Automotive News Europe - September 2019 - 58

AUTOMOTIVE NEWS EUROPE

FINAL WORD

Christiaan Hetzner
is Germany correspondent at
Automotive News Europe.
He can be reached at
chetzner@autonews.com.

How PSA passed BMW,
Mercedes in profitability
G

erman premium carmakers find
themselves in unfamiliar territory:
trailing mass market rivals in profitability. BMW and Daimler have seen returns
shrink in the normally lucrative second
quarter, pushing their profitability below
those of volume peers.
BMW's closely watched automotive EBIT
margin collapsed to 2.8 percent in the
first half, while Daimler's Mercedes-Benz
car division had a 1.4 percent operating
return on sales. The results are well below the 8 percent to 10 percent margin
that BMW and Daimler strive to achieve.
Volkswagen Group's core VW passenger car brand and its Czech brand,
Skoda, posted second-quarter returns of
5.2 percent and 8.1 percent, respectively. PSA Group's result was even better
than Skoda's as the French automaker's
adjusted automotive margin was 8.7 percent over the period.
Automotive equity analyst Arndt Ellinghorst of Evercore ISI believes investors
haven't realized shares in the premium
duo are overpriced compared with volume peers such as VW, which generate

far more cash. "The market seems to
happily ignore this given VW trades at a
20 percent discount to BMW and Daimler," he wrote in a recent note.
Results from VW Group's Audi brand,
which has suffered in past months due
to WLTP-related supply constraints, look
great compared with its German premium
rivals as it only had a slight narrowing in
operating returns to 8 percent of revenue.
To be fair, however, that figure is flattered somewhat by a decision this year
to reallocate a chunk of turnover to the
VW Group. Equivalent to roughly a tenth
of its sales, the financial move lifted Audi's margin by a full percentage point -
allegedly to improve comparability with
BMW and Mercedes.
Investments in future technologies such
as electric cars and autonomous driving
are a key factor in the struggles at BMW
and Daimler. As a group, Daimler spent
nearly 5.8 percent of its revenue on r&d
in the first half. This figure has been
steadily rising since 2014, breaching its
previous annual peak of 5.3 percent in
2009. The high came when r&d dropped

China's slowdown has hurt Mercedes, BMW and other German brands.

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at a less dramatic rate than Daimler's
revenue in the aftermath of the global
financial crisis a decade ago.
BMW's r&d ratio came in at 5.9 percent for
the first six months, another increase over
the previous period. Last year, the level
hit 7.1 percent, the highest since at least
2006 and substantially above its target
corridor of 5.0 percent to 5.5 percent.
This level of r&d spending was manageable when profits from China were soaring. That is no longer the case as China
is expected to contract for a second
straight year, which is a blow to German brands in particular because they
are overly dependent on cash generated
from the world's biggest auto market.
The recent slump, triggered by a trade
dispute between China and the U.S.,
has coincided with new cost-cutting programs at Germany's premium brands.
Lucrative exports of U.S.-built luxury
SUVs such as the Mercedes GLE and the
BMW X5 have been hit by China's retaliatory tariffs.
By comparison, PSA Group's low exposure to the spat between Washington
and Beijing means that it has neither
enjoyed the benefits of a significant
presence in China nor the costs. The
French group, like its peers at Renault
and Fiat Chrysler Automobiles, has
failed to establish a large-scale presence in China and as a result was never
part of the profit bonanza enjoyed by
German automakers.
Over the past decade, the greatest strategic strength of BMW, Mercedes and
other German automakers has been
their dominant share of the dynamic
Chinese auto market. The good news
for these companies is that forecasters
believe a rebound in China will come.
But, for once, if briefly, the German carmakers are paying the price for their
success in China. ANE

SEPTEMBER 2019

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Automotive News Europe - September 2019

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