[JSpira]

BMW will cut production, shift allocations to "high-demand" markets, and raise prices world-wide, the company announced in a conference call yesterday. The interim call, noted Dr. Michael Ganal, member of the board of BMW AG responsible for finance, was held "earlier than usual" given a confluence of developments that are adversely impacting the company's profitability.

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[simp0man]

So I guess the next bimmer I buy will be damn expensive. Damn well make sure it doesn't cut on the quality and durability design or I might go into a Lexus...

[demosthenes]

Thanks for posting.

[hpc3]

Originally Posted by simp0man

So I guess the next bimmer I buy will be damn expensive. Damn well make sure it doesn't cut on the quality and durability design or I might go into a Lexus...

Ditto. I'm shopping BMWs now based on value today. If they raise pricing ~1% or so the value statement still works for me on most of the cars I'd consider(E90/E92/E93) for an '09 MY order. However if pricing goes up substantially and negotiations get more tight I'll shop for another brand as I'm sure there will not be product improvements to justify the price increases. Vendors cannot hold customers responsible for poor product residuals... pricing should remain static if the residuals are in question. Porsche is the only mainstream manufacturer that could get away with that today, but then again they are ~10x more profitable than BMW could ever be per unit sold(or just about any other manufacturer for that matter).

[Jobu]

BMW is going through a very challenging time right now, mostly due to its success in the US. They have taken over $1 billion in write downs in 2008 so far because the US car market residuals are in the toilet. The devaluation of the USD has gutted its profit in Euro terms from sales in the US. Audi, for example is not nearly as successful in the US in volume terms, so it is hurt less when translated to Euros. We in the US are putting BMW in a world of hurt.

I don't know about others in the forum, but I believe that the ability of BMW to deliver great cars to us enthusiasts depends on their ability to remain a healthy profitable company. Their price raise and redirection of cars to other non US Dollar parts of the world is their effort to to just that. So to that end I support them (even though it means I'm disadvantaged in the short term)

We'll be paying more (or I suppose some of us will be switching brands, "see ya!") but that the price we pay for a weak dollar driven by low interest rates designed to keep us stay out of negative growth in the US. Said another way, we have screwed our own economy for years to come and we are now paying the price!

Hey the good news is that BMWNA is offering 0.9% financing on nearly all BMW's as of this week.

[mapezzul]

Originally Posted by Jobu

BMW is going through a very challenging time right now, mostly due to its success in the US. They have taken over $1 billion in write downs in 2008 so far because the US car market residuals are in the toilet. The devaluation of the USD has gutted its profit in Euro terms from sales in the US. Audi, for example is not nearly as successful in the US in volume terms, so it is hurt less when translated to Euros. We in the US are putting BMW in a world of hurt.

I don't know about others in the forum, but I believe that the ability of BMW to deliver great cars to us enthusiasts depends on their ability to remain a healthy profitable company. Their price raise and redirection of cars to other non US Dollar parts of the world is their effort to to just that. So to that end I support them (even though it means I'm disadvantaged in the short term)

We'll be paying more (or I suppose some of us will be switching brands, "see ya!") but that the price we pay for a weak dollar driven by low interest rates designed to keep us stay out of negative growth in the US. Said another way, we have screwed our own economy for years to come and we are now paying the price!

Hey the good news is that BMWNA is offering 0.9% financing on nearly all BMW's as of this week.

Nicely said.... I think the 1% increase some people have stated above is a bit too low that is not even going to cover the increase in the steel to produce the car. I would expect more than that; but we will see!

[nicknaz]

Originally Posted by Jobu

We in the US are putting BMW in a world of hurt.

I think BMW put itself in a world of hurt by offering aggressive discounts on its leases. 4.2% implied interest rate and 61% residual value on a 36mo/15k per year lease? those are some pretty aggressive pricing assumptions! (but i'm not complaining, because it got me into a bmw)

I read somewhere that once a manufacturer crosses the 200k/yr vehicle volume threshold it has enough scale to maintain a competitive cost structure. BMW chose to trade off per unit profitability to drive volume, and it worked for a while but now the economy broke their pricing model and they are feeling the burn.

I'm sure they will recover since they make fundamentally good cars

[John 070]

Originally Posted by Nick Nazareno

I think BMW put itself in a world of hurt by offering aggressive discounts on its leases. 4.2% implied interest rate and 61% residual value on a 36mo/15k per year lease? those are some pretty aggressive pricing assumptions! (but i'm not complaining, because it got me into a bmw)

I read somewhere that once a manufacturer crosses the 200k/yr vehicle volume threshold it has enough scale to maintain a competitive cost structure. BMW chose to trade off per unit profitability to drive volume, and it worked for a while but now the economy broke their pricing model and they are feeling the burn.

