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The car manufacturer BMW unexpectedly cuts its outlook due to issues with brakes from supplier Continental and weak sales in China. Over 1.5 million cars in the automotive sector are likely affected by technical measures, and BMW is currently unable to deliver many cars due to the problematic parts. The recalls are expected to cost the Munich-based company a high three-digit million Euro amount in the third quarter, and sales are also lower than anticipated. CEO Oliver Zipse cut both the earnings forecast and delivery targets, as well as expectations for free cash flow, on Tuesday. The stock fell sharply, dragging down other industry shares in a market already clouded by concerns.
The BMW shares listed in the DAX ultimately fell by 11.13 percent to 69.00 euros via XETRA.
This brought the share’s decline for the current year to nearly 30 percent. Other automotive stocks also plummeted, with the share of supplier Continental dropping sharply by 10.51 percent to 52.60 euros by the end of trading.
While BMW did not name specific parts, Continental commented on the situation itself. According to the report, the Hanover-based company has formed a provision in the mid double-digit million Euro range, which it believes should cover the warranty case. The focus is on the integrated braking system MK C2, which is being partially replaced. The functionality of an electronic component may be impaired, according to the supplier. In individual cases, the built-in fallback level applies – meaning it will always be possible to brake. Continental expects that only a small portion of the delivered systems will actually need to be replaced.
In recent months, media reports had already pointed out BMW’s problems with Continental braking systems, which led Bavaria to reportedly implement a stop on ordering Continental parts.
This year, BMW stated that its earnings margin before interest and taxes in the automotive business is likely to fall between 6 and 7 percent, down from previous expectations of 8 to 10 percent. The reasons include the costs of recalls and the delivery stop for many cars, as well as weak business in China. In the most important single market, BMW, like other premium car manufacturers, is currently facing issues, as wealthy customers are paying more attention to their finances in light of the grim economic situation.
Instead of a slight increase in car deliveries this year, BMW now anticipates a slight decline. Compared to last year’s figure of 2.55 million cars, this now indicates a decrease of 1 to 5 percent. The pre-tax profit of the group is expected to “significantly” decline compared to the previous year, meaning by at least ten percent, instead of just “slightly.”
BMW estimates the free cash flow from the automotive business at just over 4 billion euros, roughly 2 billion euros lower than previously projected. Analysts and investors closely monitor this figure because it provides insight into current financial strength and the potential for dividends and share buybacks. This significant adjustment is primarily attributed to the delivery stop. The company did not provide a specific number for the cars affected, but industry sources spoke of around 100,000 cars.
The profit warning comes at a particularly inconvenient time as the industry is currently burdened by bleak prospects. Business in China is no longer operating as smoothly for German car manufacturers as it did in the past. In Europe, demand for electric cars, into which manufacturers have heavily invested and which are necessary for compliance with CO2 climate goals, has dropped. Overall, the economy is weakening, with high sales prices from previous years threatening to crumble.
German industry leader VW announced last week its intention to terminate the agreed job security arrangements with employees. Factories in the home market are at risk, and layoffs due to operational reasons loom. Continental, one of the largest suppliers in the country, has struggled for years to earn money and finance its research and development expenditures. The Hanover-based company is not only looking to save significantly and cut thousands of jobs but also intends to divest its automotive supplier division through a spin-off on the stock market. Rival ZF is also cutting jobs on a large scale, and industry leader Bosch must also implement cost-saving measures.
MUNICH (awp international)