BMW projects a difficult 2019 after a disappointing third quarter

BMW AG outlined a grim start to the automotive sector next year and said its business will have to prepare for challenges ranging from commercial wars to the consequences of Brexit and the task of meeting stricter emission standards.

The world’s second largest luxury carmaker reported quarterly earnings that did not meet expectations, which gave a grim tone that contrasted with rivals, the owner of Mercedes-Benz, Daimler AG, and Volkswagen AG. Both predicted a recovery during the fourth quarter thanks to the liquidation of vehicle inventory and the maintenance of sales momentum in China.

It’s too early to say whether things will improve in 2019, as the company prepares for trade wars, brexit costs and “regulatory challenges,” CFO Nicolas Peter said in a conference call with reporters. “How much of that can be passed on to consumers is a big question.”

The sales profitability of auto manufacturing, a key measure of profit, decreased by almost half during the third quarter, affected by commercial tensions, higher provisions and price pressure. BMW, whose Mini and Rolls-Royce brands are made in Britain, is preparing for the UK to leave the European Union without an exit agreement, said Chief Executive Harald Krueger.

Car manufacturers are fighting on multiple fronts. While they were already pressured by record investment demands to add electric models, commercial tensions have intensified in recent months and new emissions testing rules in the EU distort the market. While BMW was ready to comply with the new regime, rivals such as Volkswagen rushed to register cars before the September deadline, causing an excess of vehicles. Faced with unexpected price pressure, BMW lowered profit targets in September.

“BMW reported a difficult quarter very similar to its German premium pairs,” Evercore ISI analyst Arndt Ellinghorst said in a note. Given that BMW has had fewer problems in complying with the new EU emissions test regime than its competitors, “we would have expected the company to show some relative strength, which it did not do”.

During the third quarter, the company also had to reserve more funds to deal with vehicle recalls at risk of fire and other warranty claims. A global campaign to exchange certain engine modules contributed to an increase in provisions of 679 million euros (US $777 million).

“Together with the rest of the industry, we are increasingly faced with adverse external factors, whose negative impact cannot be fully compensated,” Peter said, adding that lucrative models such as the revamped X5 sport utility vehicle and the large SUV X7 will help boost profitability next year.

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