I'm sure they will recover since they make fundamentally good cars

One thing the analysts often overlook when it comes to demand is the able part of the willingness and ability equation. BMW has a strong brand image, yet the sales are poor even with 0.9% and discounts. That means that although willing, Americans are unable to buy BMW's. Look how many smart people resort to leasing. If my salary doubled, I think I'd be willing to buy a Carerra 4S, and given my current lifestyle, able as well. If my salary quadrupled, I don't think I would buy a Ferrari. Again, my point is there is NO demand if a person is not able to buy. Give me 0% financing for 20 years no payments nothing down, and I still would not buy a Carerra 4S at my income level.

What's amazing is my buddy does have a salary double mine, he's a radiologist. He was toying with the idea of buying a 328i sedan, but ultimately went for a V6 Accord. All the 0.9% couldn't put the 328 in his garage--he's just too smart with finances to be lulled by financing and discounts. That's that part of economics that marketers often seem to miss.

[Majikthese42]

BMW will cut production, shift allocations to "high-demand" markets, and raise prices world-wide, the company announced in a conference call yesterday. The interim call, noted Dr. Michael Ganal, member of the board of BMW AG responsible for finance, was held "earlier than usual" given a confluence of developments that are adversely impacting the company's profitability.

BMW's second-quarter net profit fell 33% to €506 million, a 33% year-over-year decline from €751 million. Revenue held steady, decreasing less than 1% to €14.6 billion.

The call heralded a significant shift in BMW's sales strategy as well as an indication that the company was facing a crossroads: market share versus profitability. BMW has used discounting and subsidized leases to increase market share, in particular in the U.S. but hasn't yet gone into the high-volume, hard-sell tactics that U.S. car makers have employed for decades. [In other news, G.M. yesterday reported a stunning $15.5 billion second-quarter loss, citing declining sales and charges taken for workforce reductions, plant closings, and the plummeting value of larger vehicles such as SUVs and trucks. Last week Ford reported an $8.7 billion loss.]

This will change as BMW will return to a pull-oriented (versus "push") sales strategy that will limit sales volume, requiring customers not only to pay full price but to wait for cars rather than being able to drive them off the lot (something practiced almost universally except in the United States). On a world-wide basis, BMW will "reduce production volumes and increase selling prices." BMW is not alone. This week Audi announced it is reducing its sales target in the U.S. from 100,000 to 95,000.

Ganal noted that the greatest impact to profitability came from the downward trend in pre-owned vehicle residuals.

They're not in nearly as hot water as GM or Ford. Rather a pleasant, relaxing temperature in comparison.

Hopefully, they'll make up the lost volume in Asia, but I can't see a slowdown here without a frank recession there.

Someone at BMW might want to Google the analysis of Porsche's near-death experience in the early 1990s. I thought $43k including taxes for a 230HP station wagon with optional floor mats was a little spendy to begin with.

[Steve Kaudle]

Originally Posted by John 070

One thing the analysts often overlook when it comes to demand is the able part of the willingness and ability equation. BMW has a strong brand image, yet the sales are poor even with 0.9% and discounts. That means that although willing, Americans are unable to buy BMW's. Look how many smart people resort to leasing. If my salary doubled, I think I'd be willing to buy a Carerra 4S, and given my current lifestyle, able as well. If my salary quadrupled, I don't think I would buy a Ferrari. Again, my point is there is NO demand if a person is not able to buy. Give me 0% financing for 20 years no payments nothing down, and I still would not buy a Carerra 4S at my income level.

What's amazing is my buddy does have a salary double mine, he's a radiologist. He was toying with the idea of buying a 328i sedan, but ultimately went for a V6 Accord. All the 0.9% couldn't put the 328 in his garage--he's just too smart with finances to be lulled by financing and discounts. That's that part of economics that marketers often seem to miss.

I'm certainly not trying to claim your radiologist friend is not fiscally responsible, but to base that position on his willingness to buy an Honda in lieu of a BMW isn't really enough information to backup such a statment. The "willingness" angle encompasses more than just a specific level of income or understanding of finance...you need to add in the 'disposable income prioritization' factor somewhere in there too.

