins also differ vastly between markets, with German dealers averaging much higher margins than many of their european counterparts. On top of this, dealers receive registration bonus', trade-in bonus' and even wholesale bonus' (variable markting). Local costs, like transport, storage, pdi costs (pre-delivery inspections that the importer will have to make to repair any damage made in transit from the factory, remove any wax covering etc etc), although not the greatest cost block soon add up, especially if the factories are producing more cars than the markets can sell (since it hard to simply turn-off production, volume manufacturers will still build cars even without demand, ship them to the markets, where they sit in storage yards costing €€€€€ every day)

a simple example of a vehicles margin calculation would be:

Retail Price incl VAT
- VAT
- New car tax if applicable
= net list price
- dealer margin
= Gross Sales Revenue
- variable marketing payments (ie bonus' and sales allowances paid to dealers)
= Net Sales Revenue
- variable manufacturing cost
= Gross Margin
- local variable costs
= Gross Margin net of LVC

This margin has to cover the costs of the staff in the national sales company which imported the car for you (if you buy from an imported brand) as well.

As you can see mayn of the factors that determine margins are extremely variable and entirely market driven, therefore margins WILL differ from market to market.

For that reason it should be relativly easy to workout which country is the best in Europe for purchasing cars.

Do you have this information, or is it also classified?

Dunc.

P.S. Lecky your right, sorry for hijacking the thread.

The easiest place at the moment appears to be Denmark. Poland is cheaper but presents a few more problems. Most Danish dealers are used to dealing with export cars and also tend to speak better English.

Although, having said that, there are differences between brands, so Brand A might be cheaper in Holland and Brand B in Denmark.

from an EU report in 2004:

Here are 2004 results from some manufacturers:



Ford results are calculated with a Dollar exchange of 1,25 as this is reasonably representative of the average rate in 2004. The results do not include Mazda, a non-consolidated subsidiary, which produced a further 1,189 million cars.

Toyota results are calculated at a Yen exchange of 140, I didn't have any other, but it won't be far out.

Interesting is that Toyota makes 11,4% profit against BMW's 8,7% - a volume manufacturer more profitable than a premium one? Ford are just under their usual target window of 3-5% at 2,9%, and VW are really struggling at 1,3%.

Be interesting to see what our resident automotive finance expert Owain has to say about these figures.

sorry, but got to laugh.

Match point?

Even more interesting is that the per unit revenue of BMW and VW combined is exactly the same as that for Ford, the combined profit margin is slightly higher at 3,6%, but they still didn't sell as many cars as Ford alone...

Still, we haven't seen Owain's return yet..

mike_a - the revenue per unit numbers look very high - are these consolidated revenues including non-automotive activities?

..i can't imagine Ford really has higher revenues per unit than VW - and euro 21.000 per car...by the time you add dealer margins & tax means the average ford must sell for nearly euro 30.000. what is a lot even if you add in one or two aston martins...

The numbers are taken from each company's annual report for 2004. Ford's figures are only for Ford core business, as far as I know. As well as not including Mazda, I don't think they include joint ventures. It does include: Ford, Lincoln, Mercury, Volvo, Jaguar, Aston Martin, Land Rover

These per unit revenues are just ball-park measurables showing the total annual revenue for each company divided by the number of vehicles sold. this does not give you the sales price to the dealers -- BMW don't get an average 34.000 per car from their dealers either. It is just that the different companies have different revenue source distributions, so you have to find some way of normalising. a large part of VW's production is in Eastern Europe, South America, and China -- per unit income is lower in those places, which drops the average.

I could suggest how much certain manufacturers do get for certain models but, as with Owain, that would be a breach of confidentiality, so I won't. I'll just leave it that Ford/Opel/VW dealers don't get such a high mark-up as BMW dealers, and remember the other part of the equation -- market sustainable pricing, for which German retail prices are not a good measure

That all doesn't make any difference to the total picture, the profit margin of the company as a percentage of its outlay.

GM just published their 2004 results today - They shit-out to the tune of $1,300 Million, that's 1,625 Million Euro loss :excl:

Mike, how did you calculate these numbers:


profit as a % of what? you haven't stated this.

using BMW as an example, if you calculate Net Profit as a % of Revenues you get:

2,222/44,335 = 5%

so obviously you are not using that calc.

lets try Profit from Ordinary Activities as a % of Revnues:

3,554/44,335 = 8%

again, i don't see 8,7%. Maybe i am one finance guy who can't add up. Explain your numbers or produce some that add up and we can talk about them.

Also I noted that you delivery numbers also include Motorbike deliveries, which effects the per unit numbers.

As for Toyoto, where did i ever say that mass volume manufacturers can't make good profits. Toyota is a good example of well run company with good long-term prospects.

I merely stated that your assumptions that because BMW is small it is ultimately doomed is entirely false.

What is the point in being a busy fool? ie building cars for no or little profit like GM or Ford.

Your argument was that BMW is not big enough to surive on its own. I think the above numbers on the profit show that you don't need to sell 8 million cars to make over 2 bill profits.

You hinted that the Quandts would eventually sell their shares. How much profit per share do you think a VW or Ford Shareholder get? Compare those numbers to the earnings per share for BMW and you will see why the Quandts aren't selling their BMW shares. The BMW dividend was €0,52 per share, Ford gives $0,40 or about €0,32 using the average fx-rate for 2004.

Also look carefully at the investment numbers. You also see that BMW is investing heavily in future models which i am sure will continue the success if current releases are anything to go by.

Your arguments for "Big is Beautiful" are build on a house of cards.

