Friday, 21 December 2007

Company Focus - BMW Re-alignment

In early October BMW set out its stall to rekindle investor belief that the auto-maker would return to previous profitablity levels. Re-alignment highlighted by CFO Ganal’s taking centre stage in company announcements.

In analyst presentations the company drove home the message that RoCE & EBIT measures would take precidence, the latter deleting the usual Depreciation and Amortisation elements (of reporting typical EBITDA) to clearly illustrate top-line growth. [corporate guidence shows analysts averaged projected EBIT at: €4053m in 2007 /€4236m in 2008 /€4581m in 2009 / €5460m in 2010]
RoE to receive the same attention to re-assure the Quandt family of its 46.6%family holding and current institutional investors to enjoy the fruits of a stock rise driven by intended buybacks from the company in 2008.

The catalysts for change would be: higher dividends to generate additional investor interest - enabled by the transfer of pensions obligations (like Detroits Big 3) - efficient $ currency hedging and extended $ procurement payments (given the strong Euro) for US plant supply and across Asian facilities.

But that didn't stop a flurry of stock selling between early Oct and late Nov; many believing that the shadows of raw material cost increases, the weak US dollar, immediate western economic (esp US 'credit-crunch') malais and potentially hard-hitting future CO2 legislation were short-medium and long-term headwinds hard to overcome.

Thus news of additional overhead cost reduction from the 8,000 (mainly German) redundencies has come to demonstrate management conviction that fight-back plans are being implemented - especially given the comparison of Daimlers' good performance. Ganal and the Board recognise that BMW has to prove itself, the halcyon years of BMW riding the waves of global economic expansion and accordant consumer aspiration must seem very distant.

investment-auto-motives recognises the major effects of the aforementioned headwinds, but also believes that the down-turn in company fortunes is partly the result of what for some time have been strained stake-holder relations. Suppliers, employees and dealers have become somewhat dissillusioned with an toughening business climate over the last few years and found themselves in an unwelcome position 'trapped' between harsh market conditions and BMW's neccessary corporate retractions. Beyond the pressured external and internal business climate, an additional important factor appears to have been a lack of co-ordinated product management: from product design strategy (eg 1 series & X3) to launch timings (3 series, new 7 & X5) to production constraints and order fulfilment (on all except Rolls-Royce) and hence strained dealer/customer relations.

The Mini example demonstrates:

The 'playsafe' approach of 2nd Gen Mini has, we fear, backfired. Although larger, safer, more frugal etc, the small aesthetic pigeon step forward has undermined potential demand within Triad regions, putting a greater onus on new variants like clubman and possible SAV. We suspect this was done so Asian market buyers could gain the same 'authentic Mini' sense as western buyers experienced back in 2001. But this has left potential Euro, NA & Japanese buyers somewhat deflated, seeing little visual difference to the 01 car. More should have been done to manage the different expectations of both new and old regions, such as adaptable lamp lens covers, vanity trim items, etc to aid differentiation.

However, given market expansion, global demand infact put capacity constraint on the Oxford plant, running at full tilt. Good yet also bad news in terms of order fulfilment. We feel an additional local CKD (completely knock down) assembly site for Asian markets could have been constructed in India (alongside 3 series) to relieve Oxford capacity demand, reduce export costs, test local component manufacture cost & quality, and critically be in situ to highlight BMW commitment to developing the Mini brand (in many forms to come) as the prime 'designer' city car throghout Asia-Pacific. That CKD site would expand to full production maturity (as a copy+ of Oxford) to avoid any lag in meeting latter day demands that would otherwise be captured by indigenous players and the Japanese and Koreans.

Again on the small car front - but not as balance sheet relative - BMW (like Mercedes) at long last looking into the development of an off-shoot sub-brand dedicated to fashionable-eco 'A/B' segment cars. Although city cars have historically been on and off the agenda (eg Z13 studies of mid 90s) the reports of a New Isetta (picturing a computer generated mock-up) over-play the initiative to create splash headlines.
The initiative, ideally, should already have a range of 3 or so serious conceptual design options available, about to elect a favoured for conceptual engineering feasibility studies and full programme appraisal and confidential 'early adopter' customer feedback. Platform-share discussions with Daimler and Fiat, if agreed, would reduce programme timing and costs, much dependent on the adaptability (for brand execution) of the shared vehicle frame and modules.

As previously stated there have been problems in other areas of the business (eg product execution and mix, customer delivery dates, dealer over stock etc) - far too detailed to fully discuss here.

Though mistakes have been made, the reality is that the group's relative poor operating margin performance (beyond tight western pricing elasticity) is also partley of it's own making. Critical internal management policies and methods are be fixable to return the company to the lean, effective and forward-thinking operating mechanism it had previously earned a reputaion for. One that is gradually able to overcome the serious headwinds that worry the sector in general, but specifically the German luxury makers.

There is much on BMW's plate to be considered and implemented, and transparency will be key.
Just as global banks are now confiding their exposure to value destroying SIVs and being transparent in their write downs, so BMW should take note and act accordingly. Demonstrating - in detail - its credible plan to reach announced EBIT targets (esp the growth climb between 2009-2010 ) to overcome any remaining investor reluctance. This will take more than 'splash' auto-press headlines, perhaps requiring yet more of Ganal acutely demonstrating what winds of change lay behind the numbers.