Your friend may choose to spend his extra cash on wine, art, Hi-Fi, or whatever else makes him happy. I know a lot of people who drive less expensive cars than I do, but spend a good bit more than my car payment, per month on wine [and I don't think they're wrong for doing so]. At some point it's a matter of how you prioritize you disposable income. If fiscal responsibility was the bottom line, most of us would view the Accord as a luxury item and drive 2nd hand Civics and Corolla's [and drink Two Buck Chuck] instead.

[John 070]

Originally Posted by Steve Kaudle

I'm certainly not trying to claim your radiologist friend is not fiscally responsible, but to base that position on his willingness to buy an Honda in lieu of a BMW isn't really enough information to backup such a statment. The "willingness" angle encompasses more than just a specific level of income or understanding of finance...you need to add in the 'disposable income prioritization' factor somewhere in there too.

Your friend may choose to spend his extra cash on wine, art, Hi-Fi, or whatever else makes him happy. I know a lot of people who drive less expensive cars than I do, but spend a good bit more than my car payment, per month on wine [and I don't think they're wrong for doing so]. At some point it's a matter of how you prioritize you disposable income. If fiscal responsibility was the bottom line, most of us would view the Accord as a luxury item and drive 2nd hand Civics and Corolla's [and drink Two Buck Chuck] instead.

To make a long story short, the marketers often feel that the 0.9% or why don't we just say 0% no payments for 5 years nothing down (furniture, appliances, etc. are often hyped in the US this way) will move volumes of product that people aren't able to buy out of stock. It's not working for BMW, now is it? Yet as of yesterday, Honda is still bucking the trend that even Toyota can't.

[nicknaz]

Originally Posted by John 070

One thing the analysts often overlook when it comes to demand is the able part of the willingness and ability equation. BMW has a strong brand image, yet the sales are poor even with 0.9% and discounts. That means that although willing, Americans are unable to buy BMW's. Look how many smart people resort to leasing. If my salary doubled, I think I'd be willing to buy a Carerra 4S, and given my current lifestyle, able as well. If my salary quadrupled, I don't think I would buy a Ferrari. Again, my point is there is NO demand if a person is not able to buy. Give me 0% financing for 20 years no payments nothing down, and I still would not buy a Carerra 4S at my income level.

What's amazing is my buddy does have a salary double mine, he's a radiologist. He was toying with the idea of buying a 328i sedan, but ultimately went for a V6 Accord. All the 0.9% couldn't put the 328 in his garage--he's just too smart with finances to be lulled by financing and discounts. That's that part of economics that marketers often seem to miss.

John, is this an accurate summary of the key take aways in your post "smart money buys cars outright", "only people who can't afford the car lease", "buy an accord V6 instead of a 328i is smarter"?

Interesting point of view and I can definitely see where you are coming from. Here are some alternative hypothesis for what you saw:

- Re your physician friend getting an Accord: Your friend did not purchase the 328 because its premium pricing comes from attributes (suspension tuning, driving 'feel', and brand) that your friend does not buy into. I bet he purchased the Accord by looking down the spec sheet and saying "The accord gets me 10 more hp, navigation, and real leather for ~$7k less than a comparably equipped 328". If he never plans to take the car to a DE I think he made the right move.

- Re Americans resorting to leasing: Lease payments can typically be expensed under "personal use of a company vehicle" much easier than vehicle financing payments. I'm fairly sure there is a substantial segment of the population that acquires a leased vehicle this way. Also, some people view BMW as a 'trading position', a temporary vehicle on the way to 'better' things or a vehicle that isn't worth keeping around after the free maintenance/full warranty expires. Why take on the risks and hassle of reselling with a 3-4yr hold window. Just lease.

- Re Americans not buying BMWs even with 0.9% financing: Many are probably waiting to see 'how low it will go'. Will Porsche start to offer similar incentives? Will used car prices depress enough that a mint used 911 will be within reach?

Thoughts?

[DrGP]

Leasing has significant advantages for many. Low down payment. Lower payments than if the vehicle was financed. 3-4 yr turnover time. Financial benefits of a business write off. It allows people to drive a more expensive car that they would have if they had to purchase. PLUS, you decide if you want to actually keep the car at the end of the lease rather than at the beginning when you finance. If you really like the car, you can buy it out at any time. If you don't like the car, you give it back at lease end. If the residual is higher than current market value, the leaser takes the hit. If it is much lower, you have the option of buying the car and reselling it You just have so many options and advantages to leasing, it doesn't make sense for ME to do otherwise.

[Steve Kaudle]

Originally Posted by John 070

To make a long story short, the marketers often feel that the 0.9% or why don't we just say 0% no payments for 5 years nothing down (furniture, appliances, etc. are often hyped in the US this way) will move volumes of product that people aren't able to buy out of stock. It's not working for BMW, now is it? Yet as of yesterday, Honda is still bucking the trend that even Toyota can't.

