MUNICH German premium automaker BMW (BMWG.DE) expects earnings to stagnate this year as costs for 11 new model launches, capacity expansion and spending on fuel-efficient technology eat up higher profits from selling more cars.
"Due to high levels of expenditure for new technologies and models as well as investment in the production network we expect to report group profit before tax on a similar scale to 2012," Chief Executive Norbert Reithofer told reporters during its annual earnings conference.
In 2012, BMW posted earnings before tax of 7.82 billion euros ($10.13 billion).
As a result of the higher investment costs, Reithofer expects free cash flow at its core automotive business to fall below 3 billion euros in 2013 from 3.81 billion in 2012, while its EBIT margin will decline to 8-10 percent from 10.9 percent.
The Munich-based company forecast volume growth would rise by a single-digit percentage rate from about 1.85 million vehicles sold last year thanks to new models like the BMW 4 Series Coupe due in September.
With euro zone jitters returning, executives are placing their hopes on rising demand in the United States and Chinese markets to offset weakness on this side of the Atlantic.
BMW and its local joint venture partner Brilliance are investing roughly 500 million euros in China to expand their production capacity to about 300,000 cars annually in the medium term, with another 100,000 coming on top if required.
Given BMW's growth rate of 40 percent in China last year, that could very well be necessary, since its two local plants produce less than half of the cars it sold.
The market has become so important that BMW has begun producing engines in China - its first such powertrain plant outside of Europe.
Analysts say it is not just volume growth that makes China so crucial to BMW, but its profit margins as well.
"We firmly believe that China now accounts for significantly more than 50 percent of BMW's profits," wrote Bernstein's Max Warburton in a research note published last week.
($1 = 0.7717 euros)
(Reporting by Christiaan Hetzner; Writing by Arno Schuetze; Editing by Maria Sheahan)