Profit as a % return on investment outlay. For ease of calculation, as I am too lazy to go through all the numbers, my ball park estimate is:

Profit % = Gross Profit / (Revenue - Gross Profit) * 100

Quite simple really. it's the only form of profit measure as far as I'm concerned - I invest X and get Y back, P = Y-X and P% = P/X*100. A standard way of calculating in project management, AFAIK in the finance sector as well (at least my Banks calculate my investments like that, and all loans are calculated that way). So I just re-formed things from the annual results - not exact, but near enough.

I am not really interested in per unit numbers, and after all Ford produces Ka to Lincoln and small trucks, Toyota a similar size range, as do VW. A BMW motorbike can cost around the same as a VW Fox, or a Ford Ka. Only counting the "real" profit on a unit is bunkum. RR for example make mega profit on each unit sold, but they only sell 900 p.a. So even if they make 100K on each, that's only 90 Million. Ford sells more than 1 million Focus each year around the world, so they only need 90 per unit profit to make the same amount in total. I can assure you they make a lot more than 90/unit. VW produce about as many Golfs, only they struggle to make a profit on them.

Further, Ford's results include their profits from joint ventures (Turkey, China, Vietnam, etc) and their share of Mazda's profits, but only the units sold by Ford.

Toyota is similar, and do not include units sold by Daihatsu or Hino, although their revenue includes their share of those company's profits.

In the end, the profitability of a company is only the difference between income and expenditure, how it is spread or attained is of less significance from a straight results point of view.

Agreed, Ford and GM have less mark-up on their products, but that is usual with higher quantities -- A supermarket chain has a lower margin than a single retailer, but a much larger turnover. The supermarket chain also has the volume to weather a storm better than then single retailer. (I know, it's just as poor a comparison as the airlines, but it is a principle)

As for profit per share (approx ordinary share price 12/2004):

Ford - 0,40 : 15,00 = 2,7%
BMW - 0,52 : 33,00 = 1,6%

The difference is more than approximate, but feel free to work it out more acurately, it might make 0,1% here or there! I won't bother with VW, it's not worth it.

BMW owes it's existence to the Quandt family, otherwise it would have been bought up by Daimler 50 years ago. However, astute as they are, if BMW were to get into deep trouble, I have no doubt they would accept a good offer, rather than lose the lot. They do have other interests, so they don't need BMW, if push came to shove. They've done it in other areas already (used to be big in textiles, you know).

I don't think big is beautiful either, but accept that it is more powerful. Super tankers may run aground now and then, but they generally don't capsize in a storm like a cruise ship does... Manouverabilty is not eveything.

The more this discussion goes on, the more I get the impression that the clocks really do run differently in Bavaria, but there again, if I'd moved from Rover in Neuss to BMW in Munich, I'd be rooting for the Bimers too

not "rooting" just accepting reality. I have never questioned the fact the "big boys" can make profits if they sell enough units. You are correct in your assessment of how volume manufacturers use high volumes to turn minimal margins into profits. You seem, however, to suggest that mass volume strategy is the only successfull way of remaining profitable and independant in the long term. This is where we disagree.

With all your numbers, though you still haven't provided a shred of evidence to suggest why BMW can't survive long term independantly.

and to quote yourself:


this is exactly my point. It doesn't matter if you are making €2-3 bill profit selling 1-1,5 million cars or €2-3 billion selling 7-8 million. As long as you can do this long-term.

oh and by the by: your little calc on ROI for the shares is invalid as it assumes that the shares were bought at market prices. The Quandt's didn't.

No I don't suggest it is the only way. In fact:

That means the mass volume manunfacturers can be more "persuasive" with governments and institutions when things get difficult. Due to their distributed manufactuing bases, they also have the opportunity to close higher cost manufacturing operations and concentrate their production in lower cost locations.

While that is not a real long term solution, they can and will do (already are doing) this for short term advantage. I didn't say BMW couldn't survive, only that they may be more susceptable to market vagiaries than larger manufacturers.

My question remains: BMW's profit comes mainly from the medium and large premium vehicle sector. When these markets shrink, the financial climate becomes tighter, and the mass manufacturers enter that segment everything gets tougher.

That market used to be shared principally by Mercedes and BMW, then Audi got their foot in in a big way. Now Ford sells premium packaged mainstream technology under the Volvo, Jaguar and Landrover brands (together about the same yearly volume as BMW). Toyota has it's Lexus brand, which probably can't compete with BMW here, but in other markets it is very successful.

So, for the sake of argument, assume a premium market of 5 million vehicles per year, from which BMW has a 20% share. If this market drops to 4 million v.p.a. and additional competition drops BMW's share to 15%, BMW's million units drops to 600K "overnight". Okay, an extreme perhaps, but in today's economic climate perfectly possible.

Now what happens when volumes go down? When BMW only sell half as many 3 series, they have to put Regensburg on half time working. Ford, GM, Toyota and VW have the ability to consolidate their production to other mainstream locations relatively easily, by closing plants where that is easy and concentrating its production on plants it can't close so easily, or closing the expensive sites and concentrating on those with a cost advantage.

The question is, who can do this long term? A manufacturer with a concentrated high value base, or one with a distributed mixed base? My personal opinion is that the current ways of commerce are not sustainable, "traditional" ecomomic structures and thinking is running against a wall, and that is being accelerated by the concepts of short term action and reporting to please analysts in the interest of stock values, rather than long term sustainability.


Pardon? Do you think the majority shareholders in Ford pay $15 per share for theirs?

ROI is purely the dividend payed out in proportion to the share's market value. It is always possible to sell your shares in a company paying 1,5% dividend and buy the same amount in a company paying 3%... In which case you have doubled your ROI.

Of course it is not sensible to do that all in one go, especially if you have a large shareholding, but the principle remains the same. What you originally paid for shares 50 or 100 years ago, and what they are worth today has absolutely nothing to do with ROI, until you sell those shares.