I'm not trying to claim that BMW has it all figured out, nor that the poor economy wont hurt them as much or more than the Honda's/Toyota's of the world.

My only point was/is that at the end of the day, regardless of income, the decision to buy a BMW is akin to the decision to buy a piece of artwork or a high end turntable...neither are a necessity, though both may be [and often are] highly prized and appreciated by their owners. At the same time, the decision to buy a Honda is more comparable to the decision to buy a refrigerator...you need both and [as in the example above] aren't wrong to make such a decision.

[nicknaz]

Originally Posted by John 070

To make a long story short, the marketers often feel that the 0.9% or why don't we just say 0% no payments for 5 years nothing down (furniture, appliances, etc. are often hyped in the US this way) will move volumes of product that people aren't able to buy out of stock. It's not working for BMW, now is it? Yet as of yesterday, Honda is still bucking the trend that even Toyota can't.

John, I don't think we should characterize the interest rate subsidy as a marketing strategy.

It is an attempt to cut losses and back out of a business model (drive volume by leasing a lot of vehicles and use strong CPO pricing post lease to clear out old inventory at a profit) that isn't working anymore

[alan93rsa]

make sure it doesn't cut on the quality and durability design

The boat may have sailed

[flipmde786]

Originally Posted by Nick Nazareno

- Re your physician friend getting an Accord: Your friend did not purchase the 328 because its premium pricing comes from attributes (suspension tuning, driving 'feel', and brand) that your friend does not buy into. I bet he purchased the Accord by looking down the spec sheet and saying "The accord gets me 10 more hp, navigation, and real leather for ~$7k less than a comparably equipped 328". If he never plans to take the car to a DE I think he made the right move.

Its 38, not 10...just thought that should be mentioned hah

[mapezzul]

BMW will be fine, they have it figured out because they predicted this a while ago. They have been expanding in other markets exponentially and thanks to the Efficient Dynamics program they have an advantage for the carbon based tax in the EU.
The problem with most people in these posts is that they still only think in terms of the US being important, we are NOT and it is that simple. If BMW sells 10 cars in the US they do not make the same profit as selling one car in Russia, it is that simple. So of course they are going to move allotment to other markets which they started to do in January when they moved the majority of US 3ers to Roslyn. The goal is to make the US a break even venture in the near term, or to lessen the write down. You will see a shift from 60% leasing with great rates to more finance based business to lessen the burden on residuals. BMW has already begun to offer rebates on buyouts of leases to help them beat the total hit they will take.
Honda, and Toyota are going to have a difficult time adjusting to market conditions since they are US heavy, as of course are the former Big Three.

The interesting thing is going to see whether BMW increases the price point by more than 3% or just deletes standard features making them options and only adjusting the price point a little.
They have already taken away the Logic 7 as standard lets see what else goes away as an included option....

[demosthenes]

Mapezzul,

Thank you for your post. I've always wondered why BMW's cost less in the U.S. than Canada and Europe.

Part of price difference can be explained by the dropping dollar. Another part can be explained by taxes. But why would BMW be content with "break even" in the U.S.? Why wouldn't they raise prices and be content with smaller volume but larger margins? Are they trying to build a larger base so their dealers can make money on service? Please explain. Thanks.

[Seminole]

I have to say, if it wasn't for the 0.9% financing I don't think I would have gotten the BMW. I was looking at the TSX and the much lower price/ more standard features was more attractive. Though the TSX only had a 3.9% offer on it and the dealer was only offering $500 off MSRP. I drove a E90 just for the hell of it, and fell in love. The 0.9% and invoice pricing brought the two cars within a thousand or two of each other, and I jumped for the BMW. Couldn't be happier! I'm against leases because I keep my cars for a while, and I hate to throw money out the window without something to show for it. So as long as BMW keeps having awesome finance rates to discourage leasing, its fine by me.

[hpc3]

Originally Posted by demosthenes

Mapezzul,

Thank you for your post. I've always wondered why BMW's cost less in the U.S. than Canada and Europe.

Part of price difference can be explained by the dropping dollar. Another part can be explained by taxes. But why would BMW be content with "break even" in the U.S.? Why wouldn't they raise prices and be content with smaller volume but larger margins? Are they trying to build a larger base so their dealers can make money on service? Please explain. Thanks.

