China fuels record profits at German luxury carmakers
FRANKFURT (Reuters) - Surging Chinese demand for sporty sedans and SUVs like the BMW (BMWG.DE) 7 Series and Porsche (PSHG_p.DE) Cayenne helped propel the two German luxury carmakers to record first-quarter profits, underscoring their growing dependence on Asian customers.
Munich-based BMW, which already sells half its flagship limousines in China, said the country had become its biggest single market in the quarter, leap-frogging the United States in total sales volume for the first time.
The same could soon be true for Porsche. Audi, the luxury carmaking unit of Volkswagen (VOWG_p.DE), sold more cars in China last year than in its home market of Germany, where demand had been strongest for decades.
Despite a weakening European economy that has hit its French, Italian and domestic competitors, BMW managed to lift its operating profit by nearly a fifth to 2.13 billion euros ($2.80 billion), a record for the first quarter and higher than any analyst polled by Reuters had expected.
Porsche's operating profit rose at a similar rate to 528 million euros during the period, also an all-time high.
China's burgeoning affluent class has transformed the premium car industry, which has broken one quarterly record after the other, in the face of stagnant demand in Europe.
"As long as China keeps going, BMW keeps going," wrote Bernstein analyst Max Warburton, in a research note on Thursday.
Struggling European car brands like Peugeot (PEUP.PA), Renault (RENA.PA) and Fiat (FIA.MI) are all highly dependent on their home markets and have only a negligible share, if any, of the Chinese market.
GM's Opel (GM.N), with only a token share of sales outside Europe, swung to an underlying loss of $256 million before impairment charges, at current exchange rates.
Although Opel Chief Karl-Friedrich Stracke sounded upbeat in a letter to staff on Thursday, GM finance chief Dan Ammann told reporters it was too early to say whether the worst was behind the brand: "Your guess is as good as ours."
German luxury names, by contrast, account for nearly 80 percent of the premium car market in China, with Japanese competitors able to muster just a tenth, according to figures from PricewaterhouseCoopers.
Volkswagen was the first foreign carmaker in China and last month announced plans to open a new plant in the west of the country during a visit by Chinese premier Wen Jiabao to VW's Wolfsburg headquarters.
Matthias Wissmann, president of the VDA, Germany's car industry association, said domestic manufacturers had now recorded 33 straight months of rising orders for cars exported to customers abroad.
STRETCHED TO LIMIT
Top-end luxury models, which produce the biggest profit margins, are in particular demand in China. The most popular 7 Series for BMW there is the 6-litre, 12-cylinder BMW 760Li stretch limousine, which can cost 270,000 euros for a well-equipped version.
At a time when many carmakers in Europe are struggling with an overcapacity problem, strong demand from Asia is stretching production plants of German premium car brands to the limit and their margin targets now look conservative.
Porsche, for example, is targeting an operating return on sales of at least 15 percent but managed 17.5 percent in the first three months of 2012 and surpassed 21 percent in the second quarter of last year.
China helped BMW's core passenger car business post a quarterly operating margin of 11.6 percent, close to the average for last year and well above management's forecast for close to 10 percent in 2012. This fanned further speculation that the group will have to raise its profit margin target.
"We have a very dramatic situation in Italy and Spain, and as long as it is restricted to the Southern European area we should be able to compensate. Now we have seen the first weaknesses in the UK and we don't know if it will spill over to Germany at a later point in time," finance chief Friedrich Eichiner told analysts during a conference call.
"That's where our concern is and that's why we say it's too early to change the guidance now," he continued, adding it may revisit its margin outlook once management has the figures for the second quarter.
Automotive free cash flow, a closely watched metric for the quality of earnings, improved slightly, lifting BMW's net cash pile to 14.0 billion at the end of March.
"They are spending massively on R&D and that probably held back profitability in Q1. But the 1.6 billion in free cash flow compared to the 1.0 to 1.1 billion that the Street had in its numbers and a cash outflow at Daimler is a monster beat that really underpins the success story at BMW," said David Arnold, a specialist salesman at Credit Suisse.
Separately, data from Germany's car industry associations showed the new car market increasing by 3 percent last month thanks to a return of household buyers - a sharp contrast to the 22 percent plunge in Spain, where one in four workers is now unemployed and the economy is in recession.
"The German car market is proving to be an anchor of stability in a difficult European market," Wissmann said.
Continental, Germany's second largest auto parts supplier, forecast revenue in the current quarter would match the 8.3 billion euros of the first three months.
($1 = 0.7603 euros)
(Additional reporting by Deepa Seetharaman in New York; Editing by Noah Barkin, David Holmes and Helen Massy-Beresford)
- Pennsylvania newlyweds "just wanted to murder someone together:" police
- WTO overcomes last minute hitch to reach its first global trade deal
- U.S. freeze shows no sign of weekend melt after deadly storm
- Colorado baker discriminated by denying gay couple wedding cake: judge
- North Korea frees U.S. Korean War veteran after seven weeks |