Probably wouldn't sell as easily/well here honestly. They could always do as Audi is and focus on China and other nations where their luxury branding is beginning to pass the US demand. You can blame it all on the economy or weak USD vs Euro as to why sales are down however I think a lot of US citizens will simply just lose interest in them if the prices go up beyond what most professionals think is the value point, only time will tell.

I have a few cars, motorcycles, number of toys, house, kids, good job, etc... would like a E92 335i for my next daily driver but if the prices go up substantially or I lose the ability to work from invoice on pricing with the dealer of choice can't say I'll remain interested. I can afford more, would love a M3, but $65K for a compact luxury/performance car(that honestly I'll never track or fully use) just doesn't make sense any more. Something has clicked in me I guess in my middle aged crisis... spend has to equal enjoyment and there are a lot of other options out there that get close enough in the $50K and less segment.

Maybe if the lease residuals go back up due to these actions... that may balance the equation somewhat. I think it doubtful though. Someone else here nailed the residual problem on the 335s, being a turbo car and all. BMW should have caught that initially, or maybe they wanted to move a ton of cars with subsidized rates, either way a gamble I guess.

Here to hoping the 2009s don't change much in price<fingers x-ed>.

[mapezzul]

Originally Posted by demosthenes

Mapezzul,

Thank you for your post. I've always wondered why BMW's cost less in the U.S. than Canada and Europe.

Part of price difference can be explained by the dropping dollar. Another part can be explained by taxes. But why would BMW be content with "break even" in the U.S.? Why wouldn't they raise prices and be content with smaller volume but larger margins? Are they trying to build a larger base so their dealers can make money on service? Please explain. Thanks.

BMWs also cost less in the US because of purchasing power parity... we can buy more with a dollar here than other locales can with their home currency... (See the Economist, Big Mac index for more info on this), in other words you can not simply use the exchange rates of monetary units to depict "value" or what is worth more. We get more bang for the "buck", with $.1.50 you can buy a coke, in Germany you will pay 2.00 euro (if not more) so that same coke is really almost $4 and it is made in the EU. Many feel that the Euro value is over inflated by almost 50% but in terms of the bottom line of a company that does not matter, the hard numbers do.

To get back on topic:

The reason BMW sells cars at the price point they do in the US is that the market dictates what people will pay for said good, if it is too high people will look elsewhere and buy something comparable, if it is too low profit will suffer. What has really happened is that BMW wanted to achieve a certain number of cars on the road (economies of scale to make each part cheaper pre unit and saving them lots of money) and over produced increasing the supply but the demand is not as strong as it was when there were less produced. By lessening the supply the demand should raise the price per unit sold and actually make the same profit total (not per unit) in the end.

Since the supply to emerging markets is low with high demand, BMW can charge whatever they feel like. There has been some stories of people buying a car in the US, exporting it to Russia and then paying lots of fees to get it registered there (illegally) for about 100K and still saving 50k compared to buying it there....

The other way BMW is coping with the weakening dollar is producing US destined cars outside of the EU, this has greatly helped in new car profit per car.

The main issue is the devaluing of used cars from lease turn ins, the market has dropped and the cars are not work what was expected, BMW takes the hit on these write downs.


Someone commented that leasing is throwing away money and that is why they only buy.....
that makes little sense in many ways; leasing is a safe way to hedge against the market conditions and puts the money you would have spent on the car in another investment (read: appreciating assets) rather than a car which depreciates in value. By buying you pay for the entire price of the car and every day you have it it loses value, it is like filling the trunk with money and driving around with it open; how does that make sense? You pay $50 k for something and sell it for $10k... great way to not throw away your money! Drive that car 100k miles and it will cost you .50 per mile without maintenance... leasing they charge .15 per mile for the overage, so you could lease the car and drive it the same distance for a lot cheaper!

My 07 530XIT has a lease turn in residual of $47k, in 3/09. Current KBB value (which we know is usually high) is $29k, that means BMW will be in the hole for almost $20k on my car, not ME. I took the money I would have spent on it and put it in investments that have made me money. I hedge my bets on the car market and came out way ahead, it is that simple I did not "throw" away anything, with a lease you can buy at the end ( a balloon at .9 %) if it is worth more than your buyout you can resell for a profit or if it worth less you can walk away and breathe a sigh of relief.... especially if the car has had issues or you do not like it. Aside from tax advantages these are some of the nice points of a lease.

As long as they offer leases I will lease unless the residuals are unrealistic like 30% for a 2 year residual....

And BMW will continue to keep current customers in BMW through owner loyalty rates, they want to keep people in cars and keep others wanting